SOVIET ECONOMIC REFORMS: AN INTERIM REPORT CARD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89T01451R000300400001-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: December 27, 2016
• Document Release Date: January 23, 2013
• Sequence Number: 1
• Publication Date: June 1, 1988
• Content Type: REPORT

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Soviet Economic Reforms:
An Interim Report Card
A Research Paper
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Secret
SOV 88-10042
June 1988
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Soviet Economic Reforms:
An Interim Report Card
A Research Paper
This paper was prepared by
'the
Office of Soviet Analysis. Comments and queries
may be directed to the Chief, Domestic Policy
Division, SOYA
Secret
SOV 88-10042
June 1988
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Summary
Information available
as of 1 June 1988
was used in this report.
6
Soviet Economic Reforms:
An Interim Report Card
The reforms adopted at last June's Central Committee plenum and
introduced on a large scale on 1 January 1988 are having a rough start.
The leadership has indicated its deep concern, and reform economists are
pessimistic that the original intent of the reforms can survive intact.
Although the reform blueprint was bold and comprehensive, implementa-
tion of the reforms under way and articulation of the reforms that remain
to be implemented have been halting and piecemeal. The heavy hand of the
planning and ministerial bureaucracies still hangs over enterprise
decisionmaking:
? Planning Reforms. Control figures and state orders, designed to be less
intrusive than the previous system of centrally dictated planning direc-
tives, in practice allow little room for enterprise autonomy.
? Self-financing. Continued juggling of enterprise funds by the ministries
from the strong to the weak, difficulties in spending enterprise funds, and
the inability to use profitability as a test of efficiency (because of the dis-
torted price structure) make self-financing still an elusive goal.
? Wholesale Trade. The existence of many monopoly producers and the
lack of a rational wholesale price system make the Soviets reluctant to
implement wholesale trade reform, scheduled to be completed over the
next four to five years.
? Banking Reform. The ability to apply economic criteria to banking
operations depends to a large extent on the success of other reforms;
therefore, Gosbank will retain strong central controls over lending
criteria, bankruptcy proceedings, and interest rates for now.
? Price Reform. Although it is the linchpin of economic restructuring, price
reform will be one of the last reforms implemented. It is divided into
three parts:
? Wholesale prices. Still in the planning stage, the emphasis appears to
be on price revision rather than on reform of the pricing mechanism
itself, which means that these prices will remain only imperfect
guides to economic decision making.
? Procurement prices. Changes announced thus far do not alter the
? essential nature of the cost-based, administered system of procure-
ment prices.
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June 1988
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? Retail prices. No target is set for this politically sensitive reform, and
full public discussion is promised before major changes are made.
? Foreign Trade Reform. Increased contacts between Soviet firms and
foreign traders are allowed, but enterprise independence is limited by
continued central regulation of import and export prices, foreign curren-
cy exchange rates, customs tariffs, and interest rates on credit. Confusion
over the reorganization of the foreign trade sector will continue to
produce trade disruptions, at least in the short term.
? Organizational Reforms. Staff cuts and departmental reorganization
have created ill-timed disruptions and widespread resentment that is
likely to fuel opposition to the reform program. The larger issue of
reducing the number and power of the ministries appears to be stalled.
? Private-Sector Reforms. Significant new legislation gives ideological
legitimacy to this sector, widens the scope of its activities, and increases
eligibility, but major culture-related barriers by both officials and the
public remain.
These difficulties can be traced to a common set of problems:
? The success indicators of the economic bureaucracies have not been
revised adequately to change their propensity to meddle in enterprise
affairs.
? Although the total reform package is comprehensive, its timetable for
implementation is piecemeal, with crucial elements such as price reform
scheduled last.
? The traditional focus on the fulfillment of output targets is in basic
conflict with the focus on quality and innovation emphasized in the
reforms.
? The necessary implementing orders that define responsibilities and the
chains of command have not been issued.
? The reforms were implemented in the middle of a five-year plan, and the
central authorities feel it necessary to maintain their old administrative
pressures to ensure fulfillment.
The confusion and uncertainties generated by the reforms will have a
disruptive effect on economic performance, at least in the short run. They
will also increase labor-management tensions; a number of reform-related
strikes have already been reported. Workers are disgruntled because the
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reforms tie wages and bonuses more directly to performance and yet
productivity depends on factors largely beyond the individual worker's
control. So far, from the worker-consumer perspective, the reforms have
meant more discipline, less job security, slower wage increases, and only
the promise of an eventual payoff in terms of more consumer goods and
services.
The leadership must take effective and immediate action to get the reforms
back on track or risk pushing the payback period well into the 1990s. Many
Soviet economists already believe that the time for full implementation of
the reforms will actually be during the 14th Five-Year Plan (1996-2000)
rather than in 1991-95 as Gorbachev originally projected. Policy initiatives
that would indicate the leadership recognizes the problems at the root of
reform implementation would include:
? A speedup in the implementation schedule for wholesale trade reform.
? More flexibility allowed immediately in wholesale price formation.
? A relaxation of taut output targets.
? More latitude granted to the enterprise in planning its output and in
distributing and spending its funds for investment and incentives.
? A substantial reduction in the ministerial apparatus.
The upcoming party conference is scheduled to discuss the progress of the
reforms. Effective new initiatives announced at that forum would send a
clear signal that the leadership is committed to hewing to the original
intent of the reformers and realizes the serious consequences of letting the
situation drift.
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Contents
Page
Summary
iii
Scope Note
ix
Introduction
(
1
The Planning Reforms
2
Wholesale Trade
4
Banking Reform
5
Price Reform
7
Foreign Trade Reforms 9
Organizational Reform 11
Private-Sector Reforms 13
The Root of the Problem 14
Implications and Outlook 14
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vii
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Scope Note
Reverse Blank
The economic reforms that resulted from the June 1987 plenum of the
party's Central Committee promised a comprehensive, integrated approach
to Soviet systemic problems. The implementing legislation, however, was
rife with loopholes and ambiguities-
paper focuses on the continuing evolution of the reform package and how
the Soviets are coping with translating only nebulous marching orders into
a coherent set of instructions at the production-unit level.
Since many of the reforms just began on 1 January 1988, the conclusions
drawn from this analysis should be viewed as preliminary. Presumably, the
Soviets will learn from their mistakes and still have the option to refine and
revise the reforms to stay on the course they originally charted. On the oth-
er hand, the problems encountered thus far might reveal basic flaws in the
reform concept that could derail the reform initiatives. At the very least,
difficulties in this initial stage of implementation threaten to push the
transition period well into the next decade, postponing the results which the
leadership was hoping for during the next five-year plan (1991-95).
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Soviet Economic Reforms:
An Interim Report Card
Introduction
Gorbachev, upon his accession, apparently did not
have a blueprint for reform. At first he extended
Andropov's and Chernenko's industrial reforms that
reduced and simplified plan indicators and empha-
sized financing more of an enterprise's expenses out of
profits. He also established a special commission to
draw up reform legislation and oversee its implemen-
tation, and he sanctioned an unprecedented no-holds-
barred debate on a wide range of reform-related
subjects. The evolution of his thinking on this issue
was finally revealed at the June 1987 Central Com-
mittee plenum, which approved guidelines for the
"new economic mechanism" to be "almost fully"
implemented by the start of the 13th Five-Year Plan
in 1991. With the adoption of these main provisions,
Gorbachev replaced his and his predecessors' piece-
meal approach to reform with a comprehensive and
integrated program.
The reform's "basic provisions" and the ensuing 11
decrees 2 were evidently the result of a compromise
between those who wanted to move swiftly toward a
market economy and those who preferred a more
traditional approach. Their generality allows for a
wide range of possible outcomes during implementa-
tion; the reforms could result in a substantial increase
in enterprise autonomy and a partial dismantling of
the Stalinist economic model, or potential loopholes
could be used to foil this historic attempt at decentral-
ization.
On 1 January 1988 implementation of many of the
reforms began (see table). An examination of progress
in the preparation for and initial implementation of
Only 10 decrees were published; the one remaining decree report-
edly deals with the reorganization of the ministerial structure.
1
these reforms indicates that they are off to a poor
start. The leadership is worried:
? As early as November, senior party secretary Liga-
chev reportedly criticized Premier Ryzhkov for the
Council of Ministers' failure to prepare enterprises
for the switch to self-financing.
? Articles and speeches by regional party leaders
indicated that they viewed the new year's reforms
with trepidation.
? At the two-day Central Committee plenum in mid-
February, largely devoted to educational reform,
Gorbachev called on the party to fight for peres-
troyka to overcome widespread worries that reforms
are "being implemented slowly and with
difficulties."
Reform economists also acknowledge problems in
implementing reforms and in articulating those not
yet scheduled for implementation. Some argue that
the current ones must be scrapped, not merely modi-
fied. The reformer Boris Kurashvili, for example,
proposed recently that the coming party conference
authorize work to begin on a new State Enterprise
Law because of major flaws in the one introduced last
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Timetable of Soviet Economic Reforms
Reforms
1988 Goals
Final Objective
Self-financing
60 percent of all industrial production; 40 percent
of all enterprises; an estimated 60 percent of
agricultural production; 50 percent of scientific
organizations; 100 percent of transportation.
Whole economy by I January 1989.
Planning
All enterprises and associations. However, in
1988, state orders make up 80 percent of industri-
al production, including 90 percent in the fuel
ministries and 60 percent in the nine civilian
machine-building ministries.
State orders will be reduced to 60 percent of total
output in 1989, 50 percent in 1990, 30 to 40
percent in 1991, and "eventually" 20 to 25
percent.
Supply (wholesale trade)
Less than 4 percent of total industrial production;
15 to 20 percent of sales through state supply
networks.
Wholesale trade reform to cover 30 percent of
sales through state supply networks by 1989, 60
percent by 1990, and 80 percent (two-thirds of
total sales) by 1992.
Banking
All banks. A reorganization is being undertaken,
but decentralization of bank lending policies will
be limited and gradual.
No date given.
Wholesale prices
None; to begin in 1990.
Industry, transportation, and communications by
1 January 1990; construction and agriculture by
1 January 1991.
Retail prices
None; to begin only after full public discussion.
Whole economy, presumably including retail, by
1991.
Foreign trade
In 1987, included ministries and enterprises that
accounted for 26 percent of all imports; 14 per-
cent of all exports. No official increase given for
1988.
No date given.
Organizational changes
All central ministries, republic central commit- By end of 1988.
tees, and republic Council of Ministers.
January. An economist from the Institute of Econom-
ics admitted to US Embassy officers that such prob-
lems have forced Soviet economists to admit that the
13th Five-Year Plan period (1991-95) will be the time
of transition to the new system?not the present plan
period as originally anticipated.
The Planning Reforms
Progress. Deciding how to decentralize the planning
system apparently was one of the most contentious
issues during preparation for and at the June plenum.
Gorbachev reportedly pushed for the more "radical
reforms," including a 50-percent reduction in the
Secret
staffs of Gosplan and the State Committee for Mate-
rial and Technical Supply (Gossnab) and a sharp
curtailment of their functions. Gorbachev's criticism
of both organizations at the plenum indicated his
extreme dissatisfaction with their traditional methods
of operation. However, the reform decrees became
compromise documents that failed to satisfy either
radical reformers or traditionalists. The reforms
called for Gosplan to shift away from day-to-day
management of production and concentrate on "stra-
tegic" planning, but the nebulous wording of the Law
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on State Enterprises and the reform decrees appeared
to allow a large measure of interference from above,
particularly in the form of state orders and norma-
fives.'
According to testimony from Gorbachev and others
down to the enterprise level, the loose language is
indeed allowing the planning authorities and the
ministries to resist change:
? In October a worker wrote to Izvestiya complaining
that state orders for 1988 at his enterprise amount-
ed to a 150-percent increase in output over the
previous year.
? In November the Minister of the Machine Tool and
Tool Building Industry complained on Soviet televi-
sion that state orders made up 86 percent of produc-
tion in that industry and even reached 100 percent
for some enterprises.
Gosplan is defining state
orders so that they consume virtually all of many
enterprises' output?leaving nothing for discretion-
ary use. He also complained in the Soviet press that
ministries had decreed "confiscatory" normatives,
leaving enterprises with 10 percent or less of their
profit.
? In February Gorbachev criticized the "center" for
continuing to issue commands through state orders,
and a March Politburo meeting accused Gosplan of
improper guidance in drawing up state orders that
had limited the independence of enterprises.
Gosplan and the ministries are to draw up a mandatory bill of
state orders for enterprises that will cover defense production,
products needed to implement the Science and Technology Pro-
gram, and other undefined goods needed to satisfy social tasks of
state importance, ensure economic independence, and guarantee
agricultural deliveries. These same organs are also to set economic
normatives?ratios between related economic indicators such as
production and wages?that regulate, among other things, growth
of total wages, payments for capital and labor, and the allocation of
profits among various kinds of taxes and funds. These normatives
are to remain stable throughout the five-year plan period.
3
? Nikolay Shmelev, one of the more radical reform
economists, complained that ministries had fixed
the normative for total profit an enterprise had to
turn over to its parent ministry and the state at 92 to
94 percent.
? In a recent interview in lzvestiya, a plant director
described wrestling with the ministry over profit
normatives for 1988 as a life-and-death struggle.
After he finally succeeded in getting it to agree to
stable profit normatives, he discovered the ministry
had revised his depreciation deduction rates, which
in effect took away the extra profit margin he
thought he had won.
This interference by the central authorities, in addi-
tion to other problems, is making it difficult for the
enterprises to implement self-financing--a pillar of
the reforms and the avowed goal of all enterprises by
the end of 1989. In theory, full "economic account-
ability and self-finance" means that all current and
capital expenditures are financed from sales revenues
and other internally generated funds. The enterprise
has the authority, within limits, to distribute its
profits among its three funds?the bonus fund, the
social development fund, and the fund for financing
research and development and investment. Enter-
prises on self-financing are discovering, however, that
they are not profitable enough to finance the neces-
sary expenditures, that the ministry is draining the
profits of successful firms to keep the losers afloat,
and that, even with money to spend, the necessary
materials and equipment are not available.
Confronted with these problems in public forums,
ministry and Gosplan officials have declared their
right and responsibility to monitor enterprise progress
in order to meet the plan and fulfill the modernization
program
for example, a ministry cannot be separated
from oversight over the cause of fulfillment of one-
and five-year plans." During a discussion with West-
ern Soviet specialists, Abel Aganbegyan implied that
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ministerial intervention was still necessary to ensure
the fulfillment of the five-year plan, which was drawn
up before the reforms were developed, and to substi-
tute for the price and wholesale trade reforms, which
were not yet in place.
The Soviets have taken steps to deal with some of
these problems:
? Selected plants have been allowed to negotiate with
the authorities over their plan targets. In the most
publicized case, lzvestiya reported that the enter-
prise Uralmash refused to accept the 1988 plan
handed down by the Ministry of Heavy and Trans-
port Machine Building because it believed the
plant's goals were unattainable and 93 percent of its
production was covered in state orders.
? Financial relief has been provided for enterprises
unable to cope with the rigors of self-financing. A
recent two-part article in Sotsialisticheskaya indus-
triya revealed that machine-building enterprises on
self-financing were in deep financial trouble. As a
result, the ministry has initiated a debt-forgiveness
program and granted temporary preferential-term
loans designed to ease the transition to self-financ-
ing. Also, Gosbank has been granting 10-day loans
since January to enable enterprises to make their
wage payments on time.'
iGosplan and Gossnab are
working on a statute that will limit the size of state
orders and delineate the rights of enterprises when
they receive them. Also, a new regulation on minis-
tries will define the limits of their power, according
to Institute of Economics director Leonid Abalkin.
Prospects. The reform provisions indicated that basic
disagreements over centrally dictated plan indicators
had not been resolved. As a result, lower level officials
and factory managers were left to battle it out with
the ministries. It was soon clear that it was an uneven
? As part of the banking reform, the bank now automatically debits
enterprise accounts as bills fall due?the so-called calendar system
of payments. For enterprises existing close to the edge, this results
in deficient funds on payday.
Secret
contest; the authorities were defining their new re-
sponsibilities as broadly as possible, and enterprises
that wanted increased autonomy in most cases were
unable to use the Law on State Enterprises as protec-
tion.
The laws being drafted to limit state orders and
clarify ministerial responsibilities are attempts to
correct this imbalance, but it is unlikely they will do
the trick. Efforts by the ministries to maintain control
are not surprising because they continue to be held
responsible for plan fulfillment in their subordinate
plants and because the plans were drawn up before
the reform legislation was completed. Moreover, key
reforms meant to substitute economic levers for ad-
ministrative directives, such as price reform, are not
even close to implementation.
Wholesale Trade
Progress. Wholesale trade reform is to be imple-
mented over the next four to five years?making it,
along with price reform, one of the last reforms to be
completed. This delay reportedly is a result of an
ideological controversy over the legitimacy of whole-
sale trade under socialism and a legitimate concern
that a major reform in the supply system could cause
widespread disruptions in the economy. The concern
of a number of Soviets, however, is that the slow pace
of wholesale trade implementation will have a nega-
tive impact on other reforms, particularly self-financ-
ing. r
In March 1987 the first phase of reforming the supply
system began at some 10,000 organizations,
including:
? One production ministry?the Ministry of Con-
struction, Road, and Municipal Machine Building.
Wholesale trade is defined here as a system in which enterprises,
without need of authorization, freely purchase items, including
producer goods, from another enterprise, manufacturer's outlet, or
territorial supply organization.
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? Scientific-research institutes.
? Various construction organizations (including those
in Armenia and Estonia).
? Several agroindustrial complexes.
? A number of ministries in the service sector, includ-
ing the Ministry of Health and the Ministry of
Culture.
This reform made Gossnab's territorial supply organi-
zations the key contact points for enterprises in
obtaining and disposing of supplies, which relieved the
enterprises?at least in theory?of having to deal with
central Gosplan and Gossnab in Moscow and their
own ministries. In practice, however, enterprises were
not able to deal directly with other enterprises in
acquiring or disposing of supplies.
This territorial approach appears to have been a
middle ground between continued tight central con-
trol and true wholesale trade. The decree met with
severe criticism by several Soviet economists who
described it in the press as timid and an "old product
in a new wrapper." Reacting to a suggestion that real
wholesale trade be introduced, one Gossnab official
replied, "No one will let us breed anarchy in the
country." The Soviet press claimed some success in
this first stage of wholesale trade reform, but other
articles indicated that operating procedures did not
change appreciably; enterprises continued to overstate
requirements and hoard extra materials and equip-
ment. Moreover, Gosplan and Gossnab appeared un-
willing to change their mode of operation.
The second phase of this reform began with the
publication of the July 1987 decree devoted to "re-
structuring material and technical supply." Unlike
the 1986 decree that channeled orders through terri-
torial supply organs and only after the completion of
elaborate paperwork, the new decree allows the "free"
purchase and sale of goods under direct contracts
between enterprises or with state wholesale organiza-
tions and manufacturers' direct outlets. Only "partic-
ularly scarce" goods will continue to be rationed, but
the list also includes inputs that are required to fulfill
mandatory state orders. The process is to start with
"groups of goods of greatest importance for consumer
goods production, agriculture, construction, machin-
ery production, needs of cooperatives, and private
producers."
5
Prospects. The early signs are that Gossnab and many
enterprise managers are finding it difficult to let go of
the old system. Gossnab, an entrenched bureaucracy
with a tradition of conservatism, has been placed in
charge of this reform's implementation?the proverbi-
al fox in the hen house. Gossnab officials are already
narrowly interpreting the reform decree.
the major focus of the reform is
not free exchange of goods among plants, but territo-
rial reorganization of the supply system.
Enterprise managers appear interested in the general
concept of wholesale trade but are reluctant to give up
guaranteed sales and supplies. There is evidence, on
the one hand, that some enterprise managers have
been scrambling to make their own arrangements to
obtain supplies and sell their products. On the other
hand, they are trying to obtain exemptions or are
clamoring to obtain state orders?mandatory orders
by Gosplan for which supplies and sales are guaran-
teed. This type of response seriously inhibits the
growth of competition among enterprises that the
reform is intended to foster.
Reform economists point out that wholesale trade
before price reform makes little sense because enter-
prise managers need rational prices to guide their
supply decisions. As Abel Aganbegyan noted in the
November issue of The Economics and Organization
of Industrial Production (EKO), "the price of fuel
oil ... in many regions is lower than the price of coal.
But, if we change over to wholesale trade in fuel oil, it
turns out to be advantageous to burn it instead of
coal ... but from the standpoint of the state this is
absolutely disadvantageous." He also notes that the
changeover to wholesale trade is impossible as long as
there is surplus money in circulation, which he blames
on the loose use of credit.
Banking Reform
Progress. Implementation of the July 1987 decree on
banking reform began on 1 January. This decree:
? Reorganizes the banking system.
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? Decentralizes bank decisionmaking somewhat as a
complement to increased autonomy at the enterprise
level.
? Elevates the role of economic criteria in extending
credit.
? Forces both banks and borrowing enterprises to
assume greater financial responsibility.
? Attempts to improve the banking system's ability to
balance money resources with goods.
Under the old system, the Soviet State Bank (Gos-
bank) was a monopoly bank that monitored money
circulation; served as a center for the settlement of all
the economy's accounts; provided short-term and
some long-term credit financing to enterprises and set
all interest rates, lending criteria, and loan limits;
controlled allocation of foreign exchange; and set
exchange rates. Other banks, such as Stroybank (the
Construction Bank), performed specialized banking
functions. The banking system granted credits as a
matter of course?even to unprofitable enterprises?
since it had little authority to apply strict economic
criteria to banking operations. Soviet economists
claimed that, as a result, there was a persistent
imbalance between the money supply and available
goods and little economic rationale or discipline in
loan extension or repayment.
Under the new organizational structure, several new
banks have been established and some existing banks
have been restructured. Gosbank will begin to func-
tion more as a Western-style central bank: it will set
lending policies, regulate the money supply, and coor-
dinate the activities of the specialized banks. Local
banks will take over many lower level lending deci-
sions now made by Gosbank and planning organs. In
the foreign field, Gosbank will continue to set the
country's foreign currency policy, set official rates of
exchange, and represent the USSR in relations with
other central banks. The renamed Bank for Foreign
Economic Activity (Vneshekonombank), will continue
to handle and finance foreign trade transactions. The
former Stroybank, which handled banking services for
most domestic economic sectors, has been abolished
and replaced by three new, smaller banks?Prom-
stroybank, Agroprombank, and Zhilsotsbank?in or-
der to provide more specialized service. Finally, a new
Secret
savings bank, The Workers' Savings and Consumer
Credit Bank, opened with expanded services to the
populace.
Under the reform, Soviet banks will operate according
to new procedures and success indicators. On 1 Janu-
ary the entire banking system switched to self-financ-
ing under terms and conditions similar to those being
introduced in other sectors; all bank expenses must be
covered by revenues, and profits will be used to build
incentive funds for workers, for investment, and the
like. Some banking decisions have been decentralized
somewhat. Gosbank, jointly with the Ministry of
Finance and the Council of Ministers, sets general
guidelines for interest rates, but beginning 1 July
1988 specialized and local banks will have the autono-
my to increase or decrease them by up to 50 percent.
Similarly, although overall and sector loan limits are
set by Gosbank, local banks, after negotiating with
enterprises, can determine the breakdown among loan
recipients.
Loan criteria are now stricter and include the project-
ed use of credits, the financial health of the enterprise,
and its repayment history. According to the banking
decree, priority is to be given to those projects that
promote scientific-technical progress and renew capi-
tal stock. In theory, local banks may declare insolvent
any enterprise that systematically incurs losses or is
erratic in payments to the budget, banks, and suppli-
ers. Enterprises are to make all payments as they fall
due and cannot delay repayment of bank credits, as
they have in the past. The calendar system of pay-
ments has exacerbated enterprise liquidity problems,
and the banks have stepped in, providing 10-day loans
on preferential terms to cover wages. These bridge
loans are available only up to 1 July 1988.
In recognition of the need to balance "money income
and expenditure of the population," banks are en-
joined to aid the formation of cooperatives and private
businesses and state sector development that produces
consumer goods and services. The Law on Coopera-
tives permits establishing cooperative banks to tap
consumer savings in funding cooperative enterprises.
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In another effort to absorb money from the popula-
tion, ruble savings certificates were made available
beginning on 1 March 1988
Consumer banking services are also being expanded.
Checking accounts were offered beginning on 1 De-
cember 1987 in the RSFSR and are being expanded
this year to additional republics. Credit cards, for use
by Soviets and foreigners with hard currency bank
accounts in the USSR, will be issued through a joint
venture between a Western VISA company and In-
tourist, the Soviet state travel organization. A credit
card for Soviets with ruble accounts will be issued by
a new Soviet firm called Inturkart and will be phased
in slowly.
Prospects. The bank reforms are intended to improve
economic accountability?both in the banks and the
enterprises?and ensure a more rational distribution
of bank resources. The resulting credit discipline is
supposed to force enterprises to consider profitability
and thus be more responsive to their consumers'
demands for quality and variety of goods and services.
Success, however, depends on the implementation of
the entire reform package, including price reform,
which is not scheduled to be completed until the next
decade. A rational price system is essential to deter-
mining real enterprise profitability?an important
criteria for making loans or enforcing bankruptcies. A
reformed system of wholesale trade that ensures the
availability of supplies for output and investment
objectives is also essential to ensure that loaned funds
can be spent.
Banking officials and some of the decree's provisions
indicate that Gosbank will retain strong central con-
trols, at least for the present. There is reason to doubt
that the regime will be hardnosed in meting out bank
resources based solely on profitability criteria, partic-
ularly in this reform transition period:
? The bank decree contains clauses that ensure that
economic management organs will maintain ulti-
mate control over the financial mechanism and that
fulfillment of the state plan will continue to be the
most important objective.
7
? In the event that a project is deemed "inefficient,"
the bank cannot deny funds unless it gets approval
from the ministries and other economic authorities.
? Even if enterprises cannot pay their suppliers and do
not meet the criteria for bank credit, central minis-
tries may allocate to them resources from central-
ized funds.
? The procedure for declaring an enterprise insolvent
is long and arduous.
Price Reform
Progress. One of the last elements of reform to be
implemented will be price reform?even though Sovi-
et economists consider it to be the linchpin of econom-
ic restructuring. The July decree lays down general
directions for price reform, but the details will be
worked out and implemented in stages beginning in
1990. The major provisions of the decree are that:
? Unlike its predecessors, this reform encompasses all
forms of prices?wholesale, procurement, and retail
prices?and specifies that changes in the various
sets of prices are to be interrelated.
? Pricing is to be decentralized somewhat; there will
be "three tiers" of prices?those set on a centralized
basis, those established independently by the enter-
prises, and those reached by contractual agreement
between enterprises.
? Pricing is to become an integral part of the formula-
tion of five-year plans?a feature intended to ensure
the "stability" of prices.
? Prices are to be fixed on the basis of "socially
necessary expenses of production and sale, utility,
quality, and effective demand," but "unjustified
profits" earned through "breaches of state price
discipline" will be appropriated and the guilty enter-
prises fined.
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According to the decree, industrial wholesale prices
are no longer to be based primarily on costs but on
"efficiency, quality, technical-economic characteris-
tics, and consumer qualities." Prices for goods that
have been heavily subsidized in the past, particularly
fuels and raw materials, will be raised substantially.
According to Nikolay Petrakov, deputy director of the
Economics and Mathematics Institute, increases in
these wholesale prices could be as high as 125 percent
for gas and power-station coal, 200 to 300 percent for
oil, and 40 to 50 percent for metal and electricity.
Such hikes, according to Price Committee Chairman
Pavlov, are necessary to "destroy the illusion" that
such resources are cheap and inexhaustible and to
create the necessary incentives for the design, produc-
tion, and application of resource-saving equipment.
Prices are to be reduced for certain kinds of electronic
equipment and high-tech machinery?a move de-
signed to stimulate industrial modernization. As
Petrakov pointed out in a recent article, surcharges on
wholesale prices have raised the overall price of
machinery to the point that renovation of productive
capacity and assimilation of new equipment have been
discouraged. "The main problem," he concluded, "is
that equipment which has long been fully assimilated,
or even outmoded, continues to be profitable to
operate."
The preferential wholesale rates for industrial output
sold to the agricultural sector?chemical fertilizers,
cars, and farm machinery?will also be eliminated.
Farmers will have to pay for the water they use for
irrigation, and industrial and agricultural enterprises
will now pay the same rate for electricity, heat,,and
natural gas. According to Pavlov, this will force the
farmers to buy only the "most efficient" products and
to limit their purchases to those they actually need.
These revised industrial rates will increase farm pro-
duction costs and are to be compensated for by higher
procurement prices?the prices paid for agricultural
products sold to state procurement agencies. The new
prices will add 30 billion rubles to the procurement
bill-11.7 billion of which is intended to cover the
Secret
higher wholesale prices. The new procurement prices
are also intended to cover the new charges for irriga-
tion water, which the farmers now receive free.
The pricing decree called for other changes:
? The number of procurement price zones will be
reduced. This system paid higher prices for the
products of farms operating at higher costs because
of less favorable climate and soil, but Soviet econo-
mists complained that this policy allowed farms to
recoup excessive costs and has not encouraged pro-
duction to be concentrated in areas where it could
be carried out at comparatively low costs.
? Financial aid now given to low-profit and money-
losing farms in the form of special supplements to
procurement prices will be abolished. Instead, suc-
cessful farms will be charged land rent, which will
go into a special fund to help poor farms.
? Procurement prices will vary more widely according
to the quality of farm produce, and prices will be
more widely differentiated by the season the pro-
duce is marketed.
Although the price reform as a whole is supposed to
be completed before the beginning of the next five-
year plan in 1991, the pricing decree does not set a
specific target date for the politically sensitive task of
revising retail prices, as it does for wholesale and
procurement prices. It is assumed that the retail price
reform will reduce the subsidies for certain foods,
rent, and consumer services. Sensitivity to this issue is
apparent in the pricing decree, which promises that
major changes in retail prices will not be made
without a full public discussion and will not result in a
lower standard of living.
Despite agreement among most Soviet economists
that retail prices must be raised to more fully reflect
costs,
no decision had yet been
made about the size of those increases or how many
stages will be required to implement them.
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a
minority of Soviet economists seems to be challenging
even the need for such retail price hikes, especially for
food. A. Shamov, an economist with the Academy of
the National Economy, recently wrote that it would
be better to concentrate on reducing the costs of
producing, storing, transporting, and processing food
than to increase food prices. Political commentator
Fedor Burlatskiy also has worried about the potential
political impact of such price hikes, warning that the
"enemies of reform" might exploit the problems
resulting from increased food prices.
"creation of conditions whereby price is influenced 'By
the consumer of a given product himself through the
market." also has called for a pricing
system based on supply and demand, concluding that,
in the absence of such a system, "we have absolutely
no guarantee that the present situation will not
recur."
reform
economists are now agreed on the need for an entirely
new price-setting system but that they remain at odds
over the design of that system, as well as other
matters, such as compensation and monetary reform.
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For the most part, however, Soviet economists have
been focusing on the issue of how best to compensate
consumers for the expected price increases.
three options have
been considered: a reduction of prices for consumer
durables and soft goods, abolition or reduction of
income taxes on wages, and supplements to wages and
pensions. Recent evidence?including statements by
General Secretary Gorbachev and Price Committee
Chairman Pavlov?indicates that most of the atten-
tion is now focused on wage supplements but that
several issues have yet to be resolved.
Prospects. The intended revision of industrial and
procurement prices will bring them more in line with
costs, and the removal of price subsidies is a step
toward more efficient use of inputs. But the emphasis
on price revision rather than on reform of the pricing
mechanism itself means that prices will remain poor
guides to economic decision making. The procurement
price revisions, for example, do not change the essen-
tial nature of the cost-based, administered system of
procurement prices.
Reform-minded Soviet economists, who initially
seemed pleased with any movement at all on the price
reform issue, are now calling attention to the reform's
deficiencies and pushing for bolder measures. For
example, it was
not enough simply to delegate price-setting authority
to lower levels. What was needed was the
9
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"massive disagreement at the 2b)(1
political level" was responsible for the vagueness of
the July decree. the current debate 25X1
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complications and potential consequences of various 25X1
options. 25X1
Foreign Trade Reforms
Progress. Reforms in the foreign trade sector antedate
the June plenum reforms. Beginning in January 1987
more than 20 ministries and 70 large associations and
enterprises were granted the authority to conduct
trade directly with all foreign partners, rather than
through the Ministry of Foreign Trade (MFT). This 25X1
realignment of authority was an attempt to place
more responsibilities for trade at the production level,
where end users of the imports can deal directly with
the exporter, removing the MFT as a cumbersome
middleman. The June 1987 reform provisions did not
include additional foreign trade reforms, but merely
called for enhancing the use of financial-credit levers
in promoting the expansion and efficient conduct of
foreign trade. They also called for implementing a 25X1
"stage-by-stage" convertibility of the ruble, starting
with the CEMA trading system.
At the same time, Moscow sanctioned the establish-
ment of joint ventures with Western firms. Moscow
sees this type of business deal as a better and less
expensive way to acquire and assimilate Western
technology, managerial expertise, and marketing
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skills than current trade and economic practices.
Since the late 1970s, the Soviet leadership has ex-
pressed disappointment over the failure of imports of
Western machinery and equipment to make the ex-
pected contribution to industrial output.
The most recent reform effort?and probably the
most confusing to both foreign and domestic observ-
ers?is Moscow's replacement early this year of the
MFT and the State Committee for Foreign Economic
Relations, the body that administered economic aid,
with a single Ministry of Foreign Economic Relations.
the Soviets have not yet
determined the exact structure and function of the
new ministry, but the reshuffling is likely to affect the
reforms already in place. For example, Moscow prob-
ably plans to give additional ministries and enterprises
independent foreign trading rights. In addition, the
Chamber of Commerce and Industry will have an
expanded role in foreign trade.
Confusion stemming from the foreign trade reorgani-
zations has disrupted trade during the past year and a
half. both Western
businessmen and Soviets are struggling to cope with
the new problems that were created:
? The lack of trade experts at the ministry and
enterprise level has been a major shortcoming.
Western businessmen, for example, blame the inex-
perienced personnel at Soyuzkhimeksport (the orga-
nization responsible for chemical exports) for being
unable to fulfill contract obligations and to meet
many sales conditions.
? Negotiations have been delayed because confusion
exists as to which personnel are responsible for
trading specific commodities.1
The establishment of joint ventures on Soviet soil also
has not materialized as the Soviets had initially
expected, despite a widespread campaign. Indeed, the
leadership's emphasis on joint ventures may actually
have inhibited trade because many Soviets are over-
looking other economic arrangements with the West
Secret
that could have a more immediate impact on industri-
al modernization. Although Moscow has received
more than 300 project proposals, only 37 agreements
have been concluded. Western firms have shied away
from signing deals largely because of their concern
about profitability and the vagueness of existing joint-
venture legislation on important issues such as man-
agement control, profit repatriation, raw material
supply, product pricing, and the valuation of capital
contributions. Finally, Western firms are willing to
tap a large and potentially lucrative Soviet domestic
market, but they remain reluctant to help the USSR
become another exporter of manufactured goods com-
peting on the world market. The Soviets are largely
dissatisfied with the progress of joint ventures, and an
official recently indicated that Moscow is studying
plans to change the joint-venture regulations.
Prospects. Tinkering with the foreign trade sector will
continue to impede trade relations in the short run but
could produce benefits over time. Closer contacts
between producers and Western firms could eventual-
ly speed up negotiations and allow Soviet managers to
order equipment that more closely meets their specifi-
cations. Without further changes in the system, how-
ever, the independence of the enterprises will continue
to be limited because Moscow can influence trade
through regulation of import and export prices, for-
eign currency exchange rates, customs tariffs, and
interest rates on credit.
Likewise, joint ventures will probably have little
impact on Soviet hard currency earnings or the
quality of domestic production during the remainder
of the current five-year plan period. Only a limited
number of significant joint ventures are likely to be in
operation within the next year or two. Most of the
deals concluded to date or those close to signing
appear to be relatively small endeavors that involve
simple production processes, low-level technology, and
little foreign capital. Over the longer term, Moscow
stands to reap benefits from even a small number of
joint ventures. These projects could help improve the
performance of certain industries, increase skills of
selected personnel, and provide access to new foreign
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markets. How far and how fast Western skills and
work habits spread to other Soviet industries, howev-
er, will hinge largely on the progress of Gorbachev's
domestic economic reform package, not on the num-
ber of joint ventures with the West.
Organizational Reform
Progress. Gorbachev has long viewed major change in
the role of the ministerial bureaucracy as vital to his
effort to move away from the Soviet command-style
economy toward a more "self-regulating" system. He
has repeatedly stressed that the ministries and other
central planning organs must now focus on "strate-
gic" tasks and refrain from day-to-day regulation of
production. He holds that the unwieldy structures and
huge staffs of the bureaucracy are no longer necessary
and must be sharply reduced if the ministries are to be
blocked from administrative tutelage of enterprises.
Gorbachev began the process of streamlining the
government bureaucracy late in 1985 with the merger
of five agriculture-related ministries and one state
committee to form the State Agroindustrial Commit-
tee (Gosagroprom). Subsequently, five interministerial
coordinating bureaus were created to supervise the
work of groups of related ministries. These reorgani-
zations were accompanied by steps to eliminate some
intermediate links of administration and by reduc-
tions in staffs (a 49-percent reduction was officially
claimed for Gosagroprom). It proved difficult to
streamline the ministerial bureaucracy, however, in
the absence of any fundamental change in the central-
ized system of economic management. The process of
creating overarching bureaus and commissions was
not completed as reportedly planned, and the reorga-
nization drive apparently ran out of steam by the fall
of 1986.
Gorbachev sought to rectify this at the June 1987
plenum by announcing that a streamlining of the
bureaucracy would be part of his comprehensive set of
measures to decentralize economic decision making.
This time the emphasis is mainly on staff reductions
and the reorganization of ministerial departments?
and less on the elimination of ministries.
11
General guidelines for the staff cuts appear to have 25X1
been circulated to the ministries, but they have not
been published and only the broad details have come
to light, the
staffs of the branch ministries are to be reduced by 50 25X1
percent by 1990 and Gosplan and other functional
departments are to be cut by 30 percent. The state
bureaucracy is to be reduced 50 percent at the
republic level and 30 percent at the oblast level. Only
at the district and city levels, where decisionmaking
authority is slated to increase, is some growth for the
management bureaucracy projected. Altogether, ac-
cording to TASS, 3 million managerial jobs are to be
eliminated by 1990.
These reductions will not put as many people out of
work as the numbers suggest. A portion of the cuts
will be accomplished by scheduled retirements or
"early outs"; possibly one-third of those let go will be
found jobs within the same administration; and an
effort is being made to encourage released personnel
to take jobs directly in production and to go to areas
where new industries are opening up. A January 1988
decree stipulates that those being laid off will be
guaranteed severance pay for three months, will be
allowed to keep their Moscow address even if they
accept a post in the provinces, and will be entitled to
their present salary for at least one year if they have
to accept a lower paying job.
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In the area of departmental reorganization, the goal
is to shift to a two-tiered administrative structure in
order to increase the operational authority of the
enterprises and to eliminate all intermediate links
between the ministry's leadership and its subordinate
production associations and enterprises. New organi-
zations called state production associations (GP0s)
are being established, but Soviet spokesmen insist that 25X1
these do not constitute a new bureaucratic layer.
Efforts to reduce significantly the number of minis-
tries appear to have stalled, although the broad
strategy?to sharply reduce the number of ministries
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after the establishment of coordinating bureaus for all
the major sectors of the economy?has long been
agreed upon. No specifics were mentioned at the June
plenum,
/A decree on the "reor-
ganization of the Council of Ministers" is still expect-
ed. Opponents of further ministerial mergers have
probably been aided by the many problems encoun-
tered by earlier efforts, such as the formation of
Gosagroprom. Although designed to serve as a model
for the reorganization of the rest of the economic
bureaucracy, Gosagroprom has been a major disap-
pointment.
Nevertheless, some progress, but of a relatively minor
nature, has been made in reducing the number of
central ministries:
? Four machine-building ministries were merged into
two, and one other was abolished.
? Seven union-republic ministries in the field of ener-
gy and natural resources were reorganized into all-
union ministries and their republic-level ministries
abolished.
? The Ministry of Foreign Trade merged with the
State Committee for Foreign Economic Relations.
? Most recently three education administrations were
merged into a state committee. More restructuring
is under way at the republic level.
The pace of reorganization has picked up noticeably
in recent months. Although the ministries and other
central departments apparently were instructed to
submit plans for reorganization and reduction by the
end of December 1987, most did not meet this
deadline, and a new push was on to complete this
phase of reorganization by mid-April. The removal of
Gosplan Chairman Nikolay Talyzin in early February
also should reduce that organization's resistance to
restructuring. Gosplan's foot-dragging was almost
certainly a factor in the halfhearted compliance with
the streamlining directive throughout the government,
and it reportedly weighed heavily in Talyzin's ouster.
Prospects. The ability of the government bureaucracy
to resist all efforts to make it focus on strategic
questions, rather than on day-to-day regulation of
Secret
production, poses a major threat to Gorbachev's re-
form program and will have to be overcome if the
program is to succeed. But the belief that simply
reducing the size of the bureaucracy would curb its
power may turn out to be misguided and?at least in
the short run?counterproductive. So far, that effort
is creating ill-timed disruptions and widespread re-
sentment that is likely to fuel opposition to the reform
program and to Gorbachev personally.
Gorbachev is
now trying to distance himself from economic issues
but is certain to be perceived as the principal instiga-
tor behind the current reductions in force. According
to the editor of the journal Ogonek, party secretary
Yegor Ligachev has opposed deep cuts in the bureau-
cracy, which he regards as part of his power base, and
he is likely to benefit politically from the resentment
being generated.
Among reformers there is growing cynicism that this
effort is just another reshuffling that will reduce
neither the size nor the role of the bureaucracy.
Particular concern is focused on the new GPOs.
Reformers claim that GPOs are turning into dumping
grounds for released officials and are no different
from the main administrations (a bureaucratic layer
between the ministry and enterprise) they were in-
tended to replace. "They reek of the old bureaucra-
cy," wrote one reformer. Moreover, reformers argue
that major streamlining will not by itself end ministe-
rial micromanaging as long as ministries continue to
be burdened with the responsibility for the economic
performance of their sectors. Because selections of
new people are occurring while the bureaucracy is still
operating under the old system, they also worry that
those who remain are "people who thrive on bureau-
cratic procedures."
Despite these misgivings among conservatives and
reformers alike, Gorbachev appears determined to
continue planned reductions. The Politburo meeting
on 3 March issued an upbeat assessment of the
restructuring process and expressed satisfaction with
the progress to date. Gorbachev may be counting on
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the dismissal of Gosplan head Talyzin to clear the
way for other measures to reduce the powers of the
government bureaucracy.
Private-Sector Reforms
Progress. Leadership support for expanding the legal
private sector appears to be growing and has resulted
in significant new legislation to encourage coopera-
tives and individually run businesses. Although not a
part of the reform package that came out of the June
plenum, reforms in this sector complement those in
the state sector?transferring more economic decision
making to the local level and making the economy
more flexible and responsive.
During late 1986 and early 1987, the Gorbachev
regime gradually introduced legislation promoting
member-run cooperatives and individually run busi-
nesses ("individual labor activity" in Soviet parlance)
as a means of improving the quality and availability of
consumer goods and services without major adjust-
ments in the allocation of scarce resources.
thus far the measures have
affected only a small segment of the economy.
The slow start is explained partly by limitations on
eligibility for legal private activity. Legislation on
self-employment and cooperatives has limited partici-
pation largely to housewives, students, pensioners, and
state employees working during their free time. In
addition, the range of cooperative activity has been
limited to four types of business: consumer services,
public catering, production of consumer goods, and
recycling of raw materials.
The main obstacles to legal private activity lie else-
where, however. The regime has given local govern-
ments broad powers to implement the new legislation,
but evidence indicates that many are blocking change.
Local authorities are primarily concerned with ac-
commodating the interests of state-owned and state-
operated enterprises whose performance is key for the
development of their regions and their personal suc-
cess. Moreover, they have had little financial interest
in supporting legal private activity. Self-employed
individuals have paid their personal income tax or
license fee to the USSR state budget. Cooperatives
have paid their taxes to local authorities, but the tax
13
rates are very low. Like the self-employed, cooperative
members have paid their personal income tax to the
USSR state budget. Perhaps more important, local
authorities appear to resent that the wages earned by
private businessmen are often much higher than those
of state employees.
The regime's efforts have also been hampered by the
reluctance of citizens to register. People fear that the
new initiatives will be short lived and that those who
opt for legal activity now will suffer consequences
later. Many people, especially illegal operators, do not
believe the new, less burdensome tax rates for self-
employment are low enough. Many citizens, like local
authorities, are antagonistic toward the idea of others
earning relatively high incomes.
A new law on cooperatives?approved by the Su-
preme Soviet in May 1988?is the boldest step taken
by the leadership thus far to promote the development
of cooperatives. The law bolsters their ideological and
legal underpinning, loosens the eligibility require-
ments for joining cooperatives, and broadens the scope
of their activities. It also directs all revenues from new
progressive tax rates for the personal income of
cooperative members to local authorities, increases
their access to credit, and allows "major" cooperatives
to conduct foreign trade activities independently. The
new law contains a separate section on agricultural
cooperatives, which ostensibly frees collective farms
from compulsory procurement targets. The state is to
rely on attractive prices, the tying of guaranteed
supplies to state orders, and other economic "levers"
to ensure that agricultural production targets are met.
Prospects. The draft law on cooperatives, as well as
other measures taken by the leadership, represents a
serious attempt to address problems of implementa-
tion. The law could begin to have a measureable
positive impact on cooperative development during the
second half of 1988. But the new law can only
partially solve the thorny problems that impede sub-
stantial improvements in the quality and convenience
provided to the consumer. The leadership will have to
do more, for example, to overcome public and official
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hostility to private business. It must also convince the
population and local authorities that policies on pri-
vate business will not be reversed. Building credibility,
however, takes time and more measures, like the law
on cooperatives, that underscore long-term commit-
ment. In addition, the leadership will have to continue
to work to provide adequate incentives for local
authorities, enterprises, and individuals to support
private business.
The Root of the Problem
The difficulties highlighted above can be traced to a
common set of problems. First, enterprise managers
have not been clearly apprised of their new tasks and
responsibilities. Detailed instructions have not been
issued nor chains of command in new organizations
clearly delineated. Second, there is a basic conflict
between the economy's traditional operating princi-
ples and the demands of the "new economic mechan-
ism." That is, enterprise managers are reluctant to
take risks and focus on quality and innovation as
emphasized in the reforms because they are still
obliged to meet high quantitative targets. Reform
economists and even some in the leadership have
begun to speak publicly about the need to play down
the emphasis on quantity, but they have acknowl-
edged in private that it is too late to change the
ambitious plan goals for 1986-90.
More serious are the loopholes in the reform legisla-
tion that allow the bureaucracy to resist change. The
major unresolved issue is the proper role of the central
authorities in guiding enterprise activity. At present,
the ministry is held ultimately accountable for the
production of its branch subordinates, being charged
with "monitoring" their activities. This sets the stage
for continued meddling in enterprise affairs. Also,
implementation is difficult because only a portion of
the economy has transferred to the new system, and
crucial elements of the reform package are not sched-
uled for full implementation until the beginning of the
next five-year plan period. Price reform?essential for
rational economic decisionmaking?will not be com-
pleted until at least 1991, and the wholesale trade
reform is not scheduled to reach its final objective
until 1992. Finally, the reforms must be meshed with
a five-year plan that was drawn up long before the
reforms were promulgated. Ministries are still being
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held to these goals and are issuing detailed commands
to ensure their fulfillment despite the reform objective
of enhancing enterprise autonomy
Implications and Outlook
The shaky start to the reforms will contribute to the
uncertainties felt by plant managers, who must also
contend with the pressures of modernizing the capital
stock and expanding the previously disruptive quality
control program. All of these initiatives will have at
least a short-run negative impact on Soviet economic
performance. Economic disruptions from the reforms
alone could result from:
? Mixed signals over which success indicators to
follow.
? Conflicts between ambitious output targets and new
planning guidelines that emphasize quality output
and the introduction of new technology.
? Confusion on the part of Gosplan, ministry officials,
and enterprises over their changing roles.
? Delays in deliveries as plants whose production is
not covered by state orders scramble to find suppli-
ers or customers.
? Increased hoarding as enterprises try to protect
themselves from supply interruptions and confusion
over producer-consumer relations.
The reforms may also increase labor-management
tensions as plants struggle to adjust to the new
procedures. Since January 1987, when self-financing
began on a large scale in Soviet enterprises, 15 strikes
were reported, most of which were related to the
implementation of economic reforms. In general,
workers became disgruntled because the reforms tie
wages and bonuses more directly to performance, and
yet worker productivity depends on factors beyond
their control. So far, from the workers' viewpoint, the
reforms have meant more discipline, less job security,
slower wage increases, and only the promise of an
eventual payoff in terms of more consumer goods and
services
The leadership must take effective and immediate
action to get the reforms back on track or risk
delaying the payoff period until well into the 1990s. It
was Gorbachev's original intention that the reforms
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be "almost fully in place" by the beginning of the next
five-year plan period (1991-95). Many Soviet econo-
mists now believe that the transition period will be
later and that major improvements in Soviet economic
performance cannot be expected until the early-to-
middle 1990s.
,this might be dangerous because, if the
oviet consumer does not see tangible results within
the next few years, "the future of restructuring could
be in jeopardy."
Policy initiatives that would indicate the leadership
recognizes the root of the reform implementation
problems and is ready to take effective action would
include:
? A relaxation of taut output targets.
? A speedup in the implementation schedule for
wholesale trade reform.
? More flexibility allowed immediately in wholesale
price formation.
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? More latitude granted to the enterprise in planning
its output and in distributing and spending its funds
for investment and incentives.
? A substantial reduction in the ministerial apparatus.
Work is under way in at least two of these areas
(wholesale trade and state orders, as discussed above)
but it is unclear how far the new directives will go.
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cuss the progress of the reforms. New initiatives in
these problem areas announced at that time would
send a clear signal that the leadership is committed to
hewing to the original intent of the reformers and that
it realizes the serious consequences of letting the
situation drift.
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