THE POLITICAL AND ECONOMIC EFFECTS OF THE 1957 SOVIET INDUSTRIAL REORGANIZATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R01141A001200150002-9
• Release Decision: RIFPUB
• Original Classification: U
• Document Page Count: 54
• Document Creation Date: December 23, 2016
• Document Release Date: July 1, 2013
• Sequence Number: 2
• Publication Date: October 1, 1958
• Content Type: REPORT

"Mr
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FOR OFFICIAL USE ONLY
THE POLITICAL AND ECONOMIC EFFECTS
OF THE 1957 SOVIET INDUSTRIAL REORGANIZATION
CIA/RR 157
October 1958
PREPARED JOINTLY BY
THE CENTRAL INTELLIGENCE AGENCY
AND
THE DEPARTMENT OF STATE
FOR OFFICIAL USE ONLY
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FOR OFFICIAL USE ONLY
ECONOMIC INTELLIGENCE REPORT
THE POLITICAL AND ECONOMIC EFFECTS
OF THE 1957 SOVIET INDUSTRIAL REORGANIZATION
CIA/RR 157
PREPARED JOINTLY BY
THE CENTRAL INTELLIGENCE AGENCY
AND
THE DEPARTMENT OF STATE
FOR OFFICIAL USE ONLY
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FOR OFFICIAL USE ONLY
FOREWORD
This report is the result of a joint analysis by the Department of
State and the CIA of Xhrushchev's 1957 reorganization of the admini-
stration of Soviet industry. Portions involving the political and social
implications of the reorganization are based predominantly upon contri-
butions from State/IRA. Contributions by CIA/ORB deal with the economic
aspects of the problem. The present version was, drafted by CIA/ORB and
coordinated with State/IRA.
Additional copies of this report may be obtained from the Depart-
ment of State or from the Central Intelligence Agency through established
liaison channels.
The front and back covers, title page, and Foreword
of this report bear the handling restriction of "For
Official Use Only." When these pages and covers are
removed, this unclassified study may be distributed
outside official Government channels.
FOR OFFICIAL USE ONLY
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THE POLITICAL AND ECONOMIC EFFECTS
OF THE 1957 SOVIET INDUSTRIAL REORGANIZATION
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TEE POLITICAL AND ECONOMIC EFFECTS
OF THE 1957 SOVIET INDUSTRIAL REORGANIZATION
October 1958
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CONTENTS
Summary and Conclusions
Page
1
I.
Introduction
7
A.
General
7
B.
Motivations for the Reorganization
8
1. Economic
9
2. Political
9
3. Strategic
10
II.
Structural Changes in Soviet Industry
11
A.
Changes Since 1952
11
B.
Meetings of the Party and the Supreme Soviet in
Late 1956 and Early 1957
12
C.
The "Theses" and the May Session of the Supreme
Soviet
13
D.
Reorganization of July 1957
14
1. USSR Council of Ministers
14
2. Ministries
14
3. Planning Apparatus
15
4. Economic Regions
15
E.
Party Control Under the New System
16
III.
Manifestations of Resource Waste
17
A.
Problems and Their Organizational Remedies
17
1. Waste in the Use of Joint Products
18
2. Self-Sufficiency and the Failure to Subcontract
18
3. Transportation (Cross Hauling, Single Hauls,
and Pooling)
20
4. Hoarding of Surplus Inventory
21
5. Organizational Duplication Resulting in the
Waste of Human Resources.
22
6. Joint Resources -- the Case for Amalgamation and
Joint Use of Ancillary Activity
23
7. Investment Wastes from Planning and Plan
Implementation
24
a. Disproportions Within a Sector of Industry .
24
b. Selection of Specific Projects
25
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Page
c. Diffusion of Investments -- Problem
of Unfinished Projects 27
d. Waste of Resources in Investment
? Implementation 28
B. Summary of the Effects of Reorganization on the
Seven Special Cases of Resource Waste 29
IV. Changes in Decision-Making Procedures and the Effects
on Growth 32
A. Investment 32
B. Wages 35
C. Working Capital 35
D. Distribution of Supplies 36
E. Planning 4o
F. Decision-Making from the Point of View of the
Enterprise Manager 41
Table
Production of Industry in the USSR, by Subordination of
Enterprises, 1950-55 and 1957 12
Illustrations
Figure 1. Organization of Soviet Industry, 1957 and
1958
Following Page
14
Figure 2. Organization of Industry Within a Union
Republic, 1958 ? 14
Figure 3. -Organization of-a Typical Sovnarkhoz 14
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THE POLITICAL AND ECONOMIC EFFECTS
OF THE 1957 SOVIET INDUSTRIAL REORGANIZATION
Summary and Conclusions
Centralized planning and control of the Soviet economy induced the
evolution of a ramified and cumbersome bureaucratic administrative
apparatus. By mid-1957 this structure had come to be typified by large
and powerful industrial ministries in Moscow which supervised and often
directly intervened in management details of individual enterprises
situated throughout the country. It was to the ministry and its admini-
strations that most of the important operational decisions were referred
from the enterprises.
Such a system had proved itself effective in rapidly grafting advanced
industries onto the backward Soviet economy. But as the economy became
more complex, the inefficiencies of the system became sufficiently obvious
to call for some type of reform. Khrushchev himself promoted the osten-
sibly sharp break with the previous arrangement by establishing regional
"councils of national economy" (sovnarkhozy, or CNE's) along existing
territorial administrative boundaries with operational responsibility for
industrial enterprises contributing about three-fourths of total output,
located within their geographic confines. The industrial ministries,
both at the union and at the republic level, for the most part were abol-
ished. Thus the previously existing pattern of nationwide subordination
and administration according to specialized industry was replaced by a
territorial pattern of subordination with some simplification of detail
in decision-,making at the center.
As might be expected, the scheme for reorganizing the administration
of industry and construction, both in its overt content and in its ex-
plicit justification, was completely economic. The actual motivations,
undoubtedly, were quite complex and included political as well as economic
reasons with even strategic considerations perhaps playing a part.
The scheme was launched in the wake of the December 1956 Central Com-
mittee Plenum and the February 1957 Supreme Soviet, both of which were
confronted by economic problems deemed to jeopardize the prospects for
continued rapid economic growth. Nevertheless, jockeying for power by
the top leaders influenced the detailing of the reorganization. In any
change of this importance it would be unnatural if a political figure
did not use it as a vehicle to strengthen his position. Thus when the
"anti-Party group" (Malenkov and others) was purged its members were
accused, among other things, of attempting to frustrate the reorganization.
The decision to reorganize, its timing, and certain details of its
final form appear to have involved important political influences, but
economic considerations and the desire for economic improvement underlay
the decision and were basic to it.
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The reforms carried out in July 1957 were not the first attempt in
the post-Stalin period to improve the structure and functioning of the
economic system. In fact, the recent change embodies a drastic response
to many problems implicitly involved in the pattern of earlier piecemeal
organizational and procedural changes.
The reorganization scheme was launched by Khrushchev at a Central
Committee Plenum in February 1957, but details first appeared with the
publication on 30 Match 1957 of the "Theses," proposed by Khrushchev for
a countrywide "discussion" before ratification by the Supreme Soviet. As
finally adopted by the Supreme Soviet on 10 May, the organizational plan
was not markedly different from that foreseen in the original proposals.
The economic-administrative structure of the government was altered
by changing the makeup of the USSR Council of Ministers, by concentrating
both long-term and current planning in one organization -- USSR Gosplan,
by changing the functions of or abolishing most central ministries, and,
finally, by establishing sovnarkhozy to which were subordinated the ma-
jority of industrial and construction enterprises throughout the country.
The most striking aspect of the reorganization of the central organs was
the great enhancement of USSR Gosplan's influence in planning and con-
trolling economic activity. Consolidation of all central planning in USSR
Gosplan greatly enlarged the role of this organization in directing the
economic activities of republics, ministries, sovnarkhozy, and factories.
The role of the Party has also been strengthened, especially at the
local level where most boundaries of economic regions follow existing
oblast or republic boundaries and local Party units have been assigned
control functions.
The principal effect of the reorganization, however, was to create
more than 100 (now 104) economic regions, each governed by a council of
national economy. On a nationwide basis the councils have subordinated
to them enterprises producing about 75 percent of all industrial output;
the remainder is either under local government agencies or retained under
the few remaining central ministries and special committees.
The analysis that was undertaken in this report in determining the
economic effects of the reorganization proceeded along two lines of
inquiry. The impact of the reorganization on economic efficiency was
investigated first through an analysis of several specific cases of
organizational defects that Soviet leaders hoped would be remedied by
the new form of organization. Thus seven categories of problems mani-
fest under the former system were selected (for example, waste of re-
sources from cross hauling or from failure to subcontract because of
desire of self-sufficiency and the like). An examination was made of
the official evidence of "irrationality," the corrective measures that
have been taken, and the economic gains or losses resulting from these
measures having been applied to these specific cases.
From such an analysis it was clear that some gains were possible.
But the magnitude of these gains should not be overestimated. It was
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found that so many qualifiers had to be introduced when determining the
gains from correcting the problems that in only 3 of the 7 problem cate-
gories (reduction of excess inventories, extension of subcontracting, and
elimination of cross-hauling) were there rather clear-cut evidences of
positive effects on economic efficiency. Out of these three categories,
estimates by official writers of the potential gain to be had do not in-
dicate a very significant boost to industrial output.
The most important impact on growth will come, of course, in the short
run when windfall gains are possible from correction of the specific in-
efficiencies cited above. It is believed that, once these windfall gains
are achieved, the long-run impact on industrial growth will not be very
significant.
The second procedure in determining the impact of the reorganization
on economic growth was to examine the change (or lack of change) in basic
decision-making processes that affect the over-all allocation and use of
resources. This inquiry covered decision-making in six aspects -- invest-
ment, wages, working capital, distribution of output, planning, and decision-
making at the enterprise level -- and was directed at determining whether
the authority and responsibility over each aspect had changed. Change was
appraised on the criterion of who decided between alternative courses of
action in each matter before and after the reorganization in the pyramid
of decision-makers from the Presidium of the Central Committee to the
enterprise manager.
In the area of investment planning and plan implementation it was
found that decisions remain, as before, in the hands of the central
authorities. Local authorities continued to decide the use of a small
segment of investments, this authority already having been passed down in
the period between Stalin's death and the reorganization. Under the re-
organization thus far the so-called "rights" given the councils of national
economy have shifted little from the former pattern of investment decision-
making. The initial delegation of limited authority to the CNE's was
severely circumscribed by central controls, and during the first year under
the new system there were further restrictions placed on CNE authority and
responsibility in this function.
Wage rates and total wage funds for the CNE's and their enterprises
remain, as before, set by USSR Gosplan in consultation with the state
Committee on Labor and Wages.
In the use of working capital the CNE seems to have less freedom to
maneuver funds among its enterprises than did the former ministries.
The supply system, from the point of view of the enterprise manager
and CNE, remains largely intact. The enterprise manager still requires
an allocation order to purchase materials, and these individual orders,
from steel to sewing thread, are intricately related to the output and
supply plans of the enterprise, both of which are ratified from above.
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It was hoped that the lack of certainty in the timely delivery of
supplies, which along with the persistent pressure for growth in output
formerly necessitated the enterprise manager to become self-contained,
would be eliminated under the reorganization. For one thing it was ex-
pected that an enterprise would be assured supplies from other enterprises
within the same ONE. This expectation seems to have been more than real-
ized. During the first year of the operation of the CNE's, local hoarding
and preference to local buyers were alleged to such an extent that often
internal ONE contracts were overfulfilled while external contracts remained
underfulfilled. These developments led the center to take measures to
enforce the planned distribution of output. A law enacted in April 1958
threatens financial penalties against enterprise and CNE managers who fail
to fulfill contracts to ship to firms external to the ONE. The same law
threatens "repeaters" with criminal penalties. Thus, as usual, admini-
strative measures from above -- in the absence of objective economic
criteria -- define for the local authorities what is required of them to
assure that their actions are consistent with the wishes of the regime.
As part of the reforms in the organization of industry, new procedures
were adopted in planning that assertedly would bring about increased effi-
ciency in the use of resources. The enterprises were to initiate the plan,
submitting it to the ONE and on upward to USSR Gosplan. This "change,"
however, is not significant, because enterprises formerly filled in much of
the detail and reviewed the general targets "sent down" from the center con-
cerning specific output targets, labor force and wages, cost of production,
supplies of materials, and the like. Whether initiated by the enterprise
or sent down from the center, drafting and coordinating the plan are always
accompanied by hard bargaining on the part of the plant manager, who has
much at stake. Other indications give the impression that the old planning
processes are still in effect under a more "democratic" name. It is clear
that, in the end, USSR Gosplan will make the final choice as to what and
how to produce.
Other than these specific decision-making categories in which it can
be concluded that there really has been very little meaningful change, it
is of interest to look for change under the general rubric of "day-by-day"
decisions affecting the operation of the enterprise. Although gains of
some significance are undoubtedly possible, there are indications that the
decisions of this type which the government seemed anxious to have shifted
from the center to the CNE and to the enterprise may not have been shifted.
This may be the result of timidity by the ONE or ambivalence on the part of
the central authorities in releasing their direct control. On the other
hand, certain improvements in the operations of the enterprise may follow
from the physical presence of the CNE in the region compared with the former
remote direction of the enterprise from Moscow by the main administration
of a ministry.
The proximity of the ONE to the plants should reduce the degree of
ignorance of the immediate superior in the form of the CNE chairman and
give him a better basis for determining what decisions can be made rapidly
by the ONE or by the center. Thus the ONE chairman, with different success
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indicators from the enterprise manager, will attempt to enforce the
desires of the center as stipulated in annual plans. For example,
fulfillment of the plan for gross output at the expense of quality
of product mix, formerly widespread, is likely now to be curtailed,
at least for that part of the enterprise's output that remains with-
in a CNE. This is because the. CNE chairman has an incentive to see
that the product mix according to specific grades and quality is
enforced, whereas under the former system the enterprise manager
could circumvent the planned assortment and still reach output goals.
In general, it was concluded, from the analysis of changes in
decision-making procedures, that the "rules of the game" have not
really changed significantly. Thus the spectrum of choice open to
levels below the center has not widened enough to give real content
when translated into terms of improved efficiency in the use of re-
sources. The one possible exception, as noted above, may be some
improvement in carrying out the explicit goals of the central author-
ities on account of the immediate presence of the CNE chairman in
directing the enterprises in his region.
In summary form, the following can be stated as general conclusions
of the study on the industrial reorganization:
1. Centralized planning and control remain, as before, the
guiding principle's of the Soviet economy. No serious erosion in
central leadership and control has resulted as yet from the reforms
in industrial organization. To forestall any serious erosion, a number
of measures have been taken to close chinks whenever peripheral organs
have, legally or illegally, made economic decisions that were not con-
sistent with the wishes of the central organs.
2. There has not yet been a significant devolution in economic
decision-making sufficient to yield noticeable gains in efficiency in
the use of resources. It is believed, however, that a prime motivation
of the reorganization was a desire on the part of Khrushchev and the
leadership to effect a significant enhancement of efficiency by promoting
economic growth through such devolution of decision-making as was deemed
consistent with continued central control.
3. It is likely from the above Cl and 2) that the present system
is in an interim stage and that further organizational developments will
be forthcoming. These changes on the one hand could be a return to a
clearly defined central control in which all semblance of "decentrali-
zation" is removed and the rules are made so precise that the center has
effectively eliminated any choice open to lower levels (republic, CNE,
or enterprise). On the other hand, the leadership could attempt to give
real content to its original conception of "democratic centralism" -- that
is, delegating meaningful decision-making powers to local levels within a
framework of broad objectives determined by the center. Khrushchev's
recent discussion of the possibility of giving the CNE's authority to al-
locate their total investment funds among industries, subject to the
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achievement of output goals for key commodities, indicates that he still
leans in this direction. Effective implementation of decentralized
decision-making, however, requires the substitution of market prices and
profits as objective criteria of efficiency for physical output goals
and administrative allocations of supplies. There is no indication, nor
is it believed to be likely, that the Soviet leadership will move toward
a system of market socialism aa now practiced in Yugoslavia. Although
it is impossible to say definitely what direction the change will take,
it is believed that eventually (perhaps after more experimentation toward
"decentralization") there will be, at least de facto, a further tightening
up in an effort to eliminate localist tendencies.
4. The impact of the reorganization on industrial growth has not
been significant to date nor is it expected to have important influence
over the next several years, at least not under the present reforms.
5. USSR Gosplan emerges, from the reorganization as the single
most important economic organ, its powers being enhanced not only in
long-term planning but also in operational decision-making.
6. The role of the.Communist Party also has been strengthened,
especially at the oblast level. Under the new system of economic admini-
stration in which the regional Party official is urged to play a more
prominent role, an element in Soviet society gains increasing influence
the regional Party secretaiv. In this situation, two possibilities arise.
First, the regional Party secretary may closely identify his interests
with those of the regional economic officials (in terms of plan fulfillment,
adequacy of supplies, and the like). Second, the regional Party secretary
who is found to be in collusion with the economic administrators whom he is
supposed to watch may be quickly purged for not maintaining an "objective"
Party point of view. Which development will arise, of course) will depend
on 'a number of variables such aS the individual personalities of the regional
Party secretaries and on the ability of the Presidium of the Central Committee
.to maintain a .close rein on the regional officials. In any case, the regional
Party secretary may gain considerable economic-power.
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I. Introduction.
A. General.
Centralized planning and control of the Soviet economy induced
the evolution of a ramified and cumbersome bureaucratic administrative
apparatus.* Before mid-1957 this structure was typified by large and
powerful industrial Ministries in Moscow which supervised and often
directly intervened in management details of individual enterprises
situated throughout the country.
Such a system had certain advantages. In an economy undergoing
rapid growth, sectors of the economy given priority by the regime were
assured raw materials, personnel, or funds by the operations of the
-ministry in Moscow) the head of which sat on the USSR Council of Ministers.
Such a system had its drawbacks, however, and with the passage
of time ,these became sufficiently obvious to call for some type of reform.
Khrushchev himself promoted the ostensibly sharp break with the previous
arrangement) establishing regional councils of national economy (sovnarkhozy,
or CNE's) along existing territorial-administrative boundaries. These
sovnarkhozy were assigned operational responsibility for the majority of
industrial enterprises located within their geographic confines. The in-
dustrial ministries, both at the union and at the republic level, for the
most part were abolished. Thus the previously existing pattern of direct
nationwide administration according to specialized industry was replaced
by a territorial pattern of subordination with some simplification of
detail in decision-making at the center.
The principle of "a single state plan" as the basis for Soviet
economic management was not, however, repudiated. Although industrial
and administrative authorities outside of Moscow were intended to play a
larger role in solving the day-to-day problems arising in the operations
of plants and factories, the central regime continued to reserve to itself
decisions involving the definition of economic goals and appropriate policies
for their attainment.
Of all the official reasons given for the reorganization and the
generous supply of case studies provided in illustrating the defects of
the previous organization) there appear to have been three underlying
threads of complaints: (1) there was inadequate information available to
provide to central planners and decision-makers an adequate basis from
* Not only the fact that there is centralized planning but also the
extent of detail embodied in operating the mOdern and complex Soviet'
economy has engendered an ever-increasing apparatus.
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which they could make a more rational choice* in the allocation and use
of resources; (2) when the relevant data were available to the various
ministries and to USSR Gosplan, "wrong" decisions were made because of
the parochial interests of individual ministries who participated in
the final choice; and (3) when complete information was available to the
central organs and when there were no "departmental" barriers at the top,
"wrong" decisions were made because of the lack of "objective criteria"
in deciding what was the most efficient use of resources. The first two
complaints were made explicit, both in descriptions of the inadequacy of
the former organization and of the expected performance of the new organi-
zation. The third complaint was only implicitly present in Khrushchev's
original proposal and in the "public" discussions that followed; it re-
mains, at present, a minor topic of discussion relegated to the learned
journals.
The above classification of the problems underlying reorganization
gives more content to the catch phrases condemning the ministerial system
for organizing industrial production by "commodity" (departmental barriers;
overcentralization; need to move the center of gravity of decision-making
closer to the enterprise; need for more realistic, less isolated planning;
and the like).
The analysis that follows discusses four aspects of the reorgani-
zation: (1) motivations for the reorganization, (2) structural changes,
(3) economic effects of the reorganization on specific classes of resource
misallocation, and (4) economic effects from the changes in decision-making
procedures.
B. Motivations for the Reorganization.
It is difficult to unravel the various motivations for the in-
dustrial reorganization. Some Western students feel that a political
struggle for power was the over-riding "cause."** Others contend that
economic problems were the major basis for the changes.***
Yet there was) clearly, no single cause for the reorganization.
It occurred rather as an outgrowth of a complex pattern of motivations.
On balance, the decision to reorganize and the nature of the principal
changes themselves appear to have been based largely on economic grounds.
The timing of the reorganization and some of the measures finally detailed
seem to have been politically influenced. Strategic implications most
certainly were also considered.
* The term rationality is defined not with the usual textbook con-
straints introduced to achieve "optima," but under a less rigid defi-
nition. Move seems to have a definition that has the dual virtue of
simplicity and relevance for a nonmarket economy such as that of the USSR.
He contends that rationality occurs when "the economic purposes of society,
whatever these may be and whoever decides them, are achieved with maximum
economic efficiency. Or, alternatively, that maximum results are achieved
at minimum real cost:"
** For example, Myron Rush and Edward Crankshaw.
*** Such as Alec Rove.
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1. Economic.
Khrushchev's scheme for reorganizing the administration of
industry and construction) both in its overt content and explicit justi-
fication, was exclusively economic. It purported to reorganize only
economic organizations and economic relationships. And the explicit
rationale accompanying Khrushchev's proposal was grounded entirely on
economic considerations.
The scheme was launched in the wake of the December 1956
Central Committee Plenum and the February 1957 Supreme Soviet, both of
which dealt with emergent economic problems in a manner deemed by
Khrushchev and others to jeopardize the prospects for continued rapid
economic growth and to threaten abandonment of the goal of "catching up
with the West" in per capita output.
Yet despite this intended and obvious, predominantly economic,
content and rationale, Khrushchev's panacea-like scheme for drastically
altering the Soviet economic-administrative structure had important polit-
ical and strategic implications.
2. Political.
Khrushchev, whose political authority and prestige were al-
ready weakened by events in Eastern Europe, apparently was unable at the
December Plenum to counter moves to revise the Sixth Five Year Plan along
lines proposed by the industrial administrators -- that is, reduction of
high growth tempos and development of a more economically viable pattern
of imvestment allocations. At that moment it appeared that Malenkov, who
apparently had long considered retrenchment and correction of dispropor-
tions in the economy a vital necessity, was making a political comeback.
Soon after the February 1957 Supreme Soviet had adopted the 1957 annual
plan with its sharply reduced planned rate of growth -- a plan developed
by Pervukhin and his team of top-level administrators ostensibly in ac-
cordance with the December Plenum's directives -- Khrushchev reacted by
proposing a radical reorganization of industrial administration to the
Party Central Committee, called into session the day after the Supreme
Soviet concluded its work. The reorganization may well have been spon-
sored by Khrushchev in an effort to gain the political initiative in
economic policy-making and as an answer to Soviet economic problems which,
while recognizing some of the demands of the industrial-managerial bureau-
cracy, would break up the ministerial empires of the industrial managerial
elite and bring vital spheres of economic and industrial activity more
closely under Party supervision.
Some confirmation for this hypothesis can be seen. Virtually
no public support was given the reorganization proposal either by Malenkov
himself or by many of those high-level administrative and technical per-
sonnel in the ministries who would be most adversely affected by the re-
organization. Purportedly, Malenkov, with Molotov, Kaganovich, and Shepilov,
crystallized into the "anti-Party group" in a last-ditch attempt to frust-
rate the reorganization program. One consequence of the reorganization
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itself was expected to be a significant increase in the role of local
Party organs in the operation of the local economy in concert with the
sovnarkhozy.
None of these factors, however) seems to bear directly on the
decision to reorganize per se. They involve reactions.of affected parties
to the implementation of such a decision. It is reasonable to assume that
Malenkov and those officials of the governmental-administrative apparatus
who felt that their status was inextricably tied up with the fate of that
apparatus would find much that was disagreeable in the reorganization plan,
which might be deemed to reduce the role of the bureaucracy in favor of the
Party. The validity of the analysis above as to the conflict between the
bureaucracy and the Party has never been clearly established.
It seems evident that political interplay was involved in the
decision to revamp industrial management. The political motivations for
the decision, however) arose out of disagreement over the causes and solu-
tions of admittedly serious economic difficulties. Economic considerations
and the desire for economic improvement) therefore) were basic to the
decision to regionalize.
3. Strategic.
The plan to regionalize the Soviet economy carried with it
certain strategic implications. There is little reason to doubt that
the Soviet leadership expected strategic gains as a result of the re-
organization.
Khrushchev) for example, in discussing the reorganization,
stated that "the reorganization of industry that we have carried out in-
sures a more autonomous management of industry) which also is a 'plus'
strategically." Strategic factors of this sort, however) cannot be con-
sidered as a primary motivation for the new system. Khrushchev himself
specifically said that the strategic consideration "is a collateral, but
a very important ffeason7." There seems little reason to suspect that
this statement represents any kind of subterfuge on the part of the Party
leader.
In this regard it is significant that individual economic
administrative regions do not coincide with borders of military districts.
Thus, as of 11 July 1958, .there were 104 economic regions but far fewer
military districts. There is no indication that military districts are
being reorganized to include within themselves a group of self-sufficient
and largely integrated economic regions readily adaptable to dispersed
martial rule.
Shortly after the reorganization the Ministries of Radiotechnical
Industry, Shipbuilding, the Defense Industry (armaments), and the Aviation
Industry were abolished, and state committees were established to take
their place. Production enterprises of these former ministries evidently
are subordinate to appropriate regional economic councils. Such a move
does not suggest immediate primacy of "crash" strategic considerations.
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II. Structural Changes in Soviet Industry.
The reorganization carried out in July 1957 was not the first attempt
in the post-Stalin period to improve the structure and functioning of the
economic system. In fact, the recent change embodies a drastic response
to many of the same ills implied by the pattern of earlier, less sweeping
organizational and procedural changes.
A. Changes Since 1952.
Since late in 1952, and particularly since Stalin's death, Soviet
leaders have experimented with reducing administrative staffs) simplifying
national plans and planning procedures, reorganizing some central or All-
Union ministries into union-republic ministries, and assigning to the
fifteen union-republic governments greater responsibility for directing
industry within their territorial boundaries. Although some changes ac-
companied political developments (such as the drastic merger of central
ministries immediately following Stalin's death), most changes since 1952
have been motivated by economic-administrative considerations.
As part of the program to simplify economic administration, the
national economic plan -- formulated by USSR Gosplan and the USSR Council
of Ministers -- was reduced in detail. More and more computation of de-
tailed targets was assigned to ministries and their main administrations,
so that the 1955 plan contained approximately one-third the number of
specific targets that were listed in the 1953 plan -- a redUction. from
5,000 to 1,700 items. The national economic plan thus came to emphasize
aggregate rather than detailed categories. The central planning organ --
USSR Gosplan -- was required to allocate commodities only to ministries
and not to the main administrations as it had in the past. The ministers
were delegated authority to distribute the allocated commodities among
their own subdivisions.
From 1952 to mid-1957, 12 central ministries were reorganized
from All-Union to union-republic, with counterpart ministries set up in
appropriate republics. One result of these developments was to strengthen
the relative role of the union republics in directing the economy.* By
mid-1956, approximately 40,000 enterprises had already been transferred
from direct subordination under the All-Union apparatus to that of the
republics.
The transformation of ministries and subsequent transfers of en-
terprises are reflected somewhat in the accompanying table, which shows
* It must be remembered that, while the power's of union ministers may
have been strengthened during 1952-57, there was no significant devo-
lution of decision-making or control powers from the center to the. re-
public, local government, or enterprise levels. Whether it involved
production, supply, or investment, in any conflict of view between central
and republic ministries (or lower echelons) it is a reasonably safe pre-
sumption that the views of the center prevailed.
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the percentage of the volume of state industrial production attributable
to enterprises under union subordination*:
Table
Production of Industry in the USSR, by Subordination of Enterprises
1950-55 and 1957
Percent of Total Production
Subordination 1950 1951 1952 1953 1954 1955 1957
All-Union
67
68
70
69
57
53
45
Republic, oblast, and rayon
33
32
30
31
43
47
55
The reorganization of July 1957 redefined the categories of subordination
so that for the year 1958 relatively few enterprises would remain under
All-Union subordination.
In summary, the reorganizations in this period attempted to cor-
rect the bureaucratic excesses of overcentralization by attempting to
assign more authority and responsibility to the All-Union ministries and
to republic governments. Although these piecemeal steps failed to fore-
stall the growing economic problems, the experiments in limited reorgani-
zation of the economic-administrative structure after 1952 foreshadowed
the sweeping changes carried out in July 1957.
B. Meetings of the Party and the Supreme Soviet in Late 1956
and Early 1957.
Against this background the Central Committee of the Communist
Party of the USSR (CPSU) met in plenary session on 20-24 December 1956.
At this session, some industrial ministers criticized the State Economic
Commission for Current Planning (Gosekonomkomissiya) because it allegedly
made serious errors in underestimating the investment needs of certain
industrial activities. Failure to provide added capacities, these min-
isters contended, would make plan fulfillment impossible in certain sectors.
The criticisms of the ministers were answered by Bulganin, who accused
them of making extravagant requests -- particularly the requests by the
primary industries of building materials (Kaganovich), metallurgy (Tevosyan),
and electric power (Malenkov). In his speech, Bulganin also mentioned
* For enterprises under republic subordination, of course, there is merely
an added administrative layer between the enterprise and the center.
** For accounts of the proceedings of the Plenum, See I.A. Kulev (Deputy
Chairman of Gosekonomkomissiya), On the Further Improvement of Planning and
Leadership of the National Economy, and V. Karasev (candidate member of the
Central Committee), The Story of the December and February Plenums of the
Central Committee, CPSU.
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the need to expand the roles of union republics, ministries, local
governments, and enterprises in economic management.
The Party Plenum was a high point in political influence reached
by the industrial-managerial bureaucracy. They succeeded in getting a
favorable decision on their demands for lower planned rates of industrial
growth and for an economically more rational pattern of investment al-
locations. Gosekonomkomissiya was strengthened, both by being entrusted
with the "function of the operative solution of current questions" and
by having its staff overhauled and invigorated. M.Z. Saburov was replaced
by M.G. Pervukhin as chairman, and six top experts in industrial and agri-
cultural management were made his lieutenants -- a move apparently de-
signed to improve sharply top-level coordination of the economy. The State
Commission for Long-Range Planning (Gosplan), headed by N.K. Baibakov, was
left untouched.
The implied slowdown in planned rates of industrial growth, suggested
by the Central Committee communique of 24 December, was confirmed during the
session of the USSR Supreme Soviet which met on 5-12 February 1957. Plan
and budget speeches delivered at that time criticizing "excessive strains"
in the economy made it evident that Soviet leaders were aware of problems
related to fulfillment of the original 1960 goals of the Sixth Five Year
Plan.
Hardly had these decisions been made when the Central Committee
once again met in plenary session (13-14 February 1957) and took the first
dramatic steps toward industrial reorganization. On the basis of a report
delivered by Khrushchev, the Central Committee adopted a decision "to in-
struct the Presidium of the CPSU Central Committee and the USSR Council of
Ministers to draft concrete proposals for the reorganization of management
in industry and construction (in a manner) which will combine ... more
concrete and efficient management in economic areas and strict observance
of the principle of centralized planning on a national scale."
Although precise terms of the new system were not spelled out, it
appeared that the recently refurbished Gosekonomkomissiya was to be aban-
doned in favor of a strengthened Gosplan. In a subsequent interview with
a US correspondent, lihrushchev indicated that abolition of industrial
ministries at both All-Union and republic levels was Contemplated.
C. The "Theses" and the May Session of the Supreme Soviet.
The picture was considerably clarified with the publication on
30 March of the "Theses" on the reorganization, submitted by Khrushchev
on behalf of the Party Presidium and the USSR Council of Ministers for
countrywide "popular" discussion before submission to the USSR Supreme
Soviet for approval. This document outlined the concept of regional
councils of national economy, to which would be subordinated the great
majority of industrial enterprises and construction sites located within
their territorial limits. Those enterprises not subordinate to the
sovnarkhozy would be administered by local soviets. Industrial ministries
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formerly charged with these tasks would be abolished. The role of USSR
Gosplan would be significantly enhanced so as to include "definite powers
for direct solution of questions relating to coordinating the work of the
economic councils in the fulfillment of national economic plans." The
revamped Gosekonomkomissiya, whose status had become uncertain following
the February Party plenum, was to be dissolved.
The publication of the "Theses" was the signal for an intensive
disucssion, carried in the pages of the Soviet press, devoted largely to
approving the entire scheme in principle while offering various sugges-
tions on some of the details which the "Theses" failed to specify. As
finally adopted on 10 May by the Supreme Soviet, with further details
added at subsequent republic sessions, the plan was not markedly different
from that foreseen in the original proposals. Certain exceptions, however,
shed light on some of the considerations involved in the reorganization as
well as on areas of disagreement among various persons or groups involved.
D. Reorganization of July 1957.
The economic-administrative structure of the Soviet government was
altered in July 1957 by changing the makeup of the USSR Council of Ministers;
by concentrating both long-term and current planning in one organization
(USSR Gosplan); by changing the functions of or abolishing most central min-
istries; and, finally, establishing regional councils of national economy
to which were subordinated the majority of industrial and construction enter-
prises throughout the country. (For graphic presentations of the economic-
administrative structure of the Soviet government, see Figures 1, 2, and 3.*)
1. USSR Council of Ministers.
Although the numerical membership of the USSR Council of Mini-
sters is relatiVely unchanged (65 in January 1957 versus 61 in April 1958),
its composition, of course, is somewhat different. Replacing some ministers
on the Council whose ministries were abolished are several USSR Gosplan
officials (7, in addition to the chairman of USSR Gosplan), as well as the
15 chairmen of the union-republic governments. Finally, the chairman of the
Central Statistical Directorate was given the title of minister with a seat
on the Council.
The new Council reflects the enhanced role of USSR Gosplan as
well as the persistent emphasis upon economic matters in the USSR. USSR
Gosplan is the only single organization with more than one member on the
Council.
2. Ministries.
Since 1 May 1957, 33 out of 52 central ministries have been ?
abolished (6 of the former ministries were re-formed into state committees).
In addition, 4 other central ministries were consolidated into 2 ministries.
* Following p. 14.
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ORGANIZATION
OF SOVIET INDUSTRY, 1957 AND 1958
? GOVERNMENT
(Early 1957)
TECHNICALLY SPECIALIZED
USSR Council
of Ministers
All-Union
Ministries
Main
Administrations
Union Rep blic
Ministri s
Main
Administrations
PARTY
Presidium Central
Committee CPSU
Republic Council
of Ministers
Presidium Republic
Central Committee
Republic
Planning
Organs
Kroy and Oblast
Committees
Union
Republic Ministries
Republic
Ministries
1
27218 10-58
Producing Enterprises
Subordination
? ? ? ? Operational Relationships
Rayon Committees
Primary Party
Committees
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GOVERNMENT
('958)
TERRITORIAL
USSR
Gosplon
USSR Council
of Ministers
Figure 1
Republic
Gosplan
Republic Council
of Ministers
Remaining
USSR Ministries
Republic Ministries
Sovnarkhoz
Planning
Department
Producing Enterprises
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ORGANIZATION OF SOVIET INDUSTRY
WITHIN A UNION REPUBLIC, 1958
Council of Ministers
of Republic
Figure 2
1
Republic Ministry
Sovnarkhoz
Functional Departments
Planning
Department
Functional Departments
Planning
Department
Planning
Department
Local Government
Functional Departments
Selected Enterprises
Exempt from
Sovnarkhoz Control
27219 10-58
Industrial Enterprises '
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Local Enterprises
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ORGANIZATION OF A
TYPICAL SOVNARKHOZ
Council of
National Economy
Figure 3
FUNCTIONAL STAFFS
Technical-Economic
Council
(Advisory)
Planning
Material-Technical
Supply
Scientific Research
Finance
Capital Construction
Bureaus
BRANCH ADMINISTRATIONS
Sales
Labor and Wages
27220 10-58
Chemical Industry
Machine Building
Industry
Light Industry
Metallurgical Industry
Construction Industry
Others
Enterprises and Construction Sites
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Administration of most industrial enterprises is now regionally organized
under the local sovnarkhozy.*
Certain construction and industrial ministries were excepted
from the general pattern of relinquishing operational control over their
enterprises. These are the Ministries of Transport Machine Building and
of Medium Machine Building (nuclear energy).
Two examples illustrate the functions retained by economic
ministries still in existence. In electric power) sovnarkhozy administer
power stations, and the Ministry of Electric Power Stations controls the
.over-all distribution of electric power. In the chemical industry the
Ministry** was to confine itself to current and long-term planning) to the
introduction of new technology and new products, to guiding research lab-
oratories, and to studying plant location and choice of new projects -- but
was not to manage enterprises.
3. Planning Apparatus.
The central planning apparatus was changed to merge long-term
and short-term planning in one organization -- USSR Gosplan. Gosekonom-
komissiya was abolished. USSR Gosplan was enlarged in function and in
staff. Among USSR Gosplan's deputy chairmen and department heads who now
have seats on the USSR Council of Ministers, seven formerly headed union
ministries. USSR Gosplan is responsible for overseeing the development of
important branches of the economy and for insuring adequate supplies of
goods for industrial production.
Consolidation of all central planning and approximately 16 main
administrations for sales and supply, as well as scientific-research in-
stitutes formerly belonging to central ministries in USSR Gosplan, greatly
enlarges the role of this organization in directing the economic activities
of republics, ministries) sovnarkhozy, and factories.
The Gosplans of republics, similar to USSR Gosplan, were in-
creased in responsibility, functions, and staff. In the Ukraine) for
example, seven department heads of that republic's Gosplan sit on the
Ukrainian Council of Ministers.***
4. Economic Regions.
The principal effect of the reorganization, organizationally)
was to create 105 (now 104) economic-administrative regions, each with its
One Soviet author states that all industrial enterprises will be
managed by sovnarkhozy. This seems to be an exaggeration.
** This ministry was replaced recently by a State Committee for
Chemistry.
*** In the RSFSR, however, Gosplan department heads no longer sit on
the republic council of ministers.
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council of national economy.* The councils administer the major portion**
of industry and construction in their regions) the boundaries of which
tend to follow existing oblast and republic boundaries. Each council has
a chairman, deputy-chairman, and several members.*** Stiff employees of
the councils, however) vary in number from several hundred to as many
as 3,000.
The detailed structure of the sovnarkhozy varies somewhat
among the regions) but each has a governing body ("council") and an
advisory "technical-economic council" as well as administrative and
functional subdivisions. The'Armenian sovnarkhoz, for example, has
6 administrative branches (such as finance), 6 main divisions (such as
transport)) and 11 industrial branches (such as light industry, fish
industry) and chemical industry). And in Voronezh the advisory technical-
economic council, for example, is composed of 125 members, divided into
15 branch sections.
E. Party Control Under the New System.
A striking .aspect of the reorganization is the implication it has
had for strengthening the role of the Party in Soviet economic affairs.
From the very outset of the program the press has stressed that the Party
is to play a key part in Virtually every phase of CNE operations. The .
Party committees have been active in the appointment of CNE personnel,****
and undoubtedly leading positions within the sovnarkhoz apparatus are
nomenklaturyi -- that is, on that list of jobs for which the candidate is
selected and approved by the Party. Besides rendering assistance to the
CNE's in their functioning, Party organizations within the CNE (elected
within each subsection), for the CNE in its entirety, and at all levels of
the standard Party structure, are constantly reminded by the regime to
fight any tendencies toward "localism" -- the putting of local above state
interests.
Whether the Party and its members may usefully be distinguished
as a group opposed to or in contrast with the CNE personnel, economic
administrators, or governmental bureaucrats) remains questionable; it is
probably a distinction whith is all too often overdrawn. The prestige
and standing of all local officials, whether Party secretaries, CNE
personnel, or local government officials, will in great measure depend
* .The full title is Council of National Economy (Sovet Narodnogo
Khozyaystva).
** It has been estimated that the councils administer just under 75 per-
cent of gross industrial output) local government agencies administer
15 percent) and central ministries and committees administer approximately
10 percent.
*** For example, the Moscow City Council has 15 members, Sverdlovsk has
13, and Kemerovo has 12.
**** In appointments, however, the Party has exercised restraint, with no
tendency evident to sacrifice technically competent personnel in order to
load the CNE apparatus with Party "hacks."
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on the operational efficiency of the sovnarkhoz in the region in which
they are located. This common concern may well tend to encourage these
people to operate harmoniously. To be sure, friction is bound to occur,
of which numerous instances have been noted in the press. On occasion,
CNE officials have complained of what they felt to be undue Party inter-
ference in their affairs, and local governmental (oblispolkom or krayis-
polkom) leaders have on occasion found fault with the tendency of the
newly established CNE to ignore the views and desires of the previously
existing governmental organs. This problem in particular has been com-
pounded by the lack of clarity in defining the relations expected to
obtain between the CNE and the existing government organs in the corre-
sponding area.
It should be stressed, however, that in the past strains have
existed between Party officials and economic administrators. Under the
new system similar problems may well persist. Nevertheless, in the past
the various officials have shown a remarkable aptitude for compromise.
Such an ability to accommodate does not necessarily disappear in the face
of a bureaucratic and administrative organization.
III. Manifestations of Resource Waste.
A. Problems and Their Organizational Remedies.
As was suggested above; the leadership has been aware of certain
organizational deficiencies and the ways in which these deficiencies mani-
fested themselves. Numerous efforts had been made to correct these organi-
zational defects since Stalin's death by way of campaigns* and through
limited organizational changes.
To understand better the problems confronting the regime, it may
be useful to classify some cases, reported at length by official sources,
into seven major categories. The seven particular defects that follow do
not exhaust all the types of resource misuse that were officially claimed
to exist under the old system. The list, however, does cover the major
categories, as follows: (1) waste in the use of joint products; (2) de-
sire of self-sufficiency and the failure to subcontract; (3) waste through
unnecessary and inefficient transportation; (4) hoarding of "surplus" in
(5) organizational duplication resulting in the waste of human
resources; (6) joint resources -- the case for amalgamation and joint use
of ancillary activity; and (7) investment planning and plan implementation.
Official evidence of "irrationality" for the various categories,
the corrective measures that have been taken under the new form of organi-
zation, and the economic gains or losses resulting from these measures
being applied to these specific cases will be examined below.
* The term campaign refers to an organized effort to push ahead some
state program when considerable resistance to the program is eZpected.
It generally has a specific aim that the state feels can be achieved
best by means of a well-publicized drive.
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1. Waste in the Use of Joint Products.
Several examples have been reported of waste in resources
resulting from the failure to process fully compound ores or to use by-
products because of separate organizations controlling the production
of related commodities.
At one ore-processing plant, only zinc, lead, and copper
were extracted, and seven other elements, including sulfur and tin,
were discarded as waste because they were the responsibility of a
different ministry. At the Besokogorsk deposits, only iron was proc-
essed from the ore; thus waste amounted to 70 percent of useful ore
(by value) in the form of unextracted cobalt, silver, phosphorus, and
the like.
The Lisichansk Chemical Combine had formerly discarded
carbon dioxide as a waste product while a neighboring soda plant was
obliged to produce its own. In Rustavi the same type of "departmental
barrier" precluded the use of coke gas produced by the metallurgical
plant for the manufacture of nitrogen fertilizer in a nearby plant of
another ministry.
The output gains in certain of these cases were so evident
that imMediate investments were forthcoming to make use of the wasted
materials. In the case of the Lisichansk Chemical Combine, the wasted
20,000 cubic meters of carbon dioxide is now piped to the soda plant
next door. In the compound ore cases cited above, the likelihood of
gains is less clear. Many elements normally appear together, and the
fact that one or more elements are being extracted and others are not
does not of itself prove that a "free resource" is being thrown out in
the mine tailings. Costs are involved in extracting the other elements,
and whether the returns are greater from this source than from increas-
ing output of the same element (or a substitute) from another source
depends, among other things, on the concentration of the element and
the mineral form in which it occurs.
2. Self-Sufficiency and the Failure to Subcontract.
Probably the most frequent example cited of "irrational"
use of resources was the "high cost" production often undertaken by the
enterprise to assure itself of its awn supplies of component parts even
when these parts were in wide use by many plants in the same locality.
This practice resulted in small, relatively high-cost subsidiary oper-
ations attached to the plant, while nearby, with unused capacity, speci-
alized plants of other organizations might be producing the same product
at lower cost.* The most frequent examples involved castings, forgings,
stampings, welding electrodes, tools, instruments, and plastics.
* The phenomenon of large differentials among enterprises in the average
cost of production of any given commodity is characteristic of Soviet in-
dustry. 'The publicized criticism here is directed toward those commodities
that are in common use by industry and where possibilities exist for shift-
ing production from one enterprise to another.
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This desire for self-sufficiency on the part of industrial
administrators was a natural reaction to the constant worry and concern
about other plants failing to fulfill subcontracts. Under such un-
certainty about timely fulfillment of supply contracts, they could either
rely on their own supplies or run the risk of supply shortages and thus
fail to achieve the primary goal -- output.
Examples were numerous of average cost differentials of two,
three, and four times. Such differentials might be explained by economies
of scale and technological considerations, especially cases of indivisi-
bilities due to the impossibility of adapting mechanization to small ancil-
lary shops producing castings, tools, instruments, and the like. In the
machine building industries, for example, more than 30 percent of the
foundries were characterized as "inefficiently and poorly equipped" with
annual output capacities of less than 1,000 tons of castings.*
Specific examples of cost differentials existing between
these auxiliary shops and nearby "specialized" plants can be cited.**
The Voronezh Agricultural Machinery Plant produced its own hardware
articles (nuts, bolts, nails, and screws) at a cost of 3)000 rubles***
a ton while nearby plants could supply these items at 1,000 rubles a ton
(presumably the same product nix). In the Sverdlovsk CNE it was found
that small auxiliary shops were producing instruments at four and five
times the price charged by the specialized instrument plants. In the
Saratov CNE the cost of producing electric motors in one plant was
twice that at another plant which was found to have adequate capacity
to supply both plants.
To curb this waste of resources, the new CNE's were authorized
to shift such production from the "high cost" to the "low cost" plants.
With this criterion in mind) the CNE's have duly surveyed their internal
plants producing standard metal goods, and, where adequate capacity has
existed, they have closed the high-cost producers. For example, the
Leningrad CNE closed all but 14 of 84 foundry shops producing gray iron
castings for the local machine building industries and all but 30 of 76
forgings and stampings shops. Besides these fairly standard components
* No optimum size castings shop is given, but of the exemplary shops
mentioned the capacities are in the 10,000- to 15,000-ton range.
** In some cases the "efficient" plant truly specializes in these pro-
ducts or, as in most cases, has a larger shop (for example, foundry) that
is supplied with more machinery, makes use of input-saving technology, and
presunably has a current output below its "capacity." The smaller, in-
efficient plants usually use '"semihandicraft" means.
*** Unless 'otherwise indicated, ruble values in this report are based on
the official rate of exchange, 4 rubles to US $1, which is not neces-
sarily an accurate reflection of the dollar value.
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(castings) stampings) and the like), surveys are being made of other
components, such as pumps, cold-formed sections) reduction gears) and
spare parts.*
3. Transportation (Cross Hauling, Single Hauls, and Pooling).
The cases of "self-sufficiency" cited above also provided
most of the cases for the critics of waste from unnecessary transpor-
tation.
The "departmental approach," as Ithrushchev put it, resulted
in Leningrad shipping to other parts of the country almost one-third of
its production of pig iron and steel, or 110,000 tons, while at the same
time the city received up to 40,000 tons of large iron and steel castings
from other parts of the country. With this opening volley in the "Theses,"
there followed numerous press examples of "irrational transport" covering
such diverse commodities as roofing iron, peat, coal, and wire and nailr.
Within the category of cross hauling, the case of the iron
and steel castings received the most attention and probably was the most
flagrant example. The extent of such cross hauling is suggested by the
following data on deliveries of iron castings produced by enterprises of
one ministry to enterprises of the same ministry in 1957 as a percentage
of the ministry's total shipments: Ministries of the Electrotechnical
Industry and of Construction and Road Machine Building) 96 percent; Rail-
roads, 90 percent; Petroleum, 88 percent; Shipbuilding) 84 percent; and
Instruments and Automation, 74 percent. In the Ministry of Heavy Machine
Building, which is supposed to be a major supplier of other ministries,
the share was 60 to 65 percent. Or, viewed from another point of view, of
total iron castings shipped by all firms, the portion intended for enter-
prises within the producer's CNE was 4.2 percent for the Gortkiy CNE) 9.5
percent for Moscow Oblast CNE) 11.8 percent for Chaklov) 13.4 percent for
Dnepropetrovsk, 19.0 percent for Belorussia, and 21.5 percent for Altay.
Although considerations of efficiency would not necessarily
indicate that the figures should be reversed, the data above suggest a
strong propensity for the abolished ministries to practice autarky, even
to shipping coals to Newcastle.
* Although undoubtedly savings are possible from moving production from
"high-cost" to "low-cost" producers, it must be remembered that there are
certain "dampening effects" that probably will mcan that realized savings
will be less than predicted savings. These effects include: (a) the
possibility of rising (unpredicted) marginal cost in the "low-cost" plant
which will mean the average cost spread will be less after the transfer of
production and (b) the fact that the "true cost" of capital is not re-
flected in the computed cost (because of unrealistically low depreciation
rates and no interest charges). Thus the "low-cost" producer) described
as highly mechanized, will be producing each unit of product X with more
units of capital and less units of labor than the "high-cost" producer.
Therefore, if cost were "correctly" measured, the cost differential be-
tween the two plants probably would be less than presupposed.
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The "single haul" case perhaps is an appropriate generali-
zation for those instances of irrational use of transportation services
due to movement of raw or fabricated materials from one locale to another
when adequate capacity existed to produce the required commodity in the
area where the consumer is located. For example, a construction trust of
one ministry located in Karaganda imported bricks from Ust-Kamenogorsk
although there was adequate capacity from the Karaganda kilns of a con-
struction trust belonging to a different ministry.*
On low-value, high-weight items such as construction materials)
castings, and forgings the increment to the factory price from transpor-
tation charges) of course) can become significant. One case was cited of a
200-percent increment in cost per iron casting as a result of shipments
from a plant in Kiev to one in Tyumen.
A third type of complaint involved local truck transport.
Practically every plant had trucks assigned it, ideally in sufficient
capacity to satisfy the plant's peak needs. ? Large savings allegedly were
to be realized once common truck pools could be organized under the CNE --
that is, from a reduction in average cost per tonrkilometer.
? Under the territorial principle there should be some trans-
portation savings. These savings would come about from all industry re-
organizing its interplant delivery system on the criteria of buying and
selling locally if possible. Thus it would follow that irrationalities
arising from cross hauling and "single hauling" would be eliminated.
If all possible savings from reductions of railroad ship-
ments based on the maxim "sell to and buy from the closest plant" were
realized, what would be the reduction in demand for transport expressed
by savings in ton-kilometers? An example of the extent of possible
savings was estimated for the Ukraine. A Soviet writer computed that
"irrational" transport by rail (that is, savings if what he considered
to be alternative sources were used) amounted to 6.7 billion ton-kilo-
meters in that republic in 1955. This amounts to about 4.5 percent of
the approximately 150 billion ton-kilometers of freight moved that year
by rail in the Ukraine. Considering the optimistic assumptions made by
the author, the plausible savings may not exceed 2 to 3 percent of the
total ton-kilometers.
Some savings are available from pooling the enterprise truck
parks under the CNE. Cost per ton-kilometer carried by motor transport
will fall as the utilization per truck per year undoubtedly increases.
4. Hoarding of Surplus Inventory.
As Western students of Soviet management practices have, in-
dicated, plant managers, main administrations, and ministries have always
* The distance from Ust-Kamenogorsk to Karaganda is comparable to the
distance from Chicago to New York.. In this example the difference in
final cost of bricks from the two sources presumably was the transpor-
tation charge.
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attempted to put aside stocks as buffer reserves of such items as raw
materials, semifabricated parts, and buildings. These.reserves were
in excess of "legal norms" of inventories and were outside of the
officially designated state reserves.
Given the persistent supply problem facing the enterprise
manager, these extralegal reserves became an important part of what
Berliner calls the manager's "safety factor."
A State Bank investigation in 1940; cited by Berliner,
revealed that excess inventories of basic and auxiliary, materials
above the legal norms ranged from about 7 to 22 percent in the min-
istries (commiSsariats) investigated. Another study on metals alone
showed lieedils of 44 to 600 percent above the allowed norms.
This practice of hoarding was a favorite target in the past
.of periodic campaigns for "mobilizing reserves." As expected, this
topic was in the forefront of the rationale for reorganization. Once
the departmental barriers were down, the CNE's.were expected to ferret
out the "hidden reserves."
At the beginning of 1957 in RSFSR enterprises, there were
more than 18,000 uninstalled metal-cutting machine tools (15 percent of
1955 Soviet production), of which more than 10,000 were not needed by
the enterprises to which they had been delivered. The Kuybyshev CNE
reassigned inventory of 275 motive units and 68 metal-cutting and pres-
sing tools among its plants. The Krasnodar CNE reassigned unused tools
and equipment worth 18 million rubles in the first half-year of its
operation. The Gortkiy CNE uncovered excess inventories in the amount
of 59.5 million rubles, 30 million rubles of which it transferred to
other plants under its jurisdiction.
The Azerbaydzhan CNE found amumber of buildings that were
unutilized because of former "departmental barriers." One in Ningechaur
was turned into a cable factory; others in Baku and Kishlin were found
half empty, and metal-cutting lathes were installed in them.
Although the reported redistributions have been mostly with-
in the region, some CNE's are circulating lists of "surplus" materials to
other regions for their purchase.
Clearly, such redistributions are gains if they are; in fact;
true surpluses) not causing stoppages in those plants from which "excesses"
were taken because of unrealistically low official working capital i"norms."
5. Organizational Duplication Resulting in the Waste of Human
Resources.
Organizational duplication, cited as resulting from the former
"departmental system," if eliminated, would reduce manpower requirements
in the managerial and "white collar" classes of personnel (procurement and
sales workers and planning and general office personnel).
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The old ministerial system allegedly led to widespread dup-
lication of supply organs at all levels, from the All-Union ministry
and its main administrations in Moscow through the republic level and
down to the enterprise. The USSR Ministry of Construction had 15 supply
organizations in Moscow, 9 in Leningrad, and 7 in Minsk. In Gor'kiy
Oblast, lumber procurement was handled by 4o ministries and agencies.
In Magnitogorsk, there were 17 trade organizations belonging to 7 min-
istries and 6 main administrations. These and other examples were cited
by critics as a proliferation of procurement and sales organizations the
consolidation of which, they claimed, would bring about large personnel
savings.
Another type of duplication was cited. Many enterprises ad-
jacent to one another, because they complement one another, could better
be Amalgamated under a single administrative unit although formerly under
separate central organs. A typical example was the case of the Storage
Battery Plant and Storage Battery Container Plant at Podol'sk. Although
they were neighboring and complementary plants, they had separate ancil-
lary activities and administrative personnel.
The amalgamation of a cement plant and its primary consumer
next door, an asbestos plant, was advocated on the grounds of savings in
administrative personnel. Conserving scarce managerial resources was
also explicitly a factor behind the elimination of the numerous construc-
tion organizations found within every industrial region. In general, the
enterprise amalgamations that have taken place since 1957 assertedly have
resulted in savings of 5 to 15 percent of administrative personnel.
6. Joint Resources -- the Case for Amalgamation and Joint Use
of Ancillary Activity.
The firm in large-scale Soviet industry is often characterized
by the fact that it has several plants organized along vertical lines
(combines) or along horizontal lines (trusts).* Although the multiplant
principle is strongly entrenched, there are still, according to the critics,
many opportunities for further economic gains from amalgamations of plants.
In the past, "departmental barriers" precluded this possibility, it is
charged.
Since the CNE's have become organized, there has been a rash of
amalgamations, mostly into vertically integrated combines. In Sverdlovsk
CNE alone, plants were combined in 9 different industries: a cement plant
with 2 consumer plants nearby; the Serov blast furnaces with the local ore
mines; the Alapayevsk ore mines with 3 nearby metallurgical works; the
copper ore, smelting, and chemical plants in Hirovgrad and in Krasnouralfsk;
and the refractory, coke-chemical plant, and iron ore mines into the Nizhniy
Tagil Metallurgical Combine.
* Thus plants performing successive processing of metals may be integrated
into a metallurgical combine, and enterprises performing like functions may
be brought together into a mining trust.
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Gains in amalgamation are difficult to assess because they
are usually described in vague terms of "better management" or "coordi-
nated planning." Apart from the question of amalgamating several-plants
, into one firm (that. is, under one management)) the lack of coordination
in the use of ancillary activities such as common sources of electric
power, railroad sidings) and water supplies was-criticized under the old
system. . The authorities of Kazakhstan have, for example, over the past
8 years been aware of the need.for the unification of powerplants so
that more than one enterprise could use the same source of power in
Ural'sk and Chimkent.
A gain, in efficiency from joining ancillary activities, at
least as typified in the case of electric power stations,-is open to
question. ? It has been estimated that only 5 or 6. percent of total elec-
tric power, is being produced-by local-or small industrial plants where '
some unification of power facilities is likely to yield savings. Of
the remaining 94 or 95 percent of electric power output) 82 percent is
already in a grid system.* The remaining capacity (12 to 13 percent) is
in rural or logging areas or at mine and construction sites or is scat-
tered among small industrial plants, most of which are too widely sepa-
rated to permit amalgamation. Therefore) only very limited gains are to
be expected from this source.
7. Investment Wastes from Planning and Plan Implementation.
Planning.decitions in the Soviet economy fall into two broad.
classes: (a)-the planning of current output reflected in specific com-
modity output targets, the combination of factors in producing the output),
and the distribution of intermediate and final products and (b) the plan-
ning of investments to provide Tor sustaining present production through
replacement of used up capital and for future growth through providing
new capital stock.- .
While production planning mistakes are implicit in the six
categories above) the efficiency of planning the use of investment re-
sources has been under explicit attack. The discussion beloW of the
problems of investment planning and plan implementation is limited to--
those problems that were to be corrected or mitigated by the reorgani-
zation. Critics blamed the "old" organizational scheme for two broad
classes of planning and planning. implementation shortcomings: (a) fail-
ures in selection of investment projects and (b) waste in implementing
those projects that were selected. Under each of these general headings
there were specific inefficiencies that were to be the targets of the
reorganization.
a. Disproportions Within a Sector of Industry.
A perennial problem of the Soviet economy has been the
timeliness of completing new plant facilities within a sector (for example)
metallurgy) where,- because of the nature of the production process, if
* Maximum flexibility is already achieved through a network.
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new capacity in one branch (for example) blast furnace) is to be utilized,
new capacity in another branch is required (for example, iron ore). This
problem as a constraint on growth has become increasingly evident as the
economy's output, in any one branch of heavy industry) has closed previous
gaps between output and capacity. As a result) there have been growing
complaints of organization "weaknesses" that hampered the allocation of
investment resources in the proper "proportions."
More specifically in ferrous metallurgy, "sharp disparity
has developed recently" between the increased capacity in the processing
segment (blast and open-hearth furnaces) and the raw material base (iron
ore). Local as well as national disproportions were pointed out. For
example, in the Nizhniy Tagil metallurgical complex, various plants (now
merged into one combine) produced ore, coke, and metal under different
main administrations of the Ministry of Ferrous Metallurgy. Because of
"departmental barriers" within the Ministry itself, disproportions arose
at the Nizhniy Tagil complex from new plant capacity for coke production
far exceeding the requirements of the local iron-smelting facilities.
Smelting capacity in turn grew faster than local iron ore output. Pre-
sumably expansion of the production- of Tagil steel was retarded because
of local iron ore capacity which in turn could have been expanded more
rapidly if investment funds had not been misdirected into expanding coke
production capacity (that is, with the same fixed investments more product
would have been realized).
Presumably as a result of amalgamations, such as that of
Nizhniy Tagil Metallurgical Combine, better investment planning .will en-
sue -- someone will notice that more funds should be appropriated for iron
ore capacity and less for coke capacity in any given time period.
Offsetting the advantage of having a CNE chairman warn
in advance of local disproportions may be the loss of know-how of techni-
cally specialized ministries. USSR Gosplan) which had the primary respon-
sibility for investment planning, was aided in intra-industry planning of
investment by the specialized ministries with their technical staffs.
Abolition of these ministries, responsible for assuring "proportionality"
in the development of their industries, may not be compensated for en-
tirely by the mere assignment of members of their staffs to the branch of
industry departments of USSR Gosplan.
b. Selection'of Specific Projects.
The planners, operating under the ministerial scheme)
were accused of ignoring specific investment opportunities where the
critic suggested that it was obvious the return was greater than in
alternative uses of investment resources. The cases concerning minerals
and carbon dioxide cited above are examples of cases in which the critics
argued that, because of ignorance of "local conditions" or because of
"departmental barriers," the investment funds had been withheld. Another
case involved an alternative source of coal for Uzbek SSR. It was con-
tended that, by opening a local mine at Angren, coal would be produced at
23 rubles a ton compared with the delivery price of 43 rubles a ton. The
project had not been initiated, because funds had not been allocated.
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USSR Gosplan investment planners may now be better in-
formed of "local conditions" as fat as alternative uses of investment
funds are concerned. Every region, in its effort to improve its relative
importance as a producer of goods and services fOr the, national economy
and to provide more communal services for its inhabitants, will energet-
ically forward numerous project proposals, good or bad. Out of this
welter of proposals, there will undoubtedly be certain worthwhile projects
that otherwise would have gone unnoticed.
The gains in this direction may be more than offset by
the losses occurring in another direction. Criticism in the press (and
recently from Khrushchev) alleges that actual investments deviate from
the planned pattern of investments. The CNE's, it is charged, simply
divert funds from centrally planned projects to specific projects of
their own, without the permission of higher authority. This is "forbidden,"
of course, but the persistency of the allegations seems to indicate suc-
cessful circumvention of the law without the retribution that would elimi-
nate it. Thus the actual pattern of investment resource use therefore will
not be that which is planned by the central authorities. The interjection
of local preferences (with their different criteria) will, of course, mean
that the preferences of central planners are not being translated into
actual investments) and as seen from their point of view (which is the re-
levant point of view for our analysis)) there is a waste of investment
resources.
A typical case would be that of the Karaganda CNE. With
the knowledge of the oblast and city Party committees, the CNE switched
investment funds allocated specifically for the coal and metallurgical
industries to "local projects." A 25-million-ruble CNE administrative
building was constructed with funds originally earmarked for the coal in-
dustry. Seven million rubles were diverted for the construction of a
circus and drama theater.*
The Tashkent CNE decreased appropriations for coal and
ferrous metallurgy construction by 10 million rubles, and the Samarkand
CNE decreased appropriations for cotton cleaning plants by 4 million rubles,
in order to use these funds for the construction of highways and "cultural"
and housing projects.
In assessing the seriousness of this problem, it is useful
to quote Izvestiya: "The use of means for purposes other than prescribed
is a gross violation of the directives of the Party and government in the
field of capital construction. Some sovnarkhozy willfully reduced the
volume of capital investments which had been established in the plan for
1958 for the development of the most important branches of industry, and
directed considerable means into construction of urban bridges, theaters,
* This does not necessarily mean that the CNE chairman has the interest
of the general consumer in mind. There are many press criticisms of CNE's
ignoring the production of consumer goods. Such consumer-type investment
projects as theaters seem to be primarily motivated by the chairman's own
interest.
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electrification of rural areas, and other local ends. This occurred in
the economic regions of Ryazan', Lipetsk, Gorlkiy, Karaganda, Dneprope-
trovsk, Altay, Kuybyshev, and Krasnoyarsk."
c. Diffusion of Investments -- Problem of Unfinished
Projects.
Before the reorganization, ministries were frequently .
accused of using available investment resources to start an excessive
number of projects instead of using these resources to complete projects
already under way. The plan for volume of investments (finished and un-
finished) could be fulfilled even though commissioning of new capacity
remained unfulfilled. As a result, by the end of 1956 the volume of un-
finished construction in the RSFSR (where about 6o percent of Soviet con-
struction occurs) had tripled in comparison with 1951. An important
motivation for diffusing investment funds among a great number of new
projects was the desire of the ministry to be able to justify future
requests for increased investment funds.
Rather than being reduced, the volume of unfinished con-
struction has continued to increase by about 10 billion rubles yearly,
before and after the reorganization.*
More specifically, current press criticism indicates that
the old ministerial practice of dispersing funds among an excessive number
of projects has simply shifted to the republic Gosplans.** The prolonged
construction periods for petroleum refineries continue, it is alleged,
because RSFSR Gosplan officials (formerly in the USSR Ministry of the
Petroleum Industry) are starting an excessively large number of projects
with a view to justifying future requests for increased investment funds
in the future.
Far from limiting dispersions, the CNE's are accused of the
same practice cited above. The Lipetsk CNE was accused of dispersing invest-
ments among too many ferrous metallurgy projects as well as within other
branches of industry. The creation of regional economic administrations need
not in itself reduce the scope of the dispersion problems. The investment
interests of the individual CNE are analogous to those of the individual min-
istry -- to maximize the number of projects under way as well as the capital
* The ratio of unfinished construction to annual state capital investments,
however, has been falling over the past several years: 107 percent of 1955
capital investments at the beginning of 1956, 98 percent of the volume of
1956 investments at the beginning of 1957, and 92 percent of 1957 investments
at the beginning of 1958. This slowing down of the rate of unfinished con-
struction compared with the increase in the rate of total investment was a
result of measures taken before the reorganization.
** These critics attempt to pin the blame on ex-ministerial officials who
have been transferred to Gosplans and have continued the same practices of
planning and project implementation that they used in the ministries.
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work completed. But their interest in maximizing the work under way
tends to induce starting many more projects than may be economically
justified.*
Control of such interests and tendencies must be accomp-
lished by Means other than the reorganization of construction as carried
out during 1957. Evaluation of performance in construction continues to
be based on fulfillment of the plan for the volume of capital work with-
out discerning between the volume of work on unfinished or finished pro-
jects. Thus neither financial support nor bonuses to construction organi-
zations are dependent upon completing construction projects and putting
them into operation (except for projects scheduled to take less than a
year).
d. Waste of Resources in Investment Implementation.
Wastes in implementation range from gross errors of neg-
ligence because of "departmental barriers" to questions of the optimum
size of construction firms. One costly error was the case of a rail line '
constructed through a portion of the Angara River valley which was already
scheduled to be inundated by the Bratsk Hydroelectric Station dam. This
allegedly was the consequence of a failure to coordinate two separate in-
vestment decisions made by Moscow ministries. Another waste arose from the
widespread proliferation of construction firms at the local level because
construction and installation work was carried out by each ministry sepa-
rately. As a consequence, the annual volume of work of most firms was
smaller than an "optimum" annual volume.
This profusion of local construction firms introduced
added rigidities in the distribution of construction materials and labor,
with temporary shortages of materials and other factors of production
cussing frequent shutdowns at local building sites. Many of these shut-
downs could have been prevented, presumably, if a single local organ had
possessed authority to maneuver available materials and labor among the
construction firms in a given area.
Certainly some gains will be forthcoming from the reorgani-
zation. Obvious errors such as occurred in the Bratsk case will tend to
be precluded, as the regional councils undoubtedly will be aware of the
projects under way or planned for their territory. But this type of mistake,
although sensational in character, probably was a minor element in the in-
efficient use of investment resources.
Efficiency gains of some Importance may come from consoli-
dating small construction firms in the same area and from integrating firms
* This discussion is in. the context of investment diffusion -- given a
fixed sector pattern of investment. The question here is investment with-
in the oil industry and not whether the CNE will invest a given amount in
a theater or an oil refinery. The choice of the theater project may be
more in their interest, but for present purposes this choice is precluded.
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producing construction materials with the construction firms themselves.
These gains probably will result from three types of change. (1) In-
creasing the average size of a firm may reduce the cost per unit of
construction accomplished. Soviet sources claim that the optimum size
of a construction trust is 150 million to 300 million rubles (value of
construction per year) for industrial construction and 100 million rubles
per year for housing-civic construction. Before the, reorganization, only
16 percent of construction organizations in the RSFSR attained such volume
of output. Presumably, most of the other firms had a smaller volume of
construction, and therefore savings are possible by consolidations.*
(2) Pooling of common resources (labor, materials) will allow for "maneu-
vering" of inventories and manpower within a region so that there will be
fewer work stoppages because of temporary distribution failures. (3) The
vertical integration of building material firms (local brick kilns, saw-
mills, and the like) with the construction firms may prove beneficial.
B. Summary of the Effects of Reorganization on the Seven Special
Cases of Resource 'Waste.
In evaluating the effects of the reorganization on the specific
defects discussed above) it is useful to separate the transitional from
the longer run effects. The analysis of transitional effects would em-
brace the time period required to exhaust the windfall gains (stock of
opportunities for gains or losses) from the effects of the reorganization
"cures" on the seven items. Thus, assuming that normal growth would not
take place in this period, the interesting question to ask is, How much
more goods and services would the Soviet economy produce after the re-
organization has had time to work out all its positive and negative effects
on the present base of resources?**
Clearly, gains are possible. If "departmental barriers" are
eliminated, if the appropriate decision-makers are fully aware of "local
* Obviously there are go6d reasons why some trusts cannot be organized
into the "optimum" size.: (1) volume of construction varies by region
and (2) specialized firms by the nature of their work (dans, blast furnaces)
cannot readily be amalgamated with general construction firms.
** In a more rigorous sense the following are being held constant in the
"short-run" or transitional period: (1) all conventional resources of
production (quality and quantity of labor, capital stock) and other effects
(new technology) -- it is assumed that any additional resources required
to "reorganize" would be released from alternative uses (that is, capital
from depreciation allowances); and (2) the "bad effects" of the reorgani-
zation are ignored that are not considered in the discussion of the classes
of "resource waste" (A) above) and, therefore, by not directly impinging
on these cases, can be considered as "new problems," -- for example, a hew
manifestation of an old problem such as supply. This classification is
rather fictitious in the sense that what is classified as "new," such as
supply problems, have direct bearing on) say, inventory hoarding, one of
the "ole problems dealt with above. As in the case of most anPlyses in
economics, the purpose of ceteris paribus is methodological and not sub-
stantiVe.
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conditions," and if some appropriate checklist* is explicitly given
to each official (for example, the CNE chairman), then gains are quite
apparent, in the form of both input savings and output increases.
But the magnitude of these gains should not be overestimated.
The area of gains with the least qualifiers would be in the use of
eXcess inventories. But even here it is necessary to question the
official definition of "excessive."** In treating the other special
categories, the qualifying items become more numerous, and in the
most important general case, that of planning investments and their
implementation, the gains may be restricted to a minor consideration,
such as better distribution of building supplies. It is of interest
that when a subaggregate computation of a type of gain is made, such
as the cited case for transportation savings for the Ukraine) the
"maximum" computed gain amounts to only 4 to 5 percent of the base
total. Yet) as in other case, what is officially designated as
"optimum" for reducing waste in the transportation sector is unlikely
to be realized.***
Again, in the vaunted case of consolidating a commen resource
requirement, such as foundries, the evidence indicates relatively minor
savings. In the Moscow City CNE, for example, the "high-cost" foundries
(small capacity) mostly unmechanized) comprised more than half of the
71 foundries producing iron and steel castings. Even though these
foundries comprised more than half of the plants, they produced only
2.4 percent of all the output of castings for the CNE.**** Thus, al-
though the savings per casting may be large from closing the small
"high-cost" foundries, the very fact that their total contribution to
castings output was minor means that total savings cannot be very
significant.
Two over-all comments are also relevant at this point which
limit optimism concerning gains from the effects of the reforms on
these special casest: (1) the Soviet press dramatized the need for
Each CNE chairman, for example) is ordered to compare relative
costs of producing castings and to go snooping around warehouses for
excess inventory.
** Or, for example, are the legal limits on tons of rolled metal
which a plant may have on hand per 100 units of finished output of
metal goods adequate to meet requirements even when it is assumed that
the "old" problems of distribution and supply have been eliminated and
not replaced by "new" problems of distribution and supply?
*** Besides the undoubted overoptimism of the official author (who
probably included shipments that were indeed rational or impossible to
halt for other reasons), there is the view attributed to the leading
Soviet transport economist that cross hauling, a major type of "irrational
transportation," will not decline.
XXXX Output may be expressed in weight; the value may be higher.
t It should be remembered, of course, that the rationale for the
reorganization stressed the change in the "rules of the game" in making
decisions. This subject is treated below.
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organization, and their frequent examples of inefficiency are certainly
the more glaring cases, and (2) most of the categories of inefficiencies
and specific cases were already well known to officials and were the
subject of campaigns or other methods of control in the past, but they
have been tolerated at their present levels in recent times. If "losses"
had been very great from any one category, campaigns would have been in
order.
In sum total, it can be said intuitively that definite gains* will
result in the transitional period** but that one cannot expect large gains.
After the transitional effects on the resource base have been
determined, the next interesting question concerns what the effects would
be on economic growth in the longer run, by way of correcting wastes in
the use of resources (from the seven special categories) through the
reorganization.
In the long run the constraints on growth (introduced to analyze
the transitional effects) are relaxed and "normal" growth resumed; all
the factors affecting growth now become variables. Because the stock
of opportunities for gain from the resource base itself is now exhausted,
the new opportunities consist of avoiding the mistakes formerly made each
year. It must be remembered that the transitional gains resulted from an
accumulation of foregone opportunities over many years. The annual crop
of mistakes which would have been made under the old system would be only
a small fraction of the accumulation of mistakes.***
* Or net increase in output, as expressed in industrial indexes or in
gross national product at constant prices.
** The transitional period may cover a 4- or 5-year period -- that is, the
time to work out the above effects in exhausting the opportunities for gain
from the original resource base. Actually, in the period after the short-
run effects are felt in the transition, with the input of resources constant,
output will be less than in the transition, as the use of excess stock (inven-
tory) of raw materials will give only a temporary boost. Therefore, final
short-run "equilibrium" (in our special sense, given our constraints) will
come about in the longer run, and output will be greater than before the
reorganization but less than during the transition.
*** Thus, if the exhaustion of the stockpile of gains to be had from
reorganization from the seven categories could, for illustrative purposes,
initially increase total industrial output by 5 percent, the maximum con-
tinuing annual gains that would be forthcoming when "normal" growth is
resumed can be defined under the hypothetical assumption above. For ex-
ample, if industrial growth after the transitional period under the pre-
vious form of organization had come to 10 percent and all the "errors"
were reproduced (under the seven cases) exactly on scale (by one-tenth),
the loss in output from not operating under the new form of organization
would come to 0.5 percent. In other words, if the "errors" had reduced
aggregated output from the accumulated resource base by 5 percent, their
perpetuation would lower future growth in output by 5 percent of the rate
of growth, in this case 5 percent of 10 percent, or 0.5 percent per year.
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IV. Changes in Decision-Making Procedures and the Effects on Growth.
The discussion of economic effects of the reorganization so far has
taken into account changes in decision-making impinging directly on the
several categories of official complaints treated above. A more general
analysis is now undertaken of the change (or lack of change) in basic
decision-making processes that affect the over-all allocation and use of
resources'.
The most feasible way to discuss the effects of the reorganization
on decision-making is to analyze separately the various economic functions
in order to answer the following questions: (1) who in the pyramid of the
decision-makers from the Presidium of the Central Committee of the Communist
Party down to the plant manager had the authority and responsibility of
deciding between alternative courses of action in each matter before the
industrial reorganization, and who now exercises the authority and responsi-
bility after the reorganization? and (2) if authority has changed (moved
up or down, or horizontally, in the "pyramid"), what have been the effects
on the use of productive resources?
The list of relevant topics is as follows: (1) investment, (2) wages,
(3) working capital, (4) distribution of supplies) (5) planning, and
(6) success-indicators and decision-making at the enterprise level. The
discussion is restricted to changes under the general reorganization scheme
of 1957 and modifications since then, with reference to only such earlier
changes as are necessary to an understanding of the 1957 reorganization.
A. Investment.
Decisions on important aspects of investment remain, as they have
since the initiation of the Five Year Plans, reserved to the top Soviet
leadership. The determination of the share of national product to in-
vestments and the priority ranking of sectors (for example, heavy versus
light industry), as before) is made at the Presidium level of the Party.
The allocations of funds to branches within the sectors (for example,
petroleum versus coal) down to the final selection of all "significant"
projects are decided by USSR Gosplan and the USSR Council of Ministers.
Even the so-called "decentralized" state and cooperative invest-
ments (about 10 percent of total investments) are determined within
guidelines and general targets set by USSR Gosplan. Within the "cen-
tralized" category of investment financed by All-Union budget sources)
however) the republic councils of ministers may authorize projects costing
less than 50 million rubles (roughly comparable to $8 million*), but even
here the central organs reserve a veto power through financial controls
if the over-all magnitudes (by category) are not consistent with the in-
tended pattern set by the central organs.**
* Converted on the basis of the ruble-dollar ratio for investment of
approximately 6.25 rubles per dollar,
** A recent article in Izvestiya said that the republic councils of min-
isters "must check the list" of these projects (below the 50 million rubles)
"in order to exclude projects of secondary importance" (to the state).
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These departures from almost complete detailed central control
were introduced in the period between Stalin's death and the 1957 re-
organization. They involve passing down decision-making powers over a
small segment of investments that were very difficult to administer
from the center. Nevertheless, the center may easily alter the defi-
nition of categories within "centralized" and "decentralized" invest-
ments in a subsequent year if the lower echelons have not followed its
Implicit preference pattern in any year.
Under the reorganization formula of 1957, certain rights were
given to the CNE in investment planning and plan implementation. These
changes, like the earlier devolution of minor functions in investment
decision-making, really changed little from the former pattern of in-
vestment decision-making. Specifically, CNE's may redistribute capital
investments among construction projects within a single industry or
construction administration "depending on circumstances," with the cir-
cumstances not stipulated. With the "consent of USSR Gosplan" the CNE
may shift investment funds among different industries. The Soviet press
release on the law concerning the authority and responsibilities of the
CNE* notes further constraints on these already circumscribed rights.
No decision to shift investment can be made if it "affects the commis-
sioning of new productive capacity and living space." Literally in-
terpretdd, this last reservation would severely limit choice on the
part of the CNE.
It was also_stipulated that "if the cost of the project is under
25 million rubles roughly $4 million7,** the CNE may define the method
of approving or changing it." The most liberal interpretation of this
passage would mean that the CNE might plan and authorize projects below
this limit if it is able to finance them from its own resources or con-
vince the central organs to direct the state banks to finance the pro-
jects. Evidence for an opposite interpretation (that there is no real
authority to spend even a kopek)*** comes from the many cases of vio-
lations by the ONE in the case of "centralized" investment funds granted
by the center for specific projects. These violations suggest that
* The statutes defining CNE rights have never been published. The
law on the industrial reorganization passed by the USSR Supreme Soviet
on 10 May 1957 stipulated (section 19) that 'the USSR Council of Min-
isters shall work out and approve statutes ... on councils of national
economy of economic administrative regions... ." An article appearing
in Partiynaya zhizn' for 17 October 1957, entitled 'What Are the Obli-
gations and Rights of the Council of National Economy?" is the most
informative "official" statement on these matters.
** Converted on the basis of the ruble-dollar ratio for investment
of approximately 6.25 rubles per dollar.
*** Other than what was already defined in the "decentralized" in-
vestment category before the 1957 reforms. Apparently the reference to
"keeping at its own fag disposal a certain reserve ... of capital in-
vestments" means a continuation of the financial sources under the former
"decentralized" system.
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resources for the CNE's pet projects are not available through legal
channels (projects reported by the press are all less than 25 million
rubles).
. The CNE can "approve and alter" the future plans for invest-
ment of its subordinate enterprises before they are sent forward to
republic and All-Union planning organs. Since the center still has
final say, changes, in reality, have been meaningless.
The benefit expected to arise from USSR Gosplan or Ukraine
Gosplan being better informed by the local CNE than by the former
ministerial officials, so that they could base their choice of alter-
native projects on more complete information, may be offset by the
following three factors. (a) Each CNE would like to have its "impor-
tance" (value of total output) increase and may tend to swamp the
republic Gosplans with draft projects; the republic Gosplans in turn
would like to see their republics get a larger share of investment
funds to "compete" against other areas; thus data forwarded by the
CNE and the republic may be biased. (b) Although the industrial min-
isters were formerly accused of similar parochial practices, at least
they had the "All-Union outlook" for their branch of industry and the
technical expertise upon which to base a choice, say, for a plant site
This former concentration of expert opinion surely must have been dilUted
in the transfer of specialists from the former ministries to USSR Gosplan's
new branch of industry sections (for example, some were transferred to
CNE's). (c) There will be a tendency on the part of a CNE and each higher
echelon to pass project plans to the center that are capital intensive
that is, given the lack of interest rates, the unrealistically low de-
preciation charges, and the increasingly tight supply of labor.*
The control function of watching out for the "interest of the
state" in the area of investments lies primarily with financial and
Party organs. The local offices of the USSR Ministry of Finance or
the State Bank control the release of funds for the specific projects
authorized by councils of ministers and Gosplan at the All-Union and/or
republic level.
The first secretary of the oblast committee of the Party provides
another means of control over the CNE's use of investment funds. In
reference to the CNE's misuse of centrally allocated investment funds, it
is often flatly stated that the local financial and Party organs were in
collusion with the CNE.
In the case of the Karaganda CNE cited above, the oblast and city
Party committees were condemned for conniving with the CNE in shifting
investment funds. In the case of the Tashkent and Samarkand CNE's the
Ministry of Finance of Uzbek SSR and the Uzbek Office of the Industrial
Bank were accused of not protesting these shifts even though control is
* The first two items concerning charges for capital are not very serious
factors at present, as there is only a 'tweak" incentive on the part of the
CNE and its individual enterprises to earn profits.
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the direct responsibility of the financial organs and the banks. From
the evidence presented, then, it seems that the CNE actually has little
freedom of choice in using its investment funds..
B. Wages.
The wage rates and total wage funds for each enterprise are, as
before, set by USSR Gosplan in consultation with the State Committee on
Labor and Wages, attached to the USSR Council of Ministers. The CNE,
however, has the right to pay bonuses* "to the workers of enterprises
and organizations for important achievements." The extent of the bonuses
is not stipulated but must be "within the limit of the total wage fund
fixed" for the CNE. As in the case of capital investments, the CNE is
circumscribed severely in setting wage rates and wage fund levels.
C. Working Capital.
The CNE seems to have less freedom to maneuver working capital
among its enterprises than did the former ministries. Each ministry
and main administration formerly redistributed "surplus" working capital
on a monthly basis from efficient (profitable) plants to lagging plants.
These lagging enterprises often required temporary financial assistance
to purchase more inputs of materials and the like than stipulated in the
plan.**
Whereas the ministry or main administration could formerly maneu-
ver funds, the CNE can "redistribute such working capital only according
to the annual statements of accounts and the changes in the financial
plans" (and even then at the end of the year the CNE apparently must ob-
tain permission from above in the form of a plan for redistribution).
The CNE can use other funds ("its own reserves") to offer
"temporary financial assistance to enterprises" to "cover their shortage
of working capital" within the established norms. That this rather
ambiguous wording of the statute or the lack of "own reserves" serves
to curb CNE maneuverability in shifting resources internally is seen
from several suggestions that a CNE be granted the right to redistribute
working capital quarterly instead of annually.
* This system of bonuses will be in addition to the bonus systems
controlled from the center. As no details are known concerning the
new CNE system, it is difficult to determine whether it is a strong
incentive weapon in the hands of the CNE.
** The original allocation to each plant of working capital is based
on norms set forth in the plan and so narrowly defined that, if planned
input savings are not actually met, the plant might find itself tempo-
rarily unable to finance its additional needs for resources (above plan
norms and therefore above plan allowances for working capital) in order
to meet its output goals.
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D. Distribution of Supplies.
The supply system, from the point of view of the enterprise
manager looking upward, remains largely intact. The enterprise manager
still requires an allocation order to purchase materials. And these
individual orders, from steel to sewing thread, are intricately related
to the output and supply plans of the enterprise, both of which are
ratified from above.
All goods remain classified into three distribution groups --
funded, centralized, and decentralized.* The funded and centralized
commodities (the distribution of which to the republics is controlled
by USSR Gosplan) cover all important industrial materials. The inter-
enterprise contracts are based on approved supply plans, drafts of which
are submitted from the CNE to USSR Gosplan along with the production
plan (via the republic Gosplan and the republic council of ministers).
Once allocations are made** to each firm and contracts with other firms
are concluded, then the sales and distribution organizations at the
republic level handle the administrative problems of moving the mate-
rials.***
An interesting aspect of commodity distribution to industrial
firms under the reorganization is the persistence under a new guise
of the supply problems that existed before the reorganization. Many
of the important types of "irrationalities" alleged to be a consequence
of the previous form of industrial organization**** were caused by the
"complete undependability" of the plant manager's sources of supply.
After the production and supply plans had been approved and contracts
signed, the individual firm, under the former system, was never assured
that timely supplies necessary to fulfill the output targets would be
forthcoming. This basic uncertainty gave an incentive for firms, groups
of firms under main administrations, and larger groups under ministries,
to become self-contained, producing as many as possible of the required
semifabricated materials in the firm, or at least within the ministry,
regardless of production costs or transportation charges. This defect
in the system was the function not only of the high output targets that
engendered perpetual shortages and low inventories but also of the basic
incentive of a producer who supplies other plants to fulfill his own
primary output targets in order to receive premiums. In order to ful-
fill.his plan and receive his bonuses, the manager of Plant A (supplier)
* Recently there have been moves to merge these categories into
two -- "centralized," comprising the former funded and some of the former
centralized, and "decentralized," broadened to include additional items
no longer under detailed central control and subdivided by echelon.
** Aggregated on the way up from CNE to USSR Gosplan and disaggregated
at each level on the way down as approved plans.
*** Formerly done by main administrations for sales attached to USSR
ministries and after reorganization, temporarily, by the same organizations
transferred from the ministries to USSR Gosplan.
**** Such as the failure of the firm to subcontract for goods and services
from lower cost firms, cross hauling, and the like.
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did not in many cases have to produce the assortment that was stipulated
in the monthly plan, and thus in the contract, with Plant B (the buyer).*
From the buyer's point of view (Plant B contracting from Plant A),
the exact assortment with the specified quality was the important thing.
Therefore, when Plant.B found that Plant A was not supplying the right
assortment or quality of assortment, as stipulated in the contract, Plant B
turned to more reliable sources** (its own shop, its own main administra-
tion, or its own ministry).
This motivation of the manager of the Soviet industrial firm and
the resulting influence on production and distribution gives the setting
for changes under the reorganization. It was intended that within the
individual CNE there would be efficiency gains from the fact that Plant B
would be assured of supplies from Plant A in the right assortment and
quality, at least when Plant A and B were under the same CNE (as was the
typical case for ancillary-type activity of common resource problems such
as castings and forgings). Therefore, as a choice was now open to Plant B
and the CNE, based on the criterion of the cheapest source of supply,
efficiency gains were possible.***
To offset the tendency for local autarky (for hoarding or for pref-
erence to local buyers when production is short of plan), a law was en-
acted on 22 May 1957 obligating a CNE and its plant managers to fulfill
first those contracts with firms external to the CNE. The incentive for
such fulfillment was through the basic bonus -- that is, the output plan
for Plant A was not considered fulfilled and thus premiums would not be
* The manager of Plant A could "simulate" plan fulfillment by pro-
ducing quantities of specific products (for example, 12 units of
Product X -- size 6 pumps, 8 units of Product Y -- size 10 pumps, and
no units of Product Z -- castings which were not the specific products
in the plan including the contracts with other firms. The plan may
have called for 8 units of Product X, 8 units of Product Y, and 4 units
of Product Z. What was necessary was to fulfill value of total output
goals (in order to receive premiums). Besides not fulfilling the right
assortment (and still remain "consistent" with plan fulfillment), he could
"simulate" output by producing the proper mix but not the specified quality.
** This description of the plant manager's motivations is necessarily
simplified. As Berliner points out, the producer does react to the cus-
tomer's specific need, especially "in the case of highest priority customers
such as the military." "But," Berliner continues, "the reaction of lower
priority customers is less a source of concern. At the worst the planned
purchaser may bring suit for breach of contract and be awarded damages."
But "financial losses are secondary to the consideration of output targets
and premiums" (that is, secondary to the manager of Plant A who can "write
off" such losses as firm expenses without personal loss). As Berliner
indicates, "if there is a clear choice between no fines and underfulfill-
ment on the one hand, and fines plus overfulfillment on the other, there
is little doubt that the latter alternative is preferred."
*** Presumably the CNE would enforce a product mix on Plant A when Plant B
protested, as in general the CNE would be interested (unlike the former
main administration) in what is actually produced for the other CNE plants.
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paid to the manager of Plant A if deliveries toylant B (which in this
example would be outside the CNE) were not filled as specified by contract.
The press barrage, after the first 6 months of the reorganization, against
"localism" and the failure of CNE's and their enterprises to fulfill ex-
ternal commitments suggest that the incentive of the basic bonus alone was
not enough.*
On 24 April 1958, less than a year after the reforms were initiated,
a law was passed to give a further "incentive" for Plant A and its CNE to
fulfill contracts with Plant B in another CNE. The published version (a
month later) clearly indicates a step back from the reorganizations' aim of
releasing "local initiative": "Nonfulfillment ... by responsible persons
of enterprises, economic organizations, sovnarkhozy, ministries, and depart-
ments of plans and tasks Lcontract17 for supply of products to other economic
administrative regions or republics, and also for All-Union needs, is a
severe breach of state discipline and subjects the person to disciplinary,
material, or criminal responsibility."
"Those ... who are guilty of nonfulfillment -- without valid cause
of plans and tasks for these supplies, are to be given strict disciplinary
or financial penalties to the extent of up to 3 months' payment of wages."
In cases of repeated nonfulfillment without valid reason, "the
responsible person will be subject to criminal prosecution) as is appro-
priate to the crime."
Personal rather than enterprise responsibility for fines was imposed.
The carrot (bonuses) was first used and then the stick (fines and imprison-
ment).
Presuming that the latest decree will close the chinks and that
every CNE will now fulfill all external contracts regardless of the ef-
fect on internal plan fulfillment, what will be the effect on the use
of resources?
Clearly, there will be a tendency for an enterprise manager to
do one of the following three things: (1) to attempt to conclude con-
tracts with firms outside of his CNE to supply his plant with materials
rather than with firms inside his CNE; (2) if this is not feasible, to
tend to become more reliant on his own resources (produce his own cast-
ings, hardware, and the like) rather than rely on Plant A in the same
* The problem may have been one of who was to receive the bonuses. The
manager of Plant A, being presumably motivated principally by premiums,
may have wanted to fulfill his external contracts first even to the detri-
ment of internal commitments. The CNE chairman without a bonus motivation
but with a motivation of fulfilling the CNE's over-all plan and thus of
supplying all internal needs first (and in some cases overfulfilling the
internal plans for supply) may have vetoed the desire of the manager of
Plant A to fulfill the external contracts. Although there have been sug-
gestions that premiums for enterprise plan fulfillment be extended upward
to CNE officials, it is not certain that they were.
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CNE; or (3) to attempt to conclude most of his contracts to supply other
firms within his CNE. The CNE chairman in turn will be motivated to
(1) supply his CNE from outside sources instead of internally) or (2) pre-
vent his firms from taking on outside contracts.
Of course these forces are self-contradictory (every firm cannot
simultaneously try to conclude external supply contracts and be unwilling
to take on contracts to provide for external buyers), and a judgment is
not made as to which of the forces will be the strongest.* Nor is a
judgment being made as to the degree of "accidental rationality" that may
prevail after "equilibrium"** will prevail. The point to be made is that
administrative measures of this type clearly indicate the lack of any
"objective criteria" on which the firm manager or CNE chairman can act to
carry out in a more efficient manner what the central authorities want him
to do.*** Whereas the logic was clear when the original reforms of 1957
tended to encourage a CNE to make a choice based on comparative cost, the
more recent administrative measures may tend to neutralize the original
gains if not cause a "net loss."****
* It will vary by region and circumstance, although there probably will
be a certain net tendency to become self-reliant on one's own plant which
will clearly offset the prevailing tendency toward specializing.
** After all the forces have had time to have their impact on contractual
relations.
*** More efficient, not most efficient, because the planners in USSR
Gosplan do not know exactly what the Presidium's ordering (preference
function) would be. When the terms efficiency or rational are used, we
mean, as before, from the point of view of the leadership.
**** The basic arithmetic is as follows: Plant A plans to produce 100 units '
of X, 50 units of which it plans to ship to Plant B inside the CNE and 50
units to Plant C outside the CNE.
If it produces only 90 units (90 percent of plan) it will, under the
present "criteria", fulfill its external contract by 100 percent (ship 50
units) and its internal contract by 80 percent (ship 40 units). Where is
the rationality in this?"
Under the "criteria" of 1957) Plant A may have reversed the proce-
dure (as is indicated from the evidence) -- that is, Plant A did fulfill
its external contract by 80 percent and its internal contract by 100 per-
cent (and sometimes 70 and 110 percent, respectively). The plant manager
did this at the risk of losing his bonus but had administrative pressure
from the CNE to fulfill and overfulf ill internal contracts. Again, from
the central planners' point of view this is not the rational solution.
Under the 1958 revisions the new "incentives" make the manager of
Plant A more of a "loser" than under the "no bonus" stipulation of 1957.
This may or may not be enough to make him reverse his former procedure of
fulfilling internal contracts first. The fact that the CNE chairman now is
a "loser" under the new rules (he too will lose 3 months' salary) may mean
a reversal. In any case, whether the tendency will remain the same or will
be reversed, neither solution is the one preferred by central planners.
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E. Planning.
In the post-Stalin era, there has been much concern over the con-
duct of planning. Criticism increased as time went by and as the planners
worked with an ever more complex and sophisticated economy. When "dispro-
portions" appeared (ever more frequently) or when someone wanted to com-
plain about the economy's performance, planning practices and the planners
themselves were loosely attacked for being too "mechanical," "remote," or
"isolated."
By 1953 the production and materials allocation sections of the
national economic plan contained more than twice as many specific items
as in 1940. In trying to curb excessive detail, the post-Stalin regime
by 1955 had reduced the number of production targets through aggregation
by about a third and had halved the number of allocated commodities
specified in the plan.
The list was not shortened as to the types of commodities planned
by the central authorities, however, but simply by the amount of detail
under each commodity (categories of each grade and size of the commodity).
This task of working out the detailed targets down to all the subproducts
(by each specification of grade and size) was assigned to the individual
ministries. This "decentralization of planning at the top" came to a halt
at the time of the 1957 reforms, and all the branch of industry planning
as well as current and long-range planning came to roost in USSR Gosplan.
Under the new form of organization, enterprises were to initiate
the plans, submitting them to the CNE, which in turn would submit them to
the republic Gosplans and councils of ministers. The republic organs would
in turn submit these plans to USSR Gosplan. This was to "release local
initiative" and make planning less "remote." This "change," however, is
not significant, because enterprises formerly filled in much of the detail
and reviewed the general targets "sent down" from the center concerning
specific output targets, labor force and wages, cost of production, sup-
plies of materials, and the like. Whether initiated by the enterprise or
sent down from the center, the drafting and coordinating of the plan are
accompanied by hard bargaining on the part of the plant manager, who has
much at stake. There are indications from several sources, however, that
the old planning processes are still in effect under a more "democratic"
name. The summation of the enterprise draft plans for 1958 for output
increases for the Sverdlovsk CNE came to 3 percent. The CNE branch of in-
dustry administrations reviewed the plans and raised them to an increase
of 4.4 percent, the CNE raised them to 5 percent, and the RSFSR Gosplan
raised them further to 5.5 percent. What USSR Gosplan finally did was not
reported in the source.
Complaints from the lower levels have alleged that republic and
USSR Gosplans often ignore the CNE draft plans submitted to them and start
computing "from scratch," or they direct the individual plant managers to
appear for a review -- thus skirting CNE channels.
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After the initial merging of the .central planning functions in
1957, there is now agitation for further simplifying the plans and more
decentraliting. As to detail, the number of specified production targets
in the national plan in 1958 was reduced to 1,042 compared with 1,640 in
1957.
But who is to plan the vital details -- for example, product mix?
Formerly, when the plan was simplified at USSR Gosplan level (as it was
in 1955), the ministries and their main administrations which had the
"national interest" in mind planned the specific commodity goals as to
assortment of grade and size.
In a "plan by priority" economy such as the USSR, where prices
and profits are meaningless in the market economy sense, each commodity
must be specified in the plan down to its smallest variant (for example,
10 tons of sixpenny nails made of Grade 2 steel). Now it is proposed
that the plans be developed in detail at the lower levels. How will the
Ukrainian Gosplan know specifically how many sixpenny nails it will supply
the economy outside of the Ukraine? If the Ukrainian Gosplan got an order
to produce 10 tons of nails (without further specification), it would
haturally produce the nails the "easiest" way (one way is to find the size
of nail with the greatest cost-price differential).*
Of course, the state will not allow** such freedom of choice, and
all the talk about "decentralizing" planning must be taken in the sense of
administrative improvements rather than of fundamental policy changes that
would affect the methodology or underlying philosophy of the planning
process.
F. Decision-Making from the Point of View of the Enterprise Manager.
The question may well be asked, What about the climate of decision-
making surrounding the manager of the individual enterprise? From the above
* The same problem would arise with respect to a CNE if it was simply given
a plan to produce 10 tons of nails. In the past, when enterprise managers
had a choice, they would produce the "easiest" product, which would not neces-
sarily be the right one as far as the state was concerned. The fact that the
plan was expanded in such detail between 1940 and 1953 probably was motivated
by the desire to narrow the choice of the producer to produce specifically
what was required by the central organs.
** Perhaps it would be more correct to say that the state will not wish to
allow. In the past the production of nails was "simulated" even under the
detailed plan -- that is, "wrong" sizes were produced and the firm's plan
was considered fulfilled (based on value or tons of output -- for example,
nails) even though the main administration of the ministry had specified the
size and quality. The point to be made here is that -- even under the de-
tailed plans heretofore -- the right assortment was not produced. The re-
duction in the number of plan indicators (as to assortment, and the like)
without meaningful criteria (for example, prices and profits in a market
economy) will only aggravate the assortment problem.
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discussions (of supply, production choices, specific motivations, and the
like), it can be concluded that there really has been very little meaningful
change in the "rules of the game" -- that is, the spectrum of choice has not
significantly widened. When it has widened, there has not been a sustaining
of choice when voluntary or involuntary choices were given to the manager.*
Thus, although the planning process now begins with the firm, there
is no real change from the former procedure, because the plan of the firm
is only a proposal and USSR Gosplan will make the final decision regarding
it.**
Profits may have come to be even less of an incentive to the enter-
prise manager than they were before.*** Of the profits retained by the
firm, 70 percent must be spent on housing and the remainder that is not
taxed away goes to the CNE.****
Prices remain given and are only meaningful (as they were before)
when cost-price ratios are different and the enterprise director has a
choice of producing one of several items in order to fulfill his plan
target (expressed in ruble value of output, say, for nails, and the cost-
price ratios differ for various-size nails). This type of practice is
strongly condemned as "anti-state" (as always), and thus this is a use
of prices that the state will attempt to neutralize.
Shifting of the "center of gravity" (Khrushchev) from the main
administration and the ministry in Moscow to the CNE was to yield gains
by improving "day-by-day" economic decisions. Such decisions involve
responses to emergency conditions or bottlenecks as well as detailed
* When the manager and/or the CNE was found reneging on external
contracts, this loophole was "closed" (the state hopes), and thus an
alternative "choice" was eliminated.
** The firm has always made a counterproposal to the plan. It now
makes the initial proposal. In both cases the final authority lies at
the center.
*** No student of the Soviet economy has suggested that the firm manager
was ever primarily motivated by profits. Certainly he does not attempt to
maximize profits as this would be in conflict with the "success indicators"
of plan fulfillment (primarily output targets) and the earning of premiums.
Berliner, in his work on the management of a Soviet enterprise, contends
that the single important motivation of the enterprise manager is his de-
sire to earn premiums; Rove argues in favor of plan fulfillment as the
primary success indicator. This is a pedantic difference because the
premium and plan fulfillment motivations are two sides of the same coin.
Thus in order to earn premiums, the manager must meet the important plan
targets.
**** Profits, however, seem important enough from the CNE point of view
for them to attempt to have planned profits low so that above-plan profits
which can be retained are larger. As in other cases of "local initiative,"
the practice is condemned, and new controls are introduced to narrow the
freedom of choice.
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monitoring and adjustment to plan fulfillment. Responsible leadership
on the spot should enhance the timeliness of such decisions. The changes
are difficult to discern because (1) there are indications that the de-
cisions of this type which the government seemed anxious to have "shifted"
from the center to the CNE and to the enterprise were really not shifted,
either because of timidity by the CNE or because of reluctance on the part
of central authorities to release their direct control and because (2) there
.is little evidence on which to base a judgment that there are important
types* of production "errors" committed in the past that have been corrected.
There are certain intuitive judgments that may be stated. The CNE
chairman will not have certain incentives that the enterprise will have,
and yet he will have certain incentives that the enterprise will not have.**
Out of this interrelationship of incentives may come a pattern of resource
use that is 'better" than before.
For example, there is now an incentive on the part of a local bf-
ficial (the CNE chairman) to see that the part of the output of the enter-
prise which remains within the area of the CNE for the use of other firms
will not be "simulated" -- that is, the product mix according to specific
grade and quality as stipulated in the plan will be enforced for that
part of the plant's output used internally in the CNE.
The proximity of the CNE should reduce the "degree of ignorance" of
the immediate superior, in the form of the CNE chairman, compared with the
former main administration and ministry, both located in Moscow -- for
example, the chairman will-be better informed of the enterprise's production
possibilities, will make the enterprise manager "honest" in reporting, and
will be able to ascertain from all the facts*** what decisions should be
made rapidly by the CNE or by the center.
* Such as operational functions (that are perhaps. of major importance
to the firm and in an aggregate sense important) that can be "decentralized"
and be consistent with centralized planning, leadership, and control.
** He will also have certain incentives which the former main adminis-
tration and ministry officials did not have when located in Moscow. The
major function here would be the difference in the "degree of ignorance"
between the former ministerial types and the present members of the CNE
because of location alone.
*** Not the selected facts reported by long distance to his predecessor,
.the head of the main administration, by the enterprise manager.
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FOR OFFICIAL USE ONLY
FOR OFFICIAL USE ONLY
Declassified and Approved For Release 2013/07/01 : CIA-RDP79R01141A001200150002-9