THE FIAT-SOVIET AUTO PLANT AND COMMUNIST ECONOMIC REFORMS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP69B00369R000100240109-9
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 101
• Document Creation Date: December 15, 2016
• Document Release Date: April 13, 2004
• Sequence Number: 109
• Publication Date: March 4, 1967
• Content Type: REPORT

Do - No Y Je E7 o y G /-f- c /i I= - L-15
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[SUBCOMMITT
LEGISLATIVE COUNSEL
FILE1CQeY
THE FIAT-SOVIET AUTO PLANT
AND
COMMUNIST ECONOMIC REFORMS
A REPORT
PURSUANT TO
HOUSE RESOLUTION 1043, 89TH CONGRESS, 2D SESSION
FOR THE
SUBCOMMITTEE 'ON INTERNATIONAL TRADE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
U.S. GOVERNMENT PRINTING OFFICE
74-1940 WASHINGTON : 1967
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COMMITTEE ON BANKING AND CURRENCY
WRIGHT PATMAN, Texas, Chairman
.ABRAHAM J. MULTER, New York WILLIAM B. WIDNALL, New Jersey
WILLIAM A. BARRETT, Pennsylvania PAUL A. FINO, New York
LEONOR K. SULLIVAN, Missouri FLORENCE P. DWYER, New Jersey
HENRY S. REUSS, Wisconsin SEYMOUR HALPERN, New York
THOMAS L. ASHLEY, Ohio JAMES HARVEY, Michigan
WILLIAM'S. MOORHE'AD, Pennsylvania W. E. (BILL) BROCK, Tennessee
ROBERT G. STEPHENS, JR., Georgia BURT L. TALCOT:f, California
:FERNAND J. ST GERMAIN, Rhode Island DEL CLAWSON, California
:HENRY B. GONZALEZ, Texas ALBERT W. JOHNSON, Pennsylvania
JOSEPH G. MINISH, New Jersey J. WILLIAM STANTON, Ohio
CHARLES L. WELTNER, Georgia CHESTER L. MIZE, Kansas
RICHARD T. HANNA, California
BERNARD F. GRABOWSKI, Connecticut
COMPTON I. WHITE, JR., Idaho
'TOM S. GETTYS, South Carolina
PAUL H. TODD, JR., Michigan
THOMAS C. McGRATH, JR., New Jersey
JOHN R. HANSEN, Iowa
FRANK ANNUNZIO, Illinois
THOMAS M. REES, California
PAUL NELSON, Clerk and Stag Director
ALVIN LEE MORSE, Counsel
CURTIS A. PRINS, Chief Investigator
NORMAN L. HOLMES, Counsel
BENET D. GELLMAN, Investigative Counsel
ORMAN S. FINE, Minority Staff Member
SUBCOMMITTEE ON INTERNATIONAL TRADE
THOMAS L. ASHLEY, Ohio, Chairman
ROBERT G. STEPHENS, JR., Georgia SEYMOUR HALPERN, New York
]rERNAND J. ST GERMAIN, Rhode Island BURT L. TALCOTT, California
CHARLES L. WELTNER, Georgia ALBERT W. JOHNSON, Pennsylvania
TOM S. GETTYS, South Carolina CHESTER L. MIZE, Kansas
THOMAS C. McGRATH, JR., New Jersey
JOHN R. HANSEN, Iowa
THOMAS M. REES, California
1 Richard L. 'Ottinger, New York, resigned from committee Oct. 18, 1966.
II
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LETTER OF TRANSMITTAL
FEBRUARY 28, 1967.
Hon. WRIGHT PATMAN
Chairman, Banking and Currency Committee,
House of Representatives,
Washington, D.C.
DEAR MR. CHAIRMAN : Transmitted herewith is my report as chair-
man of the Subcommittee on International Trade. The report is in
two parts: (1) proposed. Eximbank extension of credit for purchase
of U.S. machine tools for the FIAT auto assembly plant in the Soviet
Union, and (2) our evaluation of current progress of economic reforms
in Yugoslavia, Hungary, Czechoslovakia, and the Soviet Union.
This study was undertaken pursuant to House Resolution 1043 of
the 89th Congress.
Three other members of the subcommittee participated in this study.
They were Representatives James Harvey, Chester L. Mize, and
Thomas M. Rees, together with Richard K. Cook of the committee
staff. Between December 7 and 19, 1966, we traveled to Italy, Yugo-
slavia, Czechoslovakia, Hungary, and the Soviet Union. The appen-
dix lists the names of those with whom we met during our trip.
The information contained herein, however, is the product of more
than 3 months of intensive study.
This report represents the combined opinions .of the four members
who conducted the study. It does not necessarily represent the views
of any other members of the Subcommittee on International Trade.
Sincerely yours,
THOMAS L. ASHLEY,
Chairman, Subcommittee on International Trade.
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CONTENTS
Page
Letter of transmittal----------------------------------------------- III
Part I. The FIAT-Soviet auto plant:
Observations and summary of findings--------------------------- 1
Background--------------------------------------------------- 4
Why U.S. machine tools?--------------------------------------- 5
Foundry machines and heat-treating equipment --------------- 6
Machines for engine manufacture---------------------------- 6
Machines for other mechanical oar components---------------- 6
Machines for production of car bodies------------------------ 6
Components of material-handling equipment, machines for
maintenance, and inspection instruments------------------- 6
The Soviet automobile program--------------------------------- 8
"U.S.S.R.: About To Enter the Automotive Age?" Intelligence
Report, CIA/RR ER 66-13, July 1966--------------------- 9
The FIAT contract and the current economic scene in the U.S.S.R_ _ 37
Export-Import Bank credits------------------------------------ 40
Conclusion and recommendation_________________________________ 42
Part II. The Communist economic reforms--------------------------- 43
The Yugoslav economic reform---------------------------------- 43
Economic reforms in Hungary----------------------------------- 48
Czechoslovak economic reforms_________________________________ 51
Status of the Soviet economic reform_____________________________ 54
"Economic Reforms: A Balance Sheet," article by Gregory
Grossman, from Problems of Communism, November-Decem-
ber 1966------------------------------------------------ 57.
APPENDIX
Itinerary of countries visited by the Subcommittee on International
Trade, with names and titles of foreign government and private indi-
viduals with whom they conferred_________________________________ 71
"FIAT Maps a Now Route in World Business," article from Business
Abroad, May 30, 1966------------------------------------------- 72
"How FIAT Sold Moscow," article from Business Week, May 14, 1966 --- 74
"To Russia-Without Love," article from Forbes, October 1, 1966------- 76
"Institutional Developments," article from Economic Survey of Europe
1965, Economic Commission for Europe (U.N.), Geneva, Switzerland,
October 10, 1966------------------------------------------------ 78
Trade with Soviet bloc-January to June (table) - - - - - - - - - - - - - - - - - - - - - - 96
Exports to Sino-Soviet bloc-January to June (table) ------------------ 97
Imports from Sino-Soviet bloc-January to June (table) - - -- - - - - - - - - - - - 98
Total free-world trade and free-world trade with Communist areas, 1948
and 1959-65 (table)---------------------------------------------- 99
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PART I. THE FIAT-SOVIET AUTO PLANT
OBSERVATIONS AND SUMMARY OF FINDINGS
On October 7, 1966, before the National Conference of Editorial
Writers in New York City, President Johnson announced that "the
Export-Import Bank is prepared to finance American exports for the
Soviet-Italian FIAT auto plant." Because we were in the final weeks
of a congressional election campaign, the significance of this statement
in terms of overall U.S. trade policy may have been overlooked.
The House Committee on Banking and Currency has legislative
jurisdiction over the Export Control Act, the application of which
will determine whether or not the U.S. Government finally approves
export licenses for U.S. machine tools to be installed in the proposed
FIAT-Soviet plant. Our committee also oversees the operation of the
Export-Import Bank. While specific congressional authority is not
required, there are ample legislative avenues available to those in the
Congress who might prefer to have Eximbank credits for these
machine tools denied.
With this in mind, we undertook to study this proposal as thor-
oughly as possible. It was our considered judgment that the size
of the undertaking as well as its possible ramifications demanded a
thorough study and public airing. If controversy were to develop
at a later time, we thought that it would be far better for all concerned
that such arguments rest upon a factual foundation.
Once embarked upon this course, we received the full cooperation of
all interested executive departments and agencies including the De-
partments of State, Commerce, and Defense as well as the Central
Intelligence Agency. Equally important was the cooperation we
received from the FIAT Co., Istituto Mobiliare Italiano, and the
Italian Government itself.
It is, therefore, the purpose of this section of the report to inform
the Congress of our findings. We will not attempt to advise our col-
leagues in the Congress on the desirability of U.S. participation in this
project from the standpoint of international politics. Those of us
who conducted this study are all agreed that day-to-day conduct of
trade relations and foreign policy properly belong to the President.
Moreover, our opinions and findings in this regard could be greatly
colored by rapidly changing international developments.
On the other hand, we do not underestimate the significance of an
undertaking of this size in terms of future United States-Soviet
relations.
At the outset, it might be useful for us to summarize findings, some
of which are drawn from the more detailed material that follows :
(1) We are confident that the Export Control Office of the Depart-
ment of Commerce carefully will evaluate every application for
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export licenses for all U.S. machine tools requested by FIAT for
installation in the proposed plant.
In a letter of October 20, 1966, to a member of our committee, the
Director of the Office of Export Control said : "We consider the
machine tools normally required for the manufacture of civilian auto-
mobiles to be peaceful goods, and license applications for such equip-
ment are likely to be given favorable consideration. Some of this
equipment, however, still might also have important strategic uses.
Approval of export licenses for such equipment would, of course, be
less likely. The formulation of this policy involved. the active partici-
pation and concurrence of the Departments of State and Defense, as
well as other interested agencies."
We realize that there are special licensing problems raised by ma-
chine tools that have well-established civil uses but can also be used for
strategic purposes. We are assured that Commerce would weigh a
variety of factors before taking action on any such tools. The avail-
ability of comparable equipment abroad and the effectiveness of the
denial of a license would be determined. The likelihood of the tools
being diverted from automobile production to strategic uses would be
very carefully assessed. Bearing on this would be the degree to which
the equipment is an integral part of a large package. The demand for
such tools by U.S. industry for use in filling defense orders also would
be a, prime consideration. Additionally, the Department would take
into account the quantity of the equipment involved and the signifi-
cance of any incorporated technology that might be extractable.
In the final analysis, all approvals would be subject to a, determina-
tion that the shipment of the equipment to the Soviet Union would
not have an adverse impact on our requirements for such equipment
in. the United States, nor make a contribution to the U.S.S.R. that
would be in any way detrimental to U.S. national security and welfare.
We are mindful of the responsibilities of our committee with regard
to the administration of the Export Control Act. Because of the
magnitude of this proposed arrangement, we would expect the Sub-
committee on International Trade to take an active interest in the
evaluation procedure of export license applications for U.S. machinery
scheduled for installation in the FIAT auto assembly plant.
It would be entirely appropriate for the subcommittee to call before
it representatives of the Export Control Office in order for it to review
the manner in which these license applications are being evaluated.
We have been further assured by the Acting Secretary of Commerce
that our subcommittee would have the full cooperation of the, Office
of Export Control should it feel the need for conducting such hearings.
(2) Although it has been said that FIAT could purchase, the needed
machine tools from other sources if U.S. export licenses are denied,
there is no question that FIAT prefers to purchase a substantial
amount of the total pant machinery from the United States, U.S.
affiliates and licensees.
We are advised by FIAT by letter received February 1, 1967, that :
A number of machine tools and equipment. items which FIAT' plans to suggest
to the Soviets for purchase in Italy and other European countries are, in fact,
currently manufactured by European subsidiaries or licensees of U.S.
manufacturers.
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THE FIAT-SOVIET AUTO PLANT
The final cost of said machine tools and equipment items is contingent upon
the decisions of the Soviet agencies handling the actual purchase orders,
If such agencies will adopt the list of equipment suggested by FIAT it can be
expected that the largest share of the purchases will be related to forging and
body stamping presses manufactured in Italy on U.S. license, as well as to com-
ponent parts of plant material handling conveyors manufactured in Italy and/or
in Great Britain, also on U.S. license.
It would appear, therefore, that U.S. machine tool technology may
pla a larger role in the proposed auto plant than had been forecast
earlier. While direct purchases from the United States may total
$50 million, additional machine tools may be purchased from Euro-
pean firms operating under license arrangement with American
companies.
Machine tools ordered by FIAT from foreign subsidiaries or
licensees of U.S. firms, to the extent they are under international
embargo because of their highly strategic character, would be con-
trolled under Coordinating Committee (CoCom) rules. The United
States, as a participating country, would have a voice in any CoCom
licensing determination respecting such equipment.
Foreign-made. tools not covered by CoCom restrictions would be
controllable by the United States under present regulations to the
extent that U.S.-origin materials or component parts are involved in
their manufacture or unpublished U.S. technology is essential to their
operation and maintenance.
(3) While it might be tempting to jump to the conclusion that con-
struction of such a. huge auto assembly plant signals an abrupt change
in allocation of Soviet resources toward consumer products, such a
conclusion would be premature at this time. Nevertheless, this- is a
huge undertaking and one that could lead to further expansion of
Soviet consumer goods industries at a later time.
(4) Spokesmen for the U.S. machine tool industry have indicated
to us that there is no domestic shortage of automotive machine tools
of the type likely to be installed in the FIAT plant. Domestic supply
is an important and key consideration in the application of the Export
Control Act. Currently the backlog of orders to U.S. firms is con-
sidered to be normal.
(5) We have been assured by the highest levels of the Italian Gov-
ernment that only a small percentage of the total cost of this deal to
the U.S.S.R. will be repaid through so-called barter arrangements.
(6) We are confident that the FIAT Co. has not blindly con-
ceived a new competitor to its own foreign markets. Some exports
from this plant may develop but we are convinced they would be small.
The types of FIAT automobiles to be produced will be specially
adapted to peculiar Soviet needs in terms of road and weather con-
ditions and would have limited sales appeal elsewhere. Moreover,
internal demand in the U.S.S.R. far exceeds current and proposed pro-
duction goals.
(7) Any Export-Import Bank credit guarantees will be between
Eximbank and Istituto Mobiliare Italiano (IMI) and not between
Eximbank and the Soviet Government. Since 1947, the Export-Im-
port Bank has extended credits of some $650 million to IMI for
financing U.S. exports, including credits aggregating about $50 mil-
lion for the use of FIAT. All of these credits have been repaid, many
of them some years before they were due.
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4 THE FIAT-SOVIET AUTO PLANT
We have been advised by the Export-Import Bank that no credits
will be extended to IMI for the purchase of any machine tools pro-
duced by wholly or partially owned foreign subsidiaries of U.S. firms
or from foreign firms working through license arrangements with
U.S. companies.
BACKGROUND
On December 7, 1966, at our meeting in Rome with officials of
Istituto Mobiliare Italiano (IMI) and Fabbrica Italiana Automobili
Torino (FIAT), the president of FIAT, Senator Vittorio Valletta,
supplemented much of the previously known history and background
leading up to the July 1965 agreement between FIAT and the Soviet
Union to construct the auto assembly plant. We were impressed with
the candor and cooperative attitude of Senator Valletta in describing
to us the intricate background leading up to the consummation of this
agreement.
Keeping in mind certain privileged remarks, we can nevertheless
state that as early as 1962 Senator Valletta discussed the possibility
of U.S. participation in an auto assembly plant with several U.S.
Government leaders, including President Kennedy. According to
the President of FIAT, he was encouraged by the United States Gov-
ernment to pursue such a deal on the theory that vastly increased
Soviet automotive production might switch at least some Soviet eco-
nomic resources toward consumer goods industries.
In the meantime, in 1962 numerous conversations and extensive
negotiations were held between FIAT and the U.S.S.R. for the iiist.al-
lat on of farm tractor and other auto engineering facilities. These
negotiations, however, did not result in any signed agreements.
In the years 1962-65 there were 46 Soviet trade and technological
visits to Italy and at least two personal meetings between Alexei N.
Kosygin and the president of FIAT. Senator Valletta informed us
that because of the size of the auto plant proposal and prior dealings
with the U.S. Government, lie considered it "his duty" once again to
travel to the United States in 1965 and explain all that had transpired
up to that time.
According to Senator Valletta, the U.S. reaction in 1965 was that
a transaction of this kind was not against the interests of the West. It
was during his trip to the United States in 1965 that Senator Valletta
thought "it logical" for him to raise the prospect. of the employment
of a certain percentage of U.S. heavy machine tools in the proposed
plant because of FIAT's traditional use of U.S. machine tools within
its own domestic plants.
As a next step, following his U.S. visit in 1965, Senator Valletta
advised Soviet officials that, he had spoken to Washington of the de-
sirability of including at least some U.S. machinery in the Soviet
plant and asked the Soviets if they had any objection, to which he
was told there was none.
In his discussion with our subcommittee members, Senator Valletta
emphasized that those with whom he had spoken in Washington had,
throughout these informal soundings, stressed that no U.S. machine
tools approved for export could carry any strategic use whatsoever.
With this in mind, in drawing up its tentative plans, FIAT did
include in its negotiations with the Soviet Union the possible inclusion
of U.S. machine tools-but "with a question mark" as to their final
approval by appropriate U.S. agencies.
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Consequently, in July 1965 an agreement on cooperation in auto-
mobile production was signed in Moscow between Vittorio Valletta,
President of FIAT, and K. N. Rudnev, Chairman of the U.S.S.R.
State Committee for Science and Technology. In addition to provi-
sions for cooperation in research, the agreement envisaged the con-
struction of a FIAT auto plant in the U.S.S.R.
After a year of negotiations on details a final contract between
FIAT and the Soviet Union was signed on August 15,1966, which pro-
vided for the construction of a plant with an annual capacity of 600,000
automobiles. The total cost of this plant, exclusive of supporting
facilities such as rail lines and housing for workers, has been esti-
mated at approximately $800 million. This figure includes $300 to
$400 million of imported machinery and equipment.
Under a financial agreement signed between the Italian export credit
organization Istituto Mobiliare Italiano (IMI) and the Soviet Min-
istry for Foreign Trade, the Italians granted the Soviet Union a credit
of approximately $320 million to cover the cost of the imported ma-
chinery. This credit is to be repaid in 17 semiannual installments
beginning 6 months after the scheduled completion of the plant in
about 1970. Following the signing of these agreements, it was an-
nounced that the plant would be built at Togliatti, a town on the middle
Volga near Kuibyshev.
WHY U.S. MACHINE TOOLS?
Although FIAT would be able to construct the Soviet plant without
any U.S. machine tools and entirely from European sources of supply,
Senator Valletta made it clear in his conversation with us that this
was not the ideal course. He stressed that FIAT preferred to have
freedom to shop in the United States because of "quality" considera-
tions.
In the past, FIAT plants have relied upon the U.S. machine tool
industry for many plant components and, quite naturally, a tech-
nological relationship has developed over the years. We presume that
not only FIAT but also Soviet technicians recognized that the most
up-to-date and advanced design automotive assembly facility might
include at least some U.S.-built or U.S.-designed machine tools. More-
over, the widest shopping area produces the most competitive bidding
situation with regard to technology, prices, delivery schedules and
servicing.
At our Rome meeting on December 7, Senator Valletta made avail-
able to us a, December 1966 list of U.S. equipment desired for installa-
tion in the FIAT-Soviet auto plant. The list details the equipment
which FIAT thinks it proper to recommend for the Soviet factory at
the present stage of engineering study and layout planning. The list
included both the types of tools desired and the U.S. companies most
likely to be in a position to supply them. In accord with our under-
standing with FIAT, for business reasons the list will not be included
in this report in that it might be modified at a later point and publica-
tion might upset normal commercial relationships.
Nevertheless, for the purpose of informing Members of Congress,
and without violating any confidence, it can be noted that the suggested
machines would be installed in production lines for which FIAT has
worked out the operation sheets and has designed tooling and fixtures
to mass produce two cars of the FIAT line belonging to the small and
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6 THE FIAT-SOVIET AUTO PLANT
medium. European size class (engine displacement, respectively, 73
and 85 cubic inches).
Nearly all the contemplated machines could be used solely for the
above production (2,000 small- and medium-size cars a day).
1. Foundry machines and heat-treating equipment
The foundry machines contemplated as U.S. supply are chiefly
flask and core molding machines. They must insure a high and steady
production of cast, iron and aluminum parts of comparatively light
weight and small dimensions (the heaviest iron casting to be produced
is the cylinder block weighing about 85 pounds).
Similar considerations apply to the heat-treating furnaces: They
would be used for high and continuous rates of production of small
mechanical parts.
The total estimated cost for the machines under this class is about
$7 million.
2. Machines for engine manu/acture
These are, in particular, transfer lines for pistons (4 lines), lathes
anal grinding machines for 4-cylinder engine crankshafts, boring and
honing machines for cylinder liners and shaft housings.
These machines would be specifically designed and tooled for the
components of the two cars designed by FIAT and could not be used
to manufacture parts of other design or dimensions because they have
fixed distances of spindle axes.
The total estimated cost for the machines under this class is about
$13 million.
3. Machines for other mechanical car components
The machines made in the United States considered under this item
are the following : Transfer lines for the machining of the differential
carrier and housing, automatic lathes, machine tools for the produc-
tion of gears, transmission sliding sleeves, splined shafts and hubs,
etc. In this case, too, they are high-production machines, intended
only for the machining of passenger car components. For instance,
the maximum diameter of the ring bevel gear to be produced is G'1
inches.
The total estimated cost for the machines under this class is about
$17 million.
4. Machines for production of car bodies
These are, in particular, presses for stamping body panels, and per-
tinent auxiliary machines, such as metal sheet straighteners and the
like. These machines are designed for processing thin-gage, large-size
sheets, such as those used in the automotive industry. This class also
includes special parts for painting installations, upholstery process-
ing equipment, etc.
All the listed items are designed for the peculiar needs of the auto-
motive field.
The total estimated cost of the machinery under this class is about
$7 million.
5. Components of material-handling equipment, machines for main-
tenance and inspection instruments
The parts of the material handling equipment referred to above are
components of the overhead twin rail Webb-type conveyors. The size
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of such conveyors is suitable only for automotive production (han-
dling of car mechanical assemblies and/or passenger-car bodies with-
in the factory). In FIAT's case these components would be used for
the various assembly and storage lines (engines and other mechanical
units, bodies, etc.) .
Among the U.S. machines recommended by FIAT for maintenance
operations are many special tool sharpeners required for the various
automatic machines from different origins to be installed in the factory.
Also the inspecting devices would be specifically designed for the
automotive industry, such as surface roughness measuring instruments,
paint, fabric and plastic material wear meters and the like.
The total estimated cost for the machinery under this section is
about $6 million.
The overall cost of the above equipment recommended by FIAT
for procurement from the United States is about $50 million.
After studying the list of machine tools that might be purchased
in the United States, supplied to us in December by FIAT, we further
inquired of FIAT the extent to which U.S. machine tool technology
might be employed in the plaint through purchases of tools from U.S.
foreign subsidiaries and,/or licensees. In this regard, we were also
interested in learning if any such tools might be on the CoCom
restricted list.
In response to our inquiry, in the letter of February 1, 1967, FIAT
listed the following items that might be purchased through license
arrangement :
Foundry and forging machinery, such as core moulding machines, hot forging
presses, aluminum melting furnaces, sand blasting machines ; metal sheet stamp-
ing and auxiliary machines, including diemaking and maintenance equipment,
flattening, blanking and other machines for bodymaking operations and die-
sinking ; machines for mechanical operations, such as transfer lines, boring,
grinding, broaching machines, multispindle lathes, gearcutting machines for
cylindrical gears ; parts and components for various plant installations, such as
?electroplating, painting, etc.
At this time, we are still uncertain the extent to which FIAT pur-
chases of machine tools from U.S. European subsidiaries or licensees
might be in addition to or part of the $30 to $50 million in direct pur-
chases from machine tool firms in the United States.
As to the question of the number of tools that would require clear-
ance under CoCom restrictions, in the February letter FIAT had this
to say:
An itemized analysis of the situation with respect to machines requiring CoCom
clearance for export to the Soviet Union can be done only after the appropriate
Soviet agencies will have decided which machines they actually want to buy
from Western sources.
In due course, FIAT will make arrangements with the involved suppliers for
the export clearance applications to be submitted through the respective govern-
ment channels. It is believed, anyway, that there will be very few equipment
items to be so cleared.
Tentatively, on the basis of the International Lists dated September 9, 1966,
it is expected that the problem willbe limited to the following items :
A few numerically controlled machines for body diesinking and similar
manufacturing fixtures, and numerically controlled profile checking equip-
ment ; diodes, transistors and electrolytic condensers permanently incorpo-
rated in control circuitry of a number of different machine tools; dressing
diamonds and diamond lined grinding wheels fitted on some grinding
machines.
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THE FIAT-SOVIET AUTO PLANT
TILE SOVIET AUTOMOBILE PROGRAM
In conducting a. study such as this it is always advantageous for
members of the legislative branch to have, to the maximum extent
possible, full knowledge of all aspects of the matter under study. We
were pleased, therefore, that the Central Intelligence Agency released
to us prior to our trip its analysis of present and future prospects for
Soviet automotive capabilities and goals.
In view of what we learned it would be tempting, though foolish,
to ,jump to the conclusion that the FIAT-Soviet auto plant deal or
any other recent developments signal an abrupt change in Soviet eco-
nomic goals. As we mentioned earlier in this report, however, we
would not underestimate the impact of installation of an auto assembly
plant which by itself is capable of quadrupling current Soviet passen-
ger automobile production.
When it was decided that the matter before us warranted a report
to Congress, we requested CIA to release its study for inclusion in
this report. We would not have done so had we not been convinced
that our conversations with FIAT, IMI, and Soviet officials under-
scored the accuracy of many of the conclusions and forecasts reached
in this Directorate of Intelligence study.
We appreciate the cooperation of the CIA in making available the
following :
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CIA/RR ER 66-13
JULY 1966
INTELLIGENCE REPORT
USSR: ABOUT TO ENTER THE
AUTOMOTIVE AGE?
DIRECTORATE OF INTELLIGENCE
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USSR: ABOUT TO ENTER THE
AUTOMOTIVE AGE?
The widely publicized Soviet decision to boost production of auto-
mobiles* brings the USSR one step nearer the automotive age. How-
ever, announced plans are not so grandiose as to require a significant
alteration in traditional Soviet economic priorities, and would leave
military and space programs unimpaired. Even with the usual slip-
page in Soviet construction plans, output of automobiles probably
could accelerate to 460,000 by 1970 and to 1.1 million by 1975. This
would provide the Soviet Union with an automobile stock roughly
equal to that of the United States in 1917, and, on a per capita basis,
about 5 percent of the current US inventory. Perspective can be
gained by projecting Soviet per capita availabilities to 1975 and com-
paring them with the inventories that already exist in Western Euro-
pean countries; in each case, the Soviet expectation is a small fraction
of the realized Western level.
Essentially, the new Soviet program is designed to produce auto-
mobiles for the bureaucratic and managerial elite, not for the average
citizen. By the early 1970's, perhaps half of the automobiles produced
will be available for public purchase, rather than for government use.
It seems certain that, within the next decade at least, the Soviet leader-
ship not only has no plans to mass produce automobiles in imitation
of the West, but would strenuously resist internal pressure to do so.
Although the USSR may some day join the circle of nations that pro-
vide automobiles for the average citizen, that day is not now in sight.
Direct investment needed to fill the present Soviet program will be
about $1.2 billion,** of which $800 million is planned for the construc-
tion of a Fiat automobile plant in the USSR. The French firm of
Renault may play a role in reconstructing the present Moskvich plant;
other facilities will be expanded by the USSR itself. Through 1970,
* The term automobile as used throughout this report refers to passenger automobiles; the
term motor vehicles includes not only automobiles but also trucks and buses.
** Expressed in current US dollars, unless otherwise indicated.
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12 THE FIAT-SOVIET AUTO PLANT
the investment will represent less than i of 1 percent of all Soviet
investment in industry and 4 to 5 percent of machine building invest-
ment. Even these data overstate the burden, for repayment on the
Fiat contract will stretch well into the 1970's.
Indirect investment required for the supporting facilities for the
production of steel, gasoline, and tires has not been fully calculated,
but appears to be on the order of $400 million-substantially less than
the direct investment.
So-called tertiary investment-in highways, gasoline stations and
service facilities, motels, and the like-also needs to be added to the
bill. An examination of Soviet plans for highway development during
the next five years reveals that these call for only a modest increase
over the previous five years-about 20 percent in terms of kilometers,
or an expenditure of about $1.2 billion a year. Road density in the
USSR by 1975 will be considerably below that of most Western Euro-
pean countries and the United States. Furthermore, Western experi-
ence demonstrates that for several decades after a country begins the
acceleration of automobile production, the tempo of supporting in-
vestments increases only slowly. Not until there is a large, widely
distributed stock of automobiles does a rapid acceleration take place.
Some amelioration in the Spartan level of service and maintenance
facilities will be needed. At present, there are only eight gasoline
stations and eight garages in Moscow. If the Soviet regime increases
the number of such facilities at the same rate as in the past, the cost
by 1975 would be about $175 million. The lack of adequate main-
tenance facilities is reflected in the fact that approximately one-fifth
of the automobiles in the Soviet motor inventory are normally out of
service, awaiting repairs.
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THE FIAT-SOVIET AUTO PLANT 13
1. Plans and Feasibility
For production of automobiles, the Soviet five-year plan (1966-70)
implies an average annual rate of increase of 28 to 32 percent in
contrast to the rate of 7.7 percent achieved during the past five years
(1961-65). For the first time, a Soviet plan calls for a greater output
of automobiles than trucks, as shown in the following tabulation.
Production
(Thousand Units)
1965 1970 Plan
Automobiles .............................. 201.2 700 to 800
Trucks ................................... 379.6 600 to 650
Buses ......................... .......... 35.6 60
Total .................................. 616.4 1,360 to 1,510
Although the USSR appears ready to commit more investment to
the automobile branch of the motor vehicle industry, it seems unlikely
that the 1970 goal of 700,000 to 800,000 automobiles will be reached
before 1972 (see Table 1).
The plant to be built in the USSR by the Fiat company will be
capable of producing 600,000 automobiles a year when operating at
capacity and will be the single most important source of increased
production of automobiles. (For the schedule of the Fiat plant, see
the chart, Figure 1.) Other significant output increases could come
from a planned modernization of the Moskvich automobile plant in
Moscow, from a new automobile plant at Izhevsk that is to begin
Table 1
Estimated Production of Automobiles in the USSR
1968-75
Volga ..............
56
58
60
63
86
70
75
80
85
90
Moskvich ..........
74
83
88
90
100
120
140
160
180
200
Zaporozhets .........
48
57
67
76
84
90
95
100
100
100
Izhevsk ............
0
8
30
50
80
100
100
100
100
100
Fiat ...............
0
0
0
5
100
250
400
500
600
600
GAZ 69 b ...........
28
28
28
28
28
28
28
28
28
28
Total` . .. ..
210
230
270
310
460
660
840
970
1,100
1,100
Based on a study of the past performance of the Soviet automobile industry, the current
five-year plan for the industry, recent press announcements, and a study of the individual
automobile plants. Data are rounded to two significant digits. Because of rounding, com-
ponents may not add to the totals shown.
A jeep type of vehicle.
Including production of 100 ZIL-111's and 200 Chaika's per year.
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14: THE FIAT-SOVIET AUTO PLANT
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THE FIAT-SOVIET AUTO PLANT 15
production of the Moskvich 408 later this year, and from the planned
modernization of the Gor'kiy motor vehicle plant.
There are several reasons for estimating that the USSR will not
achieve its 1970 goal for automobile production. It is well docu-
mented that Western builders experience long delays when working in
the Soviet bureaucratic and technical environment. The Fiat plant
is not expected to be completed until mid-1969 and will probably not
be producing at capacity until 1974. In addition, the modernization
and expansion of present automobile plants and the start of produc-
tion at Izhevsk is not likely to move with the speed necessary to achieve
the 1970 goal-Soviet planners have always been slow in starting new
production. Finally, extensive renovation of the Moskvich plant will
cause protracted disruptions in production.
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~6 THE FIAT-SOVIET AUTO PLANT
H. The Automobile in Soviet Society
The USSR has only a toehold in the automotive age. Steady in-
creases in Soviet automobile production in the last decade boosted
output to 201,200 units in 1965, but judged in relation to demand in
the USSR as well as production in other industrially advanced coun-
tries, such a level of output is minuscule. The production and inven-
tory of automobiles in the USSR in comparison to other selected coun-
tries is shown in Table 2. (For models of Soviet automobiles, see
Figure 2.)
The small size of the automobile industry in the USSR is clearly
the result of calculated neglect by Soviet policymakers, both under
Stalin and later under Khrushchev. Indeed, Khrushchev was fond
of pointing out that the mass production and distribution of automo-
biles was a "weakness" of capitalism which the USSR had no inten-
tion of emulating. Instead, he advocated the establishment of rental-
car services in the major cities-a policy that has worked very poorly in
the few cases where it has been tried.
Khrushchev's attitude undoubtedly stemmed in large part from a
conviction that the USSR could not afford to provide its people with
automobiles if it was to meet priority commitments in the develop-
ment of heavy industry, military weaponry, and space technology.
Noneconomic explanations for this neglect were probably equally im--
Table 2
Production and Stock of Automobiles in Selected Countries
1964
Stock of
Automobiles'
Automobiles per
Million Population'
Argentina
114,617
800,000
36,400
Australia ..........
340,614
2,599,000
234,000
Belgium ..........
327,899
201,000
21,400
Canada ...........
560,678
5,122,000
265,000
France ...........
1,390,312
7,960,000
164,000
Italy
1,028,930
4,632,000
90,600
Japan
579,660
1,672,000
17,300
South Africa ......
143.373
1,023,000
58,500
Spain ............
119,000
652,000
20,800
Sweden ..........
160,106
1,666,000
217,000
United Kingdom ...
1,867,640
8,436,000
156,000
United States .....
7,745,492
71,950,000
375,000
USSR ............
185,200
919,000
4,000
West Germany . .
2,650,183
8,100,000
144,000
? Based on automobile registrations, except for Soviet data, which are estimated.
Based on midyear population.
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THE FIAT-SOVIET AUTO PLANT 17
MODELS OF SOVIET AUTOMOBILES
VOLGA- Largest car available to the public;
retail price $6,000 plus.
MOSKVICH 408- Popular model of the
Moskvich line; retail price
ZAPOROZHETS- Smallest and most unpopular
Soviet car; retail price about
$1,500.
about $5,000. FIAT 124- Comparable to the Moskvich 408;
a likely choice for the Fiat plant.
Prestigious models produced in limited quantities
exclusively for the Soviet elite; no quoted prices.
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18 THE FIAT-SOVIET AUTO PLANT
portant to Khrushchev-for example, the problems of political control
and the potential dangers of sociological changes that have been con-
sidered anathema to the Communist leadership.
Kosygin's views on the automobile are not revolutionary but suggest
some catering to the bureaucratic elite and to the aspirations of Soviet
consumers in the upper middle class. This does not mean a program
that will lead to an automobile for every Soviet family. Kosygin's
speech to a meeting of the State Planning Committee on 19 March
1965 is the most complete statement thus far issued from Moscow on
the reasons behind the plan to boost automobile production:
You know how staunchly the idea was imposed that there was no necessity in our
country to develop the production of passenger automobiles on a large scale. Let
all people ride only in buses, so to speak. Everything has been done to deprive even
the leaders of big enterprises and economic organizations of the right to use passenger
cars. Is this correct? The result has been that many leaders have been compelled
to use trucks unlawfully for their official rides. An apparent saving was made on
transport costs, but in fact damage was inflicted on our economy.
The plans thus far released by the Soviet leader appear to confirm
the viewpoint implicit in this quotation. In 1965 there were 4,350
automobiles per million population; it is estimated that there will be
about 7,000 by 1970 and about 17,000 by 1975. The Soviet inventory
in 1975 would be about equal to that in the United States in 1917..
On a per capita basis of comparison, this 1975 Soviet achievement
would be about 5 percent of current US inventory levels. The re-
stricted nature of the automobile plan can also be seen from the fact
that, at present, Italy, with a per capita gross national product (GNP)
of less than $1,200, provides one automobile for every 10 persons.
In comparison, by 1975 the USSR, even with a projected per capita
GNP of $1,900, will provide only one car for every 60 persons.
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? Ill. Automobiles on the Road, 1966-75
At present, the Soviet inventory of automobiles, publicly and pri-
vately owned, is estimated to be about 1 million automobiles (see
Table 3). By 1970, the inventory probably will be 1.7 million. De-
spite the planned increase in numbers of automobiles by 1975, few
Soviet citizens will have their own. A large share of total produc-
tion per year will continue to go for official use-that is, publicly
owned cars operated by administrative personnel, factory managers,
the military, and taxi services (see Table 4). Approximately one-
fifth of the inventory is normally out of service, awaiting repairs.
Table 3
Estimated Stock of Automobiles in the USSR'
1966-75
Starting inventory .
1,000
1,100
1,200
1,300
1,400
1,700
2,100
2,500
3,100
3,700
Production
......
210
230
270
310
460
660
840
970
1,100
1,100
Exports.
........
47
54
63
72
110
150
190
220
250
260
Imports ?
........
2
2
2
2
2
2
2
2
2
2
Scrappage' ......
80
87
94
100
110
130
160
200
250
290
Year-end inventory
1,100
1,200
1,300
1,400
1,700
2,100
2,500
3,100
3,700
4,200
Data are rounded to two significant digits. Because of rounding, components may not
agree with the totals shown.
? Assumed to be constant at 23 percent of production-the same level as 1961-64.
? Assumed to be constant at 2,000 units.
' Assumed to be constant at 8 percent of the starting inventory.
Estimated Number of Newly Produced Automobiles
Available for Private Use in the USSR
1966-75
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
Production
.........
210
230
270
310
460
660
840
970
1,100
1,100
Exports.
...........
47
54
63
72
110
150
190
220
250
260
Imports ?
...........
2
2
2
2
2
2
2
2
2
2
Official and commercial
use ..............
77
87
100
120 160
200
230
240
240
210
Private use' ........
84
95
110
130 200
310
410
510
610
660
Data are rounded to two significant digits. Because of rounding, components may not
agree with the totals shown.
'Assumed to be constant at 23 percent of production-the same level as 1961-04.
? Assumed to be constant at 2,000 units.
? For 1966-69, the number of automobiles available is assumed to be constant at 52 percent
of the figure arrived at when exports and imports are netted out of production. After 1969
the percent of net production increases by 4 percentage points per year, reflecting a larger
share of automobiles available to the public.
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IV. Primary Investment
If the USSR is to produce 1.1 million automobiles annually by 1975
(see Table 1), approximately $1.2 billion will have to be invested in
plant buildings, equipment, and direct manufacturing support facili-
ties. The following tabulation presents estimates of the investment
needed to modernize and increase the output of the existing plants as
well as to build the two new plants proposed by Soviet planners:
Production Investment
(Thousand Units) Required
Plant 1966 1975 (Million US $)
Gor'kiv .......... ..................... 56.0 90 44
MZMA ........... ...................... 74.0 200 190
Zaporozh'ye 48.0 100 78
Izhevsk (to be built) ..................... 0.1 100 130
Fiat' (to be built) .. ................... 0 600 800
Total ...... ... 1,242
' Tol'yatti, formerly Stavropol', on the Volga.
Approximately $900 million of the $1.2 billion total investment will
have to be spent prior to 1970 if the estimated levels of production
are to be attained by 1975. The $900 million is about 0.5 percent of
expected total Soviet investment in industry and 4 to 5 percent of
total investment in machine building for 1966-70. The USSR is'ca-
pable of allocating this small share of total new investment funds
to the automobile industry without resorting to any significant shifts
in present investment allocation plans, including those for the military
or space program. The financial burden on the USSR is eased by
the extended repayment terms of the Fiat agreement-terms of nine
years following completion date.
Most of the total investment of $1.2 billion needed by 1975 will. go
into the proposed Fiat plant. An official of a large US automobile
company estimates that the total cost of direct manufacturing equip-
ment and buildings in such a plant would be $522 million. With sup-
porting facilities, the total cost would probably be within the range
of the $700 million to $800 million estimated by Fiat. Although the
details of the project have not yet been finally settled, a breakdown
of estimated costs of the Fiat plant and the degree of Italian, Western
European, and US participation is shown in Table 5 (for the costs of
specific parts of the plant, see the Appendix).
The total cost to the USSR of a fully operating automobile plant
to produce 600,000 cars per year will exceed $800 million. Training
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THE FIAT-SOVIET AUTO PLANT
expenses will be considerable for the 30,000 to 40,000 employees
needed to operate the facility. Unless the major new plant is erected
in a large city, dwellings, schools, and other facilities will have to be
built. In addition, smaller investments will be required in industries
supplying raw materials and semimanufactured goods directly to the
automobile industry as well as in those industries supplying goods and
services to automobile users.
The details of other Soviet plans to modernize and expand existing
plants and to construct other new plants for the automobile industry
have not yet been fully disclosed. Renault of France may sign an
agreement to enlarge the dilapidated and outmoded Moskvich plant.
Expanding this plant to a capacity of 200,000 automobiles per year
would be tantamount to building a new plant and would cost ap-
proximately $190 million. Renault might follow its previous practice
in dealing with Communist countries and reduce costs by supplying
used equipment from its French plants.
In addition, the USSR is preparing to start production of Moskvich
automobiles in Izhevsk in the western Urals. This plant will require
an additional investment of about $130 million before the proposed
capacity of 100,000 units can be reached. The USSR probably will
also increase automobile production in its Gor'kiy and Zaporozh'ye
facilities by a total of about 86,000 units per year between 1966 and
1975, requiring about $122 million more in new investment.
Soviet, Italian, Western European, and US Participation in the Estimated
Costs of the Fiat Plant to be Constructed in the USSR
Building (all to be supplied by the USSR) .............................. 167
Machinery and equipment ........................................... 355
Supplied by Fiat from Italian, Western European, and US sources ....... 255
Supplied by the USSR ........................................... 100'
Other supporting facilities b ........................................... 278
Supplied by Fiat ................................................ 65
Supplied by the USSR ........................................... 213
Total cost of Fiat plant .............................................. 800
Total supplied by the USSR ........ ............................. 480
Total supplied by non-Soviet sources . ............................. 320`
Italy ............................................ 195 to 235'
Other Western European ......................... 40 to 90
United States ................. .................. 30 to 50
' Some commentators have suggested that the USSR would supply no equipment. It is
most unlikely, however, that the USSR, with the world's largest machine tool industry, would
not participate in equipping such a plant.
b Other supporting facilities include costs of external transportation connections; Fiat-supplied
training, engineering, plant layout, and powerplant; and plants for paint, gaskets, nuts, bolts,
radiators, and other assorted hardware.
Midpoint of the range.
Including an engineering fee of $65 million.
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THE FIAT-SOVIET AUTO PLANT
V. Secondary Investment
A. INTRODUCTION
The production of from 7 million to 9 million automobiles annually
in the United States affects virtually every branch of US industry.
One out of every seven wage earners is connected with some phase of
the automobile world. One out of every six businesses in the United
States depends on the manufacture, distribution and servicing, or use
of motor vehicles. Automobile, truck, and bus production in the
United States in 1963 accounted for the following shares of various
materials:
Percent of
Domestic Production
Domestically consumed steel ....
23
Cold rolled sheet and strip ......................................
46
Gray iron castings ....... ....................................
19
Malleable castings .............................................
57
Natural rubber ...............................................
65
Synthetic rubber ..............................................
60
Nickel .......................................................
14
Zinc .........................................................
35
The automotive support industries-fuel, accessories, and the like--
have grown rapidly in the United States and now almost equal one--
half of the value of retail sales of new automobiles, as shown in the
following tabulation:
Million US $
Automobiles ..
....
46,000
Tires, batteries, and accessories ....................................
2,900
Gasoline, repair, and maintenance .............. ..........
.......
20,000
Total .... .. ........................................ .......
68,900
In the USSR, in contrast, automobile production has little impact
on industrial production. In 1959, total production of motor vehicles
(automobiles, trucks, and buses) used less than 4 percent of the gross
value of the output of ferrous metals. The share of inputs consumed
by the motor vehicle industry in 1959 is shown in the following
tabulation:
Percent of
Material Gross Output
Ferrous metals .. ........................................ .....
3.4
Nonferrous metals .................................................
3.8
Metal products (nuts, bolts, and the like) ...........................
3.8
Glass ..........................................................
1.6
Bearings ........................................................
11.1
Tools and instruments ............... ...........................
1.2
Electrotechnical (generators, electric motors, batteries, and the like) ....
1.0
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THE FIAT-SOVIET AUTO PLANT
B. FERROUS METALS REQUIREMENTS
In view of planned increases in iron and steel production, auto-
mobile production will not significantly increase its claim on total
Soviet output of ferrous metals through 1975 (see Table 6). The
Soviet metallurgical industry, however, will have some problems in
producing steel products according to specifications in all the required
shapes and grades. The metallurgical industry must supply the auto-
motive industry with substantially increased quantities of cold rolled
sheet, bars, pipe and tubing, various shapes or profiles, plates, cold
finished bars, and tubes.
Production of Selected Ferrous Metals and the Share Required
for Production of Automobiles in the USSR
1965,
1970, and 1975
Share
Share
Share
Ferrous
Required
Ferrous
Required
Ferrous
Required
Metal
for
Metal
for
Metal
for
Pro-
Auto-
Pro-
Auto-
Pro-
Auto-
duction
mobile
duction
mobile
duction
mobile
(Million
Pro-
(Million
Pro-
(Million
Pro-
Metric
duction
Metric
duction
Metric
duction
Tons)
(Percent)
Tons)
(Percent)
Tons)
(Percent)
Castings .......... 16.5
0.2
24
0.4
31
0.8
Gray iron and mal-
leable ........
12.6
0.2
17
0.4
22
0.8
Steel ...........
3.8
0.02
6
0.03
9
0.05
Rolled steel .......
70.9
0.3
97b
0.5
125
0.9
Cold rolled sheet ...
3.8
3.3
7
4.5
12
6.7
Excluding production of spare parts. Because of rounding, components may not add to
the totals shown,
? Midpoint of the range of 95 million to 99 million tons.
The USSR has encountered particular difficulty in expanding the
output of cold finished steel products. Soviet production of 3.6 mil-
lion tons* of cold rolled sheet in 1965 was far less than the target
figure of 6.5 million tons. Because of the lag in the production of
cold rolled steel, the USSR has been negotiating since mid-1965 with
manufacturers of metallurgical equipment in several Western countries
to buy a cold rolled sheet plant. One possible transaction, estimated
at about $190 million,** calls for the annual production of 600,000 to
800,000 tons of cold rolled steel-enough steel for 1 million auto-
mobiles and several million washing machines and refrigerators. Such
a plant would increase Soviet production of cold rolled steel by 17 to
Tonnages are given in metric tons.
** Including the cost of equipment to roll tin plate and galvanized sheet and estimated
building costs.
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22 percent. The USSR has manufactured several continuous cold
rolling mills, but the mills are much less advanced technologically
than those available in the industrial West. The USSR recognizes
that Western builders could supply a technologically superior cold
rolling mill at less cost and with less delay than could Soviet industry.
C. MACHINE TOOLS
The need of the Soviet automobile industry for dependable high-
performance specialized machinery is a key reason why the USSR has
turned to the industrial West to equip its new plant. Soviet machine
tool builders have always emphasized long production runs of gen-
eral-purpose machine tools that are often used instead of more expen-
sive specialized machine tools in Soviet industry. Consequently, the
USSR has inadequate capacity for manufacturing complex, specialized,
and highly precise machine tools. In addition, the USSR recognizes
the absolute cost and quality advantages that the industrial West has in
the production of automotive machine tools. The USSR, however,
can be expected to produce domestically most of the required equip-
ment of a nonspecialized nature for its expanding automobile industry.
As more automobiles are produced, specialized machinery will be
needed for continuing new investment, replacement, and automotive
support industries, and, therefore, it will become more profitable for
the USSR to produce domestically more of the specialized equipment
required by its automobile industry. Thus expanded automobile out-
put probably will have a greater effect on the Soviet machine tool
industry after 1970.
D. TIRES
The new five-year plan for tire production in the USSR calls for a
production increase by 1970 roughly equivalent to the increase
achieved in the seven-year period 1959-65. Output of tires (26.4
million in 1965) is scheduled to rise to between 38 million and 40
million by 1970. Automobile tires will probably account for a grow-
ing percentage of total tire output-the estimated production for
1966 and 1970 compared with 1960 follows:
1960 .......... ............
... 2.2
1966 ............................................ 4.0
1970 ............................................ 7.0
At least four new Soviet tire plants are to be built in 1966-70, and
a number of existing plants are to be expanded. The capacities of
the new plants will be on the order of 2 million to 3 million tires each,
although at least some of these plants will not reach full operation
until after 1970.
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The increase in tire plant capacity will cost about $40 million. Ad-
ditional supporting investment in carbon black, tire cord, and synthetic
rubber production could boost total investment $100 million more
for 1966-70.
E. GASOLINE
The additional requirements for motor gasoline through 1975 will
place no special burden on the petroleum industry, which by 1975
may be outproducing the United States in crude oil. The industry,
however, will have to emphasize more the production of gasoline
in the higher octane ranges-72 octane and above. At present, the
USSR produces about 5 million tons per year of such gasoline-17
percent of the'total gasoline yield. If the production of crude oil
continues to grow through 1975 at the rate planned for the next five
years, as much as 75 million tons of motor gasoline may be produced
in 1975, of which about 37 million tons could be of high octane. By
contrast, the additional automobiles that are to be on the road in 1975
(excluding trucks and buses) will need only about 4 million tons per
year of high-octane gasoline.
One refinery with a capacity of 12 million tons could produce the
required 4 million tons if oriented toward that goal. Such a refinery
might cost between $290 million and $360 million, of which no more
than $100 million would be assigned to provide the facilities required
to produce the high-octane gasoline.
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THE FIAT-SOVIET AUTO PLANT
VI. Tertiary Investment
1. Introduction
The USSR will almost certainly have no desire and little need to
duplicate in the foreseeable future the heavy tertiary investments
that have been fostered by the automobile in Western Europe and
the United States. Plans thus far released for the period through
1970 indicate that Moscow has felt under no compulsion to accelerate
basic highway construction, much less construction of service stations
and motels. Soviet planners have long believed that a well-developed
railroad system best suited the USSR's needs for hauling freight. Al-
Ynost all large industrial plants in the USSR are served by railroad
sidings that provide door-to-door rail service. Trucks have been used
in the USSR primarily for short-haul intracity shipments, and no
change in this pattern is discernible.
2. Highways
As a result of the emphasis on railroads and the vast size of the
country, only a rudimentary highway network exists in the USSR.
Of 1,340,000 kilometers of roads in 1964, only about 350,000 kilometers,
or about one-fourth, was surfaced in any way, and less than 120,000
kilometers, about 9 percent, was paved with concrete or asphalt. The
length of paved roads in the USSR about equals the paved highway
system in the state of Michigan. The historic backwardness of the
Soviet highway system is illustrated in Table 7, which compares the
length of Soviet and US highways for selected years.
During 1960-64 about 20,100 kilometers of surfaced highways,
including 10,600 kilometers of paved highways, were built annually
in the USSR. By contrast, the United States built over 32,000 kilo-
meters of major (Federally-aided) highways in 1964.
As shown in Figure 3, Soviet highway construction has not ac-
celerated in recent years, and no dramatic changes are expected in the
expansion of the Soviet highway network during 1966-70. The new
five-year plan (1966-70) calls for the construction of 63,000 kilo-
meters of paved roads, an increase of about 20 percent over the length
of roads constructed in the five-year period 1960-64. There will be
some increased emphasis on construction and reconstruction of badly
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THE
Length of Highways in the USSR and the United States
1940, 1950, and 1960-64
Percent Percent
Total ? Total Paved Surfaced Total Surfaced Surfaced
1940 ........ 1,531 143 7 9 4,855 2,200 45
1950 ....... 1,550 177 19 11 5,322 3,121 59
1960 ........ 1,366 271 77 20 5,707 4,147 73
1961 ........ 1,336 290 87 22 5,750 4,165 72
1962 ........ 1,336 311 97 23 5,794 4,260 74
1963 1,332 330 108 25 5,828 4,334 74
1964 ........ 1,340 352 118 26 5,864 4,394 75
Public roads under jurisdiction of highway departments.
? Rural, state, municipal, and county roads.
Including gravel surfaced roads.
? The reduction in the total is due to decreased importance of some dirt roads.
needed rural (farm-to-market and railhead) roads. Some important
intercity highways will be completed or improved during 1966-70,
including the Moscow-Bryansk-Kiev highway, the Moscow-Tambov-
Volgograd highway, and the Moscow-Kuybyshev-Ufa highway. Most
of Central Siberia and the Far East, except for short stretches in the
vicinity of the major population centers, will remain completely with-
out a system of paved roads.
Despite the secondary importance of highways in the USSR, the
vastness of the country, combined with the past neglect of the high-
way system, means that significant investment allocations are required
even for a fairly minimal expansion effort. This conclusion is sup-
ported by the following estimates of the annual cost of new construc-
tion in the USSR for 1966-70:
Annual Cost
(Million US $ )
Paved ........................................ 840
Other hard surfaced highways .................... 400
Total ...................................... 1,240
By contrast the United States awarded $5.04 billion in contracts for
new highway construction in 1965, and contracts for 1966 will total
approximately $6 billion.
3. Service Stations and Garages
Automotive service facilities in the USSR are woefully inadequate,
nor is there any indication that the regime intends to improve this
situation in the immediate years ahead. In Moscow there are eight
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28 THE FIAT-SOVIET AUTO PLANT
?0 a
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gasoline stations and eight garages, only three of which service all
makes of Soviet automobiles. In Leningrad there are three gasoline
stations and only one garage. Outside the major cities, service sta-
tions and garages are even harder to find, as shown in the tabula-
tion below:
Distance
Route (Kilometers)
Gasoline
Stations
Garages
Moscow-Minsk ...........................
705
5
1
Moscow-Leningrad ........................
724
5
2
Moscow-Khar'kov .........................
734
7
2
Moscow-Cor'kiy ..........................
995
3
0
Khar'kov-Kiev ............................
478
3
1
Moscow-Kalinin ..........................
161
0
0
In contrast to the 211,000 gasoline stations in the United States,
which perform necessary economic functions, especially with respect
to maintenance and repair, the total number of stations in the USSR
in 1963 was 1,500 to 1,600. If the present ratio of automobiles to
filling stations is maintained, during 1966-75 the USSR would have
to build additional filling stations,* as indicated in the following
tabulation:
Number
Equipment
Cost
Total Cost
1966-70
...............
1,300
6,500
22,100
1971-75
...............
4,800
24,000
81,600
Total
...............
6,100
30,500
103,700
The USSR has not announced any plans for expanding repair facili-
ties, but some indication that the plans are quite modest in scope was
suggested by a recent news item in a Moscow newspaper which stated
that during the next five years two service facilities, each capable of
handling 12,000 vehicles annually, will be built. In addition, an
unspecified number of other repair facilities will be built, with a total
capacity of only 72,000 vehicles annually. The following tabulation
gives estimates of the additional number of garages likely to be built
in the next 10 years**:
Number
Equipment
Cost
Total Cost
1966-70
...............
430
4,300
15,000
1971-75
...............
1,600
16,000
56,000
Total
................
2,030
20,300
71,000
* Estimated from the ratio of automobiles in use (844,100) to service stations (between
1,500 and 1,600) in 1963.
**Estimated from the ratio (1 to 3) of garages to service stations in the USSR in 1962.
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30 THE FIAT-SOVIET AUTO PLANT
4. Social Considerations
Apart from these strictly economic considerations there are other
reasons for expecting the Soviet regime to move cautiously in encourag-?
ing investments that would promote the expanded use of automobiles
beyond the city limits. For example, the USSR is one of the most
security conscious nations in the world and the movements of its
citizens are carefully monitored through a system of police registra..
tions. The regime probably would not be willing to accept the eco-
nomic and political costs of expanding such a system to manage the
major increase in mobility that would certainly follow an unrestricted
expansion of the facilities for long-distance travel. No matter how
appealing the prospect of suburban and rural living is to the Soviet
urbanite, presently confined to an inadequate city apartment, the
regime may be expected to resist a proliferation of private rural hous-
ing as both costly and poorly suited to the Soviet conception of the
social needs of its citizens.
1. The United States
The Soviet planner, even though intellectually committed to in-
creasing the importance of the automobile in the USSR, must look
with considerable trepidation at data that show how the US economy
was revamped by mass production and use of the automobile. After
the United States took to wheels, there was a vast inner migration
which led to modern multilaned highways, vast suburbs, and more,
and more consumer durables. To support 82 million motor vehicles
(09 million automobiles and 13 million trucks and buses) in 1963,
the United States had the following:
Number
Sales
(Billion US $ )
Automotive wholesalers ? .... ....................
22,883
6.7
Franchised automobile dealers .....................
33,349
37.4
Automotive repair ...............................
114,459
3.6
Gasoline service stations ..........................
211,473
17.7
'A wholesale distributor of automobile parts-from tires to engine blocks.
It should be borne in mind, however, that the enormous investment
in superhighways and sprawling suburbs in the United States today
was not a feature of the US automotive history during 1910-20--the
time period most analogous to the present Soviet position (Phase A
in Figure 4). The mass-production age of automobiles began in the
United States in about 1910 (181,000 automobiles were produced.
during that year). By 1912 the stock of automobiles totaled close to
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a million, about the same as the Soviet inventory today. By 1917 the
US stock had grown to 4.7 million automobiles; the USSR probably
will need 10 more years to increase its inventory by this amount. In
the 1910-20 period the JS stock of automobiles increased annually
by an average of 33 percent, but total highway expenditures and the
total length of surfaced highways increased much more slowly (see
Figure 5). Total expenditures on roads increased 9 percent annually
and the length of surfaced highways 6 percent.
Highway construction in the United States has long received an
impetus from the growing requirements for both passenger and freight
traffic. The early urban car owner in the United States was anxious
to drive into the countryside, and the farmer pressed for farm-to-
market roads. But it was not until about 1946 that the United States,
having a stock of nearly 30 million automobiles and having been re-
leased from the pressures of war and depression, substantially acceler-
ated tertiary investment and entered the Phase C of the automobile
age, as described in Figure 4. The long-run relationship between the
stock of automobiles and highway expenditures in the United States is
shown in Figure 6.
More specifically, not until 25 years after the United States had left
Phase A-the phase that the USSR is just now entering-did the US
automotive age finally induce greater increases in service facilities,
superhighways, modern motels, supermarkets, shopping plazas, and
the mass migration to the suburbs. Although the dispersal of the
population from the central city has been underway in the United
States since the turn of the century, the major trend toward suburban
development has taken place since World War II. In the last decade,
more than three-quarters of the new dwelling units, measured by value
or number, in the major metropolitan areas were constructed outside
the central cities.
2. Western Europe
Western Europe, which had only a motorbike toehold in the auto-
motive age in the early 1950's, has in recent years become a full mem-
ber with all attendant pleasures and problems. Both production and
stock have increased rapidly, as shown in the tabulation below:
Million Automobiles
1950
...................................
1.1
6.0
1962
...................................
6.7
27.8
1964
...................................
7.0
35.1
The annual rate of growth of the stock of automobiles in Western
Europe has averaged 13 percent from 1950 through 1964, a higher
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Figure 5
UNITED STATES AND WESTERN EUROPE: COMPARATIVE INDEXES
OF AUTOMOBILE STOCK AND HIGHWAY EXPENDITURES
UNITED STATES
1910 = 100
AU
TOMOBILE STOCK
---
---191
192
0 458,377 units
0 8,131,522 units
--TO
TAL HIG
1910
1920
HWAY E
$ 275
$ 633
XPENDIT
million
million
URES
LENGTH OF SURFACE
1910 328000 kilom
1920, 594,000 kilom
D HIGH
eters
eters
WAYS
WESTERN EUR
OPE
1955= 700
TO
TAL HIGHWAY EXPENDIT
URES
1955 $ 1.6 billion
-
-
- 1964
$ 6.3 bil
lion
AUTOMOBILE STOCK
1955 11.8 million units
1964 35.1 million units
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THE FIAT-SOVIET AUTO PLANT
OC
7
G
o
~-
W
_
=
3
Q
Z
W y~
o&
Z
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growth rate than GNP, which rose at an average annual rate of about
9 percent (in current terms) .
In the past decade Western Europe has devoted, as shown in the
tabulation below, an increasing share of its resources to the develop-
ment of roads and highways.
Total Highway
Expenditures
(Billion US $)
Percent
of GNP
1956
.. ...... .................
2.0
0.8
1964
.............. ..............
6.3
1.4
1970
..............................
9.7?
2.0
? Estimated by the International Road Federation.
Yet, despite the rapid increase in highway expenditures in Western
Europe and the present existence of about 5 million kilometers of roads,
the present highway system is considered inadequate for the traffic
it must bear. The turnpike or thruway is virtually unknown in Europe
outside Germany. In France in 1964 there were only 348 kilometers
of such superhighways. The heavy investments in bypasses, free-
ways, and beltways are yet to be borne by most of the countries of
Western Europe. As shown above, Western European highway ex-
penditures as a share of GNP have increased but are still significantly
lower than in the United States.*
Western European experience indicates, as does US experience, that
a widespread increase in automobile ownership eventually induces
large amounts of other tertiary investments. Much of this invest-
ment-restaurants, motels, service stations, and shopping centers-
caters to the increased mobility given the population by the auto-
mobile. Much of the investment in public works-cloverleafs, turn-
pikes, and freeways-is required when the density of automobile
traffic threatens to destroy the very mobility that the automobile has
introduced. The United States today is becoming increasingly aware
of the major investments and revamping of cities and countrysides
that are needed to live with the automobile. Western Europe is well
into the automobile age, entering Phase C (see Figures 4 and 5),
but has not yet completely faced up to the heavy investments needed
to live with the automobile.
Ultimately the Soviet economy may have to pay the costs-the super-
highways and underground parking-of enjoying the convenience
of the automobile. Western experience, however, shows that it will
be decades before the automotive expansion forces the Soviet economy
to cater to the induced investment engendered by the automobile
rather than the preferences of the hierarchy.
* By. contrast, highway expenditures in the United States for the past decade have con-
sistently been about 2.2 percent of GNP.
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) THE FIAT-SOVIET AUTO PLANT
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 Approved For Release 294/Op/q#rR9p99R0001002401?9-9
THE FIAT CONTRACT AND THE CURRENT ECONOMIC SCENE IN THE
U.S.S.R.
The leaders of the Soviet Union find themselves at present under
intense pressure from two sources. They are under pressure, in the
first place, from the economically more efficient countries of Western
Europe and the other advanced industrial nations. It has come as
something of a shock to the doctrine-bound leaders of Russia to find
that, despite all their own dire predictions to the contrary, the "capi-
talist" countries of the outside world have prospered and grown in
strength and self-confidence since the end of World War II. The
countries of the West have, in defiance of the Marxist economic
analysis, maintained their stability, security, and prosperity by means
of their inherited democratic institutions and, at the same time, suc-
ceeded in expanding consumer goods available to their own citizens
from year to year.
The democratic countries, moreover, are now effectively pressing
the Soviet Union to open its borders to more goods, tourists, and
ideas from the outside world. They are also continuing to set ever
higher standards of personal- consumption, a fact which, under modern
methods of communication-however well managed-is very difficult
to conceal from the Russian people. A reported familiar reaction
on the part of the Russian man in the street, whenever he hears an
official spokesman boast about new Soviet achievements in modern
weaponry or space technology, tends to be something to this effect :
"If we are so smart, how come we are so poor?"
The leadership is also under pressure within the country. As a
society, the Soviet Union today is no longer the frozen, immobile
mass of inert, pliable subjects it was two decades ago. Behind the
facade of political conformity and ideological rigidity, a great many
subtle changes are now underway. Personal incomes are rising and
at the same time becoming more differentiated. While the vast ma-
jority of the population still earns little more than enough to sustain
a bare existence, a large number of families belonging to the bureau-
cratic and technical elite are provided by the regime with purchasing
power to spare. They are, furthermore, rapidly acquiring the tastes
and habits of the affluent society beyond the frontiers of Russia.
Gradually, knowledge about the outside world is improving, and as
a result, expectations at home are rising.
The leaders of the country no longer seem to be either willing or
able to continue to repress economic discontent indefinitely and in-
discriminately. Above all, they have become aware that they cannot
afford to remain indifferent to the mood among those groups of citizens
that are contributing importantly to the growing fund of scientific,
technical, and economic power at the disposal of the state. These
are persons and groups with their own unique frame of reference.
They know their own worth to the regime, and they are also fairly
well informed about the style of life enjoyed by their peers in the
modern industrial society around the world.
Like it or not, the privately owned automobile has emerged as
something of a symbol of the standard of living of the modern in-
dustrial man. As long as they could, the Soviet leaders tried to
ignore the fact, or to pronounce it irrelevant to their own unique
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;ii THE FIAT-SOVIET AUTO PLANT
values and social conditions. They have tried hard, as we know, to
delay the coming of the private automobile as long as possible.
Alternatively, they have attempted to find their own distinctive
"socialist" response to the strong popular urge for personal transporta-
tion. After his visit to the United States in 1959, Khrushchev returned
home with a message to this effect: "We will turn out a lot of cars,
but not now. We want to establish a system for the use of automobiles
that will differ from the one in capitalist countries." Accordingly,
he proposed a kind of municipal rent-a-car service, under which each
city would own a fleet of automobiles and make them available to its
citizens, on It rental basis, for vacation or weekend trips. Under pres-
sure from the top, such a service was tried out in a few cities, but
it turned out to have worked very poorly for a number of reasons.
We all tend to repeat rather often the generalization that the Soviet
Union today is the second largest industrial producer, with an annual
output roughly equal to half of our own. But we are inclined to forget
that this rough-and-ready quantitative statement measures not only the
distance that the Soviet Union has covered during the past five decades
but also the length of the road that still remains to be traversed. We
have to continue to remind ourselves that Russia's population is 20 per-
cent larger than that of the United States. Russia's requirements in
both productive capacity and in finished goods, therefore, remain to
this day largely unfulfilled. The Soviet Government cannot but
continue to work on the assumption that the basic industrial plant of
the country is still largely unfinished. There are still new productive
capacities that have to be added in order to make it possible to expand
the scale of production in a, wide range of primary commodities--fuels,
electric power, petroleum, metals, machinery, and chemicals-as well
as to broaden the nation's capabilities in construction and transpor-
tation.
What this means, in practical terms, is that the Soviet Government
is now prematurely being pushed into the first stages of the automo-
bile age by a variety of pressures largely against its own will. We
may assume that the high command of the Communist Party must be
undergoing a certain amount of agony on this score. Soviet planners
must have on their desks many more "essential" investment projects in
basic industry on which to devote the estimated $1.2 billion they will
have to spend on the first phase of expanding the production of a
"luxury product" such as the automobile. Soviet critics of this in-
vestment decision can muster a wealth of evidence with which to docu-
ment the possible impact of such a shift in policy with respect, to heavy
industry. We may be certain that they are likely to warn their col-
leagues that this "diversion" of capital funds could slow down the
expansion of the heavy industrial base of the econmy and, to that
extent, impede the growth of the country's basic capabilities to support
the needed defense establishment..
'The national leadership, however, seems to have made a firm deter-
mination to go ahead with this modest initiative in the direction of
consumer welfare. Given the scale of operations announced thus far,
we may assume that what is involved here is not an effort to produce
enough automobiles to supply the entire consumer public of the
U.S.S.R. One million passenger cars (by 1975) will not go very far
toward meeting the needs of the mass of consumers. The Soviet lead-
ers know this, and we may assume that this, moreover, is precisely
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the pace at which they intend to proceed to supply this scarce and
prestigious item.
Soviet doctrine, incidentally, has a built-in justification for a scale
of production that is designed to meet the needs of the elite consumer
group only. Official ideology, it will be recalled, defines the present
phase of the political order in the U.S.S.R. as "socialism." During
this phase, the individual citizen is Paid according to his work. Wages,
in other words, are differentiated in accordance with the quantity as
well as the quality of a person's contribution to society. It is a matter
of some importance to the regime to be able to demonstrate to the
ambitious and capable young men of the country that their higher
wages, paid in return for a greater effort and skill at their jobs, will
bring them within reach of the most scarce of all consumer com-
modities in the land.
It may be in order at this point to consider why the Soviet Gov-
ernment has decided to bypass altogether its own 40-year-old auto-
mobile industry when it was confronted by the need to manufacture
the production equipment and to design the models for the new and
expanded plants now on the horizon. There has been no official ex-
planation on that score. But the decision to go to the West to acquire
this equipment and know-how does imply something. It implies, in
our opinion, a. negative Kremlin judgment on the modernity of its
own automobile technology. In addition, it also suggests a new mood
of pragmatism on the part of their leadership. The present leaders
of the U.S.S.R. no longer are willing to pretend, as they would have
a decade or two ago, that their technology in any field of industry
was, by definition, superior to any capitalist technology in a similar
line of production.
The question as to why they turned to Italy for this equipment is
also a matter worthy of our attention. To answer this question on the
basis of purely commercial considerations, the critical fact in this case
is that Italy has emerged in recent years as a stable trade partner with
an active and growing interest in Soviet fuels in general and in crude
oil in particular. Italy is now Russia's largest customer for crude oil
outside the Soviet bloc (7 million tons per year during 1964-65). For
the past 2 years, moreover, Russia has enjoyed a comfortable export
surplus in its balance of payments with Italy. This gives her the
needed assurance that the problem of repayment will not present any
insuperable obstacles in the immediate future (see tables, pp. 96-98).
In the present commercial climate, however, it is reasonable to expect
that the Russians will want to protect their delicate balance of pay-
ments with the West as a whole by placing a major purchase order of
this kind within an appropriate credit arrangement. Such credits, ex-
tended on the part of the supplier, are now standard procedure, and
where major transactions of the size of the FIAT contract ($300 to
$350 million) are concerned, the duration of such credit tends to be
generally extended for periods ranging between 7 and 10 years. In
such cases, furthermore, the national government of the supplying firm
in the West is almost always involved, whatever the nominal form of
the immediate source of the credit. Recent experience has shown that
private firms or banks are unlikely to extend such large credits without
the explicit or implicit support of their own government.
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4 THE FIAT-SOVIET AUTO PLANT
The fact that the Italian automobile industry has a close working
relationship with the toolmakers in this field in the United States may
be taken as another factor that must have entered into the making of
the present decision. Russia's technical experts have a healthy respect
for the men and ideas that govern the U.S. automobile and machine
tool industries. They are aware of the costly and superior research
effort that goes into the product turned out by our industries, of taie
intense pressure for innovation under which we operate, as well as
the economies of scale from which we benefit as a result of the size of
our own domestic market.
From the standpoint of the United States, an export of this kind
has to be viewed in light of the following facts: (a) machine tools of
this type, however, sophisticated in design, are special-purpose equip-
ment that will represent a considerable expense and will have to be
assigned directly to automotive production; (b) these tools will be
utilized to help broaden the commitment of the Soviet Union to the
production of a resource-intensive, highly popular consumer prod-
uct; (c) direct Soviet expenditures on the expansion of auto produc-
tion must be recognized as perhaps only the beginning of that Gov-
ernment's involvement in an enlarged outlay of resources in the
consumer sector.
Beyond the initial outlay, related to building the plants and the
equipment of the first expansion phase of the industry, the Soviet
Government is certain to be drawn into additional avenues of invest-
ment of a secondary and tertiary character. They will find- it impos-
sible to avoid the added costs that will be incurred, as a first step, in
connection with the building of the new highways to carry the in-
creased traffic generated by the flow of greater numbers of automobiles
from the assembly lines of the new plants. This secondary stage of
investment, in turn, will increase the pressure for more construction
expenditures, such as fuel stations, garage networks, highway res-
taurants and motels. Every new round of added automotive capacity,
thereafter, would again engender a new round of expenditures on the
costly infrastructure required to support the mass-produced automo-
bile in the style to which, it had become accustomed in the modern age.
In short, we are dealing here with equipment of a particular char-
acter. It is not the kind of equipment that can be used in the Soviet
Union to replace less productive installations, and thereby achieve
a net gain in efficiency, with favorable repercussions in the defense
sector of the economy. Rather, we seem to have an opportunity in this
instance to contribute by means of this equipment toward a shift
of resources, however modest at the outset, in the direction of a
pattern of expenditures that is distinctly novel in Soviet economic
practice and fraught with pressure for still greater outlays to come.
EXPORT-IMPORT BANK CREDITS
After the President's speech of October 7, 1966, when it was an-
nounced that Eximbank would extend credits for purchase of U.S.
machine tools for the FIAT-Soviet plant, quite naturally there was
increased congressional interest.
In a series of letters to senior Members of the House and Senate,
several aspects of the proposed U.S. participation were further clari-
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fled. In October, the First Vice President and Vice Chairman of the
Eximbank, Mr. Walter C. Sauer, made clear that any financing Exim-
bank may undertake in connection with the plan would be in the form
of a loan to IMI, an Italian financial institution, for the benefit of
FIAT. The Bank would not be extending credit to or in any way be
dealing with the Soviet Union or any of its entities.
Ho further pointed out that since 1947, the Export-Import Bank
has extended credits of some $650 million to IMI for financing U.S.
exports, including credits aggregating about $50 million for the use
of FIAT. All of these credits have been repaid, many of them some
years before scheduled repayment.
Mr. Sauer said that shortly after FIAT had been awarded the con-
tract by the Soviet Government to design and construct an automobile
plant in the Soviet Union, IMI asked the Bank whether in principle
the Bank would consider extending credit to enable it to finance the
purchase by FIAT of U.S. machinery. The Bank was told that FIAT
was quite -prepared to fulfill its contract to build the plant whether
or not U.financing was available; the point being made that the
necessary equipment and machinery was available in Europe if FIAT
chose to buy there.
According to Mr. Sauer, after consulting with other executive agen-
cies, the Bank informed IMI that it was prepared to receive an appli-
cation for a loan for the purpose mentioned. It was understood that
the loan would not exceed the amount of the purchases which FIAT
made in the United States and which were then estimated at approxi-
mately $50 million. It was further understood that the loan would
be for a medium term; that is, repayment over a period of about 5
years beginning in 2 or 3 years from the shipment of the equip-
ment being financed.
Parenthetically, this might be regarded as 7- to 8-year credit terms,
more in line with the 81/2-year terms being extended by IMI than might
otherwise be thought at first glance.
According to the Eximbank, the matter was left on the note that
when FIAT determined how much and what specific items of U.S.
equipment it wished to purchase, IMI would file a definite application
for the loan, passing on the particular purchases proposed. As of the
time that this report is being written, this stage has not yet been
reached.
Also in late October, Secretary of State Rusk explained that the ad-
ininistration's position with regard to the FIAT deal was that it would
be in our national interest to encourage increased production of con-
sumer goods in the Soviet Union; that the equipment which would be
purchased by FIAT in the United States for use in their plant in the
U.S.S.R. would not contribute to Soviet military capability. More-
over, the Secretary pointed out that the plant would be a positive fac-
tor in our declining balance-of-trade surplus. More important perhaps
was the fact that Secretary Rusk for the first time made it clear to
Members of Congress that the Department of Defense is on record as
favoring the loan by the Eximbank for FIAT. He said :
It is the judgment of the Defense Department, shared by General Wheeler
of the Joint Chiefs of Staff, that a loan that would induce the Soviet Union
to devote greater resources to the production of consumer goods at the expense
of applying those resources to military purposes is in our national interest.
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THE FIAT-SOVIET AUTO PLANT
About this same time, the Deputy Secretary of Defense, Cyrus
Vance, in a communication to a senior Member of the House, said that
the FIAT deal would support the increased emphasis which the
U.S.S.R. is putting on using its resources to produce consumer goods.
He pointed out that the United States must recognize that the greater
the amount of GNP which the Soviet Union places on consumer goods,
the less they can devote to military hardware, forces and facilities.
Mr. Vance revealed that the FIAT project was fully discussed at
the senior interdepartmental group meeting in May 1966. He fur-
ther stated that the Chairman of the Joint Chiefs of Staff, General
`Vheeler, fully shared his views on the proposed FIAT deal.
In yet another letter to a ranking House Member in October 1966,
Eugene V. Rostow, Under Secretary of State for Political Affairs,
emphasized that the equipment which would be purchased by FIAT
in the United States for use in their plant in the U.S.S.R. would not
contribute in any way to Soviet military capability. In concert with
other high ranking administration officials, Mr. Rostow also stated
that the Department of Defense is on record as favoring a loan by the
Export-Import Bank for FIAT.
Our study was undertaken with the thought in mind that the con-
gressional subcommittee with legislative jurisdiction over the Export-
Import Bank and the Export Control Act should independently ap-
praise these executive department opinions.
Recognizing the executive branch's authority and constitutional
prerogatives in the conduct of our Nation's trade relations and foreign
policy, we are further impressed by the solid support given to the
President by various departments and agencies.
The Departments of Defense, State, Commerce, and the Export-Im-
port Bank all have publicly stated that they favor U.S. participation
in the FIAT proposal. The Central Intelligence .Agency, while not
a policymaking body, has served these Departments in an advisory
capacity in their final determinations. To our knowledge, the CIA
has voiced no objections.
Furthermore, we have been assured that more than adequate safe-
guards will be established to insure that no equipment or tools will be
provided by the United States that would be contrary to our Nation's
best interests and security. In this respect, we fully intend to es-
tablish congressional review on all action taken by the Export Control
Office so that we may also judge the manner in which all license appli-
cations are being evaluated.
For all of these reasons, we have no objections to the Export-Import
Bank implementing the President's decision to permit U.S. participa-
tion in the proposed FIAT-Soviet auto assembly plant.
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PART II. THE COMMUNIST ECONOMIC REFORMS
Unlike our study of the FIAT-Soviet auto plant, where we were
able to conduct a comprehensive and detailed study, our review of
Czechoslovak, Hungarian, Yugoslav, and Soviet economic reforms was
but preliminary in nature.
We do not presume to be experts on these economic reforms. Ob-
viously, a series of 1- to 3-day visits, together with hurried rounds of
meetings and conferences with various Communist and U.S. officials,
could not qualify us as experts in the field. We did, however, come
away with some definite impressions which we would like to convey to
our colleagues.
With the exception of some comprehensive analyses in various
academic journals, there has been little information made available
on what constitutes the oft-mentioned "winds of change" in the Soviet
Union and Eastern Europe. Regardless of one's views as to the
sincerity and reach of the announced economic goals, all of us must
recognize that various acts and expressions of Congress might affect
their development, one way or another.
Also included in this part of our report is an article reprinted from
the November-December issue of Problems of Communism, entitled,
"Economic Reforms : A Balance Sheet." The author, Prof. Gregory
Grossman of the University of California, seems to have come away
from his travels and studies with impressions strikingly similar to
our own. We have chosen to reprint this article in full with the
author's permission not only because we were impressed with his
work but because the author is a recognized authority on Communist
economic reform and writes from a wealth of experience and many
years of painstaking study. Professor Grossman's article appears
at the conclusion of our brief analysis.
TIIE YUGOSLAV ECONOMIC REFORM
Economic reform in Yugoslavia has a connotation significantly
different from its meaning in the other countries of Eastern Europe.
In those countries, the system variously described as Stalinist, com-
mand economic, or administratively controlled, has been in operation
since the 1940's; in Yugoslavia, this system was abandoned in 1948-50.
The basic feature of a command economy is that investment and dis-
tribution decisions are made by fiat of a central planning board;
money is used in transactions between the state-owned economy and its
workers, but not, except as a unit of account, among the state-owned
enterprises themselves. Command of money only gives command of
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44 COMMUNIST ECONOMIC REFORMS
goods to the extent that these are available.; it has no influence on pro-
duction or investment decisions.
After Yugoslavia was expelled from the Cominform in 1.948 because
Tito refused to turn over control to the Soviet Union, the country
rapidly dismantled its ministerial apparatus and adopted, at least in
principle, a market economy. But it was a market economy without
private ownership of the means of production (except in agriculture,
where forced collectivization was abandoned in 1953). At the same
time, the Yugoslavs introduced the system of 'workers' self-manage-
merit," under which factories and other enterprises, though owned by
society as a whole, were turned over to the "working collectives" for
operation.
In theory, all the prerogatives of management were exercised by the
workers' collective, through an annually elected, workers' council and
its executive organ, the managing board. Investment decisions, how-
ever, were still left under central control; a planning board allocated
finds-not physical objects as under a command economy-and or'a-
nized new enterprises. Decisions for major expansions of existing
enterprises came under the same central control.
It should be noted that even 12 years ago the Yugoslavs made the
fundamental decision which the other Communist countries of Eastern
Europe are just now beginning to discuss. They abandoned the phys-
ical allocation of resources and replaced it with financial allocations;
they made the dinar money, in a sense in which no other Communist,
country's unit of currency is money-if you had it, you could do eco-
nomically significant things with it,.
In theory, at least, the Yugoslavs were advocates of a free market
in goods of all types-consumer goods and investment goods alike.
Prices, instead of being set by fiat as in command economies, were to
be formed freely on the market.
But, of course, the transition was by no means as easy as all
that. The system of workers' management never took hold to the
extent that the workers really made significant managerial deci-
sions. On the whole, the managers who had been installed under
the ministerial system remained. The workers' council itself was
never intended to do more than set policy; it, and the managing
board, were not immune to party control. It met too infrequently,
and, it is charged, had too little interest in day-to-day operations to
exercise a decisive influence on the course of events. Managers origi-
nally selected by the ministries continued to run the enterprises with
varying success, depending on their individual capacities.
A very serious limitation on the functioning of the market was
imposed by administrative controls of one sort or another. Believing
that in their underdeveloped condition Yugoslav enterprises could not
compete with foreign products, and that the financial condition of the
country made exchange controls necessary, the policymakers shielded
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COMMUNIST ECONOMIC REFORMS 45
the "infant industries" very carefully from the cold winds of interna-
tional competition.
Serious efforts were made, it is true, to set up a system of rules and
regulations which would harmonize, in something like the same way
as Adam Smith's "invisible hand" was believed to work, the individual
interests of the various enterprises with the common good. The
League of Communists of Yugoslavia was supposed to make sure that
the necessary coordination took place. The result was often termed
"administrative interference" with the economy and condemned, al-
though such actions were more often criticized than resisted.
Nevertheless, enterprises in Yugoslavia have been for a decade and a
half independent in a sense which even now is not even being advo-
cated for the other countries of Eastern Europe, much less put into
practice.
There have been several experiments with price controls, and no
one would argue that the Yugoslav market is or has been as free as is
normal in other free market economies. Nor have the controls been
imposed, as has been the case in Western countries in wartime, on a
free-market economy; what has happened, rather, is that a certain
amount of freedom has grown up within state controls. It is striking
that the controls are never defended as ends in themselves; rather,
they are rationalized as temporary necessities. But the various, con-
stantly changing frameworks of controls have never attained their
stated, and probably their real, purpose : the setting in motion of an
economic machine which could be allowed to run with relative free-
dom, subject only to a framework of generally accepted rules.
For some years the Yugoslav economy expanded at a rapid rate un-
der this system. Certainly more attention was paid to consumer needs
and desires than has been the case in other Marxist countries.
More scope was left for private enterprise, not only in agriculture, but
also in handicrafts and services, though the entrepreneurs were liar
assed and taxed and, like the peasants, regarded by the true Commu-
nist believers as undesirable necessities. Foreign assistance played a
significant role, both in cushioning the shocks of adjustment and in
making possible the high rate of investment which kept economic ac-
tivity running at a high and growin rate.
But by July 1965, it was painfully clear that something new had
to be done. Too many enterprises, especially in Croatia and Slovenia,
with their longer tradition of industrial and economic progress, were
chafing at the restraints. Too many people in the underdeveloped
regions were demanding more investments, while many in the more
developed areas were vocally resentful of the diversion of resources
to the backward regions. Foreign debts were coming due and the
balance of payments was not showing the surplus needed to pay them.
Despite constant criticism, there continued to be administrative inter-
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16 COMMUNIST ECONOMIC REFORMS
ference with the economy. The growth rate was slowing and it was
becoming clearer that the country was living beyond its means.
And so in 1965 the Yugoslav Government adopted program of re-
form which can perhaps best be described by saying that this time
they meant to do what in theory they had been doing since 1950.
Briefly, it was proposed to liberalize imports as fast as the country
could afford; to decentralize the banking system and make it the
source of investment capital, free of governmental interference; to
encourage the entry of foreign capital, with the management ?and teclh-
nical skills which would accompany it; to free prices from admin-
istrative control as quickly as possible (while imposing a price freeze
to prevent too rapid readjustments) ; in short, definitely to get the Gov-
ernment (and the party) out of business.
It was a part of the program that. the rate of investment should be
curtailed. Perhaps for the first time in history, a ruling Commu-
nist Party said that it had been doing too much for the future and
not enough for the present generation.
The implications of "we really mean it this time" are far reaching.
In particular, the Yugoslav Communist Party is openly and publicly
facing the question of its own role, and Yugoslav leaders are repeating
that the reform is as much a sociological as an economic phenomenon.
That it has political implications as well is obvious and did not really
need demonstration through the unprecedented resignation of a Com-
munist government (in Slovenia, in December 1966) because it was
defeated in aCommunist legislature. Encouragement of local initia-
tive and responsibility naturally implies conflicting points of
view and makes impossible the standard Leninist pretense that. there
is only one "correct" position on every question.
As an indication of their serious intentions, as well as for very prac-
tical reasons, the Yugoslavs applied for full membership in the General
Agreement on Tariffs and Trade, and obtained it in August 1966.
This international commitment to free trade and to a market economy
put the country on record internationally and laid on it enforceable
obligations toward other countries, thus giving the reform inter-
national status. It also enabled the Yugoslavs to bargain for better
treatment of their exports on international markets.
Yugoslavia has long been a member of the International Bank and
the International Monetary Fund; the first. of these has loaned the
country over a quarter of a billion dollars for various development
projects and the latter has assisted Yugoslav efforts to improve its
financial position for many years. Most recently, the Fund has
granted Yugoslavia two substantial standby arrangements to support
the current reform and has in the course of its regular consultations
assisted the country with technical advice. Yugoslavia has made good
use of the expertise 'available from the Fund and has cooperated with
it fully, furnishing information and participating in its deliberations
in the same way as avowedly non-Communist countries.
Recent developments in Yugoslavia, themselves not part of the re-
form, show the kind of impact the reform measures can have,, For
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COMMUNIST ECONOMIC REFORMS
example, Yugoslav workers can freely go abroad to work and some
400,000 have done so. Yugoslavia wants, eventually, to attract them
back to Yugoslavia, though they are glad at the moment to relieve
their unemployment problem and to gain foreign exchange in this
way. But they refuse to consider the use of police methods to restrict
immigration.
Similarly, the Yugoslav effort to earn hard currency through tourism
has led, not only to contact between Yugoslavia and foreigners to an
extent no other Communist state would tolerate, but to a steady reduc-
tion in the amount of redtape needed to enter and leave the country.
Yugoslavia has already abolished the visa requirement for visitors to
countries which do not require visas for Yugoslav citizens. This year,
the government intends to abolish all visas for tourists. The erosion
of police authority which this development has brought with it has
been a significant gain for individual liberty.
Developments on the economic front since July 1965 have not yet
provided a definite answer to the question of the reform's success or
failure. The reform meant, initially, a sharp drop in living stand-
ards and a rise in unemployment as enterprises felt the pressure of
curtailed credit and moved to cut payrolls. In principle, enterprises
are to be forced to compete successfully or go out of business,
generally through merger with a more successful enterprise. But
these latter have been, at least in some cases, reluctant to take on
economically unsound firms.
Price stability was maintained until the last quarter of 1966, when
wages and prices began to rise more sharply than had been expected.
Imports, too, climbed during 1966 more than exports, putting in doubt
the success of the reform in righting the balance of payments. Indus-
trial production continues to rise, though at a slower pace than in the
early sixties.
The major liberalization measures, those affecting imports and
banks, came into effect only January 1, 1967, and there has accord-
ingly not been time for their effects to be measured. The long-
delayed legislation permitting foreign participation in Yugoslav enter-
prises has not yet materialized. Its introduction appears to depend, in
considerable degree, on the answer to another question-the conditions
under which one Yugoslav enterprise may invest in another and what
degree of management rights such investment will imply. While this
problem is to some extent optical and even theological, it does touch
on two major tenets of Yugoslav socialism: the social ownership of
the means of production and workers' self-management.
With the reform some 18 months old, the impatient no doubt would
expect to be able to pronounce a final judgment. But, for the reasons
set forth earlier, there is a sense in which Yugoslav communism can
be said to be in permanent revolution, or at least permanent reform.
But the process which has already made Yugoslavia unique among
Communist countries appears to be continuing with gathering
momentum. It has already made Yugoslavia the most free of the
Communist countries possessing the most desirable economic climate
from the standpoint of the consumer.
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The economic reform program of Hungary is scheduled to be pro-
found and far reaching. Its major components are due to come into
force on January 1, 1968, a year after those in Czechoslovakia and
modifications are therefore possible, based on observation of the early
successes and failures of the Czechoslovak effort.
In most important respects the two countries are following a parallel
course. The aim of Hungarian economists is greater price rationality,
higher productivity through the use of material incentives, and the
attainment of competitiveness in the world market.
As in the case of other Eastern European countries, the question
arises in Hungary as to why it is necessary to have economic reforms
which may involve serious economic and political dislocations. In
the immediate postwar period and, in fact, until about 1957 the Hun-
garian economy was one characterized by a seller's market in nearly
all commodities. The demand existed for anything that could be pro-
duced and in a situation of universal shortage, rational allocation of
investment funds was a matter of very low priority. Almost any in-
vestment was bound to produce satisfactory and visible results. Fur-
thermore, with everything in short supply raw materials were :neces-
sarily centrally allocated. The price mechanism was not used to al-
locate resources among competing uses. Quantity of output was
maximized without regard to the existence of markets which were
assumed to be present for anything that could be produced. It was
assumed in the area of foreign trade that the Soviet Union represented
an inexhaustible source of raw materials and an equally inexhaustible
market for the products of Hungarian industry.
What has now happened in Hungary, as in other countries of
Eastern Europe, is that the seller's market is disappearing as the
basic wants of consumers are increasingly satisfied and they begin to
pick and choose in a search for higher quality and better value in the
products they buy. On a larger scale the same thing is true in the
area of foreign trade where Hungary's most important customers-
the Soviet Union and the other members of the Council for Economic
Mutual Assistance (CEMA) -are showing an increasing awareness
of shortcomings in the quality and variety of the goods which the old
system has been producing. The Soviet Union is also showing a
growing awareness of the costs of opening up new sources of raw
Materials as the older and richer deposits of minerals and petroleum
are becoming depleted. The result of these trends is a new emphasis
upon marketability of production and quality control which can best
be achieved with flexible prices and decentralized managerial author-
ity at the plant level. The goals of the economic reforms are a more
rational price system, more rational investment policies, and a. quasi-
rnarket economy which will serve as an automatic allocator of avail-
able resources. The outcome, it is hoped, will be a far more efficient
and productive economy in which growth patterns automatically -will
follow market demand both internal and in the field of foreign trade.
The tools by which these goals are to be approached are to be
largely economic rather than administrative. Central planning is
to be strengthened by confining it to long-range developmental plans
and to determining the direction of major new investments. The de-
tailed annual plan with its myriad regulations hampering the free-
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COMMUNIST ECONOMIC REFORMS
dom of individual plant managers is to be replaced by a much looser
set of guidelines based on profit as a success indicator and these profits
are, at least in theory, to be earned competitively in the marketplace.
While it is doubtless a step forward to devolve responsibility for
genuine decisionmaking on individual plant managers and tell them
to maximize profits, this action cannot result in also maximizing the
real value of total output unless the price structure of inputs bears a
fairly close correlation to at least their relative value. The reform
of wholesale prices is, therefore, an. indispensable step in the Hun-
garian plan. The fact that present producers' prices are set arbi-
trarily helps one to appreciate the importance of achieving a closer
approximation of price to scarcity value before effectively abandon-
ing the system of allocation through rationing which has prevailed
until now. Scarce and expensive raw materials have been in some
instances priced, for internal consumption at figures below those of
relatively more abundant locally produced materials.
While the details of the new price structure are still being worked
out, it can be assumed that an effort will be made to equate the cost
of imported goods with their foreign exchange cost times a realistic
multiplier. At the same time, locally produced raw materials pre-
sumably will be revalued at or near their cost of production (in-
cluding a fair profit margin). While political necessity will prevent.
the setting of true equilibrium prices in some scarce goods, it should
be possible to reach a much closer approach to equilibrium than the
present severely distorted structure permits. A major difficulty can be
seen, however, in maintaining sufficient flexibility after the initial price
shifts. Managers will bring understandable pressure to have the prices
of their particular inputs kept low and stable while changing condi-
tions of supply and demand, now to be given freer rein, will keep real
value fluctuating.
One of the most interesting phenomena in economic reforms in
Hungary and throughout Eastern Europe is the trend away from
"collective consumption." Collective consumption in the Marxist lex-
icon is the name given all forms of state-subsidized activity ranging
from the state subsidy to education, the performing arts, and scientific
research common to the West as well, to the heavy subsidies to housing,
utilities, and public transportation characteristic of Communist re-
gimes. Until recently, the fact that rents were nominal in Eastern
Europe, usually not enough to cover maintenance much less deprecia-
tion, was proudly pointed out as evidence of the state's regard for the
workers. Ideologically, the growth of collective consumption was de-
scribed as progress toward the eventual goal of elimination of private
property when all consumption could be collective-"to each according
to his needs."
This trend is now being reversed without apology. It has been per-
ceived that whatever ideology may say on the subject, heavy
subsidies and unrealistically low prices merely stimulate unlim-
ited and insatiable demand for such scarce and expensive commodi-
ties as housing. Raising the price to economic or near-economic levels,
it is hoped, will both curtail demand and stimulate a livelier apprecia-
tion and care of what is available. What makes this sort of move dif-
ficult, however, is that subsidized goods and services have come to be
regarded as a right, and unless arrangements can be made for an equal
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COMMUNIST ECONOMIC REFORMS
and simultaneous rise in personal disposable income, rent increases
will be bitterly and vocally resented. The same applies with equal
force to public utilities or public transportation. Nevertheless, in
Hungary as elsewhere, the more economical consumption patterns
which will prevail at higher prices apparently have been adjudged to
be worth the political risks.
Turning from price policy to investment, it is perceived that ration-
ality in investment in terms of minimizing the capital-output ratio is
almost wholly dependent on a rational price structure. While plan-
ners' preferences will continue to play a maj or role, unless domestic and
foreign prices are brought into some identifiable and reasonably regru-
lar correlation, massive misdirection of scarce capital resources is
likely to persist. The decentralization of a portion of investment
decisions to individual enterprises would serve to promote efficient
reinvestment of some enterprise profits and stimulate technical innova-
tion. But, in the absence of a true capital market, profit reinvestment
may not prove the most efficient use of capital and effects of this will
be magnified by any distortions in prices.
So far, there is no indication of any channel by which retained profits
of one enterprise may be invested in another. In the absence of such
a mechanism, a strong incentive will remain for the state to tax off
the bulk of profits and redirect them into what the planners perceive
as the most efficient use. It will not be surprising to see decentralized
investments restricted to near the level of depreciation, although in
January 1967 it was announced that about 55 to 60 percent of all invest-
ments would be decentralized under the new plan. There is an under-
standable tendency of managers to use profit increases to raise wages
and worker benefits to the maximum extent possible. As in Yugo-
slavia, decentralized investment probably will show a marked tendency
to concentrate on new workers' housing rather than new productive
facilities. A major role in allocating investment capital will be played
by the Central Bank, which by varying its terms and conditions effec-
tively would be evaluating not only the economic but the relative
social desirability of competing investment proposals. Depending on
the efficiency of the enterprise and, the rapidity with which it turns over
its inventory, the Bank's interest rate is expected to vary from 5 per-
cent to a maximum of 18 percent.
Part of the new reforms is reexamination of the role of the. workers
in the new economic structure. Hungary is fully aware of the role
of the Yugoslav workers' councils and their legal ownership of the
individual manufacturing enterprises in that country. The Hun-
garians also appear worried about the conflict between worker de-
mocracy on the one hand and the authority of the plant manager on
the other. Whatever Marxist doctrine may say, it is certainly true
that the two seldom perceive their self-interest in the same light. To
prevent agitation for worker democracy on the Yugoslav pattern it
appears that it has been decided to strengthen the role of the official
trade union movement which has up to now served largely as a trans-
mission belt for central directives and a means of dispensing fringe
benefits such as cheap prepaid vacations, theater tickets, and the like.
It may prove difficult for the old regime's appointed labor leaders to
adjust to the idea of having genuinely to represent labor interests
against those of management.
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On paper, the Hungarian reform program is one of the most dar-
ing now projected anywhere in Eastern Europe, excluding, of course,
the special case of Yugoslavia. Unless severely modified before its
inception next January 1, it should have a profound effect on the
thinking and daily life of every Hungarian and could have far-reach-
ing results in accelerating the decline of economic dogmatism.
While the new system is by no means a. return to capitalism, the
interesting point is that neither is it recognizable as communism-at
least by any of the definitions applied up to now.
CZECHOSLOVAK ECONOMIC REFORMS
The economic reforms instituted in Czechoslovakia on January 1,
1967, have two basic objectives. First, regeneration of public interest
and stimulation of individual initiative. Second, reintroduction of
the fundamental economic law of comparative advantage into Czecho-
slovak trade by using the international market to influence Czecho-
slovak production and investment. This may force as reduction in
the number of products produced in Czechoslovakia and concentra-
tion on production of those which are competitive internationally,
resulting in increased trade and improved "terms of trade." Since
the contribution of trade to the Czechoslovak GNP is high-more than
three times higher than the CEMA average-improved terms of trade
have an immediate relevance to the Czechoslovak standard of living.
In essence, this decision involves nothing less than the reintegration of
the Czechoslovak economy with the world economy.
In the early years of Communist control in Czechoslovakia the com-
mand economy was introduced with certain features which helped
disguise the exploitation of the economy by the Soviet Union in the
interest of rebuilding the war-damaged economy of the Soviet Union
and achieving other Communist objectives. This was done by shield-
ing Czechoslovak production and investment decisions from the pres-
sures of the international market through the simple device of isolating
internal and foreign trade.
The mechanism was simple. The Foreign Trade Corporations
(FTC) paid Czechoslovak producers the same crown wholesale price
paid by domestic purchasers. The FTC set its foreign price in for-
eign currency at a level to make the product competitive. The state
budget then paid deficits incurred when the FTC sold goods abroad
at prices which, when converted to crowns at a fixed rate, turned out
to be lower than the wholesale prices the FTC had paid to the manu-
facturer. However, the state budget also received profits from the
domestic sale of imports. (Actually, the crown profits and losses
were accepted by the state budget for both imports and exports.) The
Ministry of Foreign Trade in turn gave guidance to the FTC de-
signed to maintain adherence to bilateral trade agreements and to
keep the balance of payments in equilibrium. The demise of cost
accounting was furthered by domestic wholesale prices which were
set by such general criteria as the social desirability of developing
a particular industry because of the need to work for a "balanced
economy."
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The fundamental consequence of frustration of the law of coin-
parative advantage was that limited resources were used inefficiently.
To buy raw materials at 10, process them, and sell at 12 (sometimes
less) leaves little room for wage growth and modernization of plant
and equipment. If we add to this an excessively wide range of pro-
duction, forfeiting the gains of mass production and an excessive
dispersal of research and development, fora country of 14 million
inhabitants, the stage is set for progressive technological obsolescence
of production and lower export prices. These factors, along with
the sustained non-market-oriented investment pattern, completed the
circle of decreasing effectiveness in all phases of economic activity.
Such a system can be maintained, but only at the cost of real growth
and a decreasing standard of living. Since the rest of the world was
not standing still, the contrast became too great to be longer denied.
Now the command economy is being dismantled. The role of the
central authorities in determining production has been reduced. Min-
istries will play a smaller role in day-to-day operations. Production
will respond to the world market through the introduction of flexible
prices and by the pressure of imports on domestic prices. Enterprises
will produce to make a profit rather than to fulfill centrally deter-
mined targets. (Initially, some profits may be illusory because some
raw material inputs are subsidized by the entire economy.) This is
entailing a rebirth of cost accounting.
New investment will be largely made from enterprise profits or
from loans approved by the State tank in coordination with the Cen-
tral Planning Commission. Loans from the State Bank will bear in-
terest rates, working from a prime rate of 6 percent, which will. re-
flect the Bank's estimate of the soundness of the proposed investment.
Should the Bank not be willing to make a loan, an enterprise may
proceed from its own funds.
When enterprises cannot make a profit they must nevertheless pay
workers a minimum wage. State subsidies to cover wage deficits, tax
deficits and loan arrears will be on a selective basis :For limited periods.
Enterprises which cannot make a go of it must close and their re-
sources (labor, capital, equipment) must be shifted to profitable use..
This introduces the capitalist concept of "business failure" and "fric-
tional unemployment" to the Communist world.
On January 2,1967, a coal mine and two coke ovens in Bohemia were
closed on grounds of unprofitability. Some of their workers are to
be retrained and some absorbed into more efficient mines as part of a
program which is designed to ease the frictions of shifting labor into
more efficient uses. The official trade union movement has been given
responsibility for being prepared to retrain over 50,000 workers a year.
Although equalization of the conditions under which the enterprises
will operate through uniform tax rates and interest rates is accepted
in principle, the possibility for differentiated treatment exists. This
may be used to thwart natural economic development or simply to
cushion the dislocations resulting from the shift of economic re-
sources. In general, loan availability, tax rates and interest rates
will be used to guide the economy, if the reformers have it their way,
with Keynesian moderation.
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COMMUNIST ECONOM R
In the future bonuses and to some extent wages will depend upon
enterprise profits rather than upon meeting centrally determined tar-
gets. The old system encouraged enterprises to strive for low targets
and to exceed them by only modest amounts. It also encouraged pro-
duction of shoddy goods, high-cost goods, and unwanted goods.
Differentiation of wages will be institutionalized. Mental work will
be upgraded and superior work will receive superior pay. Rationing
by means of price mechanism will give new incentives to increase
earnings.
In theory, some change in the evaluation of political loyalty as well
as ability will be accepted in determining advancement. The present
system of giving top enterprise posts to individuals whose basic quali-
fication is party position is essentially a retrogression to an aristocratic
principle since it makes membership in an establishment the key to
preference in- all areas of community life. As a system, it is out of
step with the mainstream of social development and is a burden to any
society where it is practiced. The local party functionaries are be-
ing instructed to keep their hands off local enterprises.
Any one of a number of factors may work to impede the progress of
the reform program. Possibly, supplies and near-future earnings of
hard currency will be insufficient to finance the imports needed to make
the new system work. High-level political support for the reforms
tends to waiver whenever the pressure is off. There may be a growth
of grassroots opposition to the dislocations resulting from plant shut-
downs as resources are shifted. Long-term trade agreements and ar-
rangements for the procurement of raw materials limit flexibility in
adapting trade to purely commercial pressures. Many rank and file
officials in ministries, party and enterprises are benefiting from the
present system and are bitterly opposed to innovation.
Despite the uncertain outcome of the reforms, their adoption is in
itself highly significant. A basic national issue-organization of the
economy-has been made public property and publicly. debated. It
is now possible to trace the evolution of thinking on the part of leading
Czechoslovak officials.
In 1964 some 72 percent of Czechoslovak trade was with Communist
countries. Czechoslovak statements have proclaimed that this trade
will stabilize at about 68 percent. This seems unlikely. If the reform
is implemented, the possibility exists for a significant decrease in the
percentage of Czechoslovak trade with Communist countries.
The possibility of importing raw materials from non-Communist
countries, made possible by increased earnings of hard currency from
these countries, could allow Czechoslovak economic policy decisions
to be made in an atmosphere of greater independence.
Domestically, there could be a growth and dispersal of initiative,
the creation of other roads to privilege than party patronage, and a
retreat of the heavy hand of the party from involvement in many areas
of daily life.
The reform is being implemented and it may be far reaching. The
tendency of recent years has been to cope with problems pragmatically
rather than rely on ideological guides, although orthodox phrases often
embroider the operating paragraphs. As far as the reformers are
concerned, the only thing they are not prepared to touch is the collective
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ownership of the means of production. A large portion of Communist
theory and practice thus has been jettisoned because experience has
proven them irrelevant to the successful operation of a modern in-
dustrial society.
Implementation of the reform almost certainly will bring with it
serious problems for the maintenance of the primacy of the party.
The party, however, will be alert to cope with these problems and this
in turn will likely mean that the final result will be somewhat different
than either the reformers or party expect.
Nevertheless, the insights which have been developed during the
Czechoslovak economic debate on the self-defeating character of the
command economy make it impossible for that system to be again
accepted by Czechoslovak Marxist economists.
STATUS OF TIIE SOVIET ECONOMIC REFORM
After a prolonged public debate and a period of experimentation in
a small number of enterprises, the Soviet Union, in September 1965,
launched a reform of its industrial management and plannin W, de-
signed to increase productive efficiency and to reverse the declining
trend of overall economic growth which has caused increasing concern
to the Soviet leadership in recent years. The reform reflects the
cautious approach by the new leadership to its economic problems. It
is a compromise combining both elements of tighter central controls
(epitomized by the reestablishment of the system of industrial min-
ist.ries) and concessions to the initiative of industrial managers on
the operating level. Principal among the latter is the reduction in
the number of economic indicators planned for each enterprise by the
central authorities, and increased decisionmaking powers granted
enterprise directors in day-to-day operations. The reform also estab-
lishes a new criterion for judging the enterprise's performance-
substituting profit and the volume of sales for the index of gross
volume of production which encouraged wasteful use of resources.
An important feature of the reform is its provision for increased
material incentives for both managers and workers which are to be
financed from special funds which the enterprises will establish and
maintain by deductions from their profits, profits which heretofore
have been almost wholly siphoned off by the state. The aim of the new
incentive system is to promote technological innovations, economizing
on inputs, optimum use of investment resources, adaption of produc-
tion to demand, improvement in the quality of production, and effi-
ciency generally.
Soviet economic reform stops far short of the liberalizing measures
introduced or contemplated by some of the U.S.S.R.'s East European
neighbors. One plausible explanation for the less adventurous bent of
the Soviet regime in this area seems to be that, after a half century of
Soviet power, economic conservatism is more deeply ingrained in the
U.S.S.R. than in the other countries. Another appears to lie in the
U.S.S.R.'s international position : to maintain it, the Soviet leadership
feels obliged to keep -a firm hold on its economy, a hold which would
weaken if market forces were given freer play.
Yet even the relatively limited reforms in the U.S.S.R. continue to
face obstacles in their implementation. The Soviet press has pub-
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COMMUNIST ECONOMIC
fished a substantial amount of evidence attesting to bureaucratic foot-
dragging and to unwarranted interference by both government and
party organs with the day-to-day operations of industrial enterprises.
Partly as a result of these developments, the implementation of the
reforms has fallen considerably behind the original schedule. As of
the beginning of 1967, only 673 industrial enterprises, encompassing
some 10 percent of the industrial labor force (about 2.5 million) and
accounting for some 12 percent of industrial output had been shifted
to the new system; the initial schedule called for a transfer of enter-
prises employing some 10 million workers (one-third of the industrial
labor force) to the new system by that date.
It is too early at this stage to attempt an assessment of the reform's
impact on industrial performance. The number of enterprises under
the new system is still too small to produce an appreciable overall
impact. While official Soviet statements claim a much better than
average performance for the enterprises under the new system in
terms of profits, sales and productivity, it should be noted that this
would have been the case even under the old system because only the
most efficient enterprises have been transferred so far. The crucial
test for the reform will come when all enterprisesy including the in-
efficient ones, are transferred to the new system. The transfer is
scheduled to be completed in 1968.
An integral and crucial part of the broader economic reforms is the
revision of industrial wholesale prices. Last September, Moscow
finally announced the time schedule for the introduction of new prices
which has been postponed several times and which has held back the
pace of introduction of other reforms as well as the calculation of the
final version of the current 5-year plan (1966-70). The new prices
in heavy industry are to go into effect July 1, 1967, while those in con-
sumer goods producing industries are to be introduced prior to that
date. The official announcement emphasized that retail prices will not
be affected.
The new wholesale prices will be based, as heretofore, on average
rather than marginal costs, but they assertedly will be brought closer
to the level of full production costs, including capital charges which
did not previously figure as an element of price. Direct subsidies of
less efficient enterprises will therefore continue, but the number of such
enterprises is expected to be substantially reduced. The capital
charges as well as profitability rates (calculated as a ratio of the enter-
prise's ruble profits to the value of its total capital stock) will be dif-
ferentiated rather than uniform with the aim of giving each enterprise
within a given branch an approximately equal opportunity to set up
and maintain its incentive funds-n feature amounting to a form of
indirect subsidy of the less efficient ones. A major stated aim of the
price reform is to promote improvements in product quality and tech-
nological innovation.
The main focus of the reform of heavy industry wholesale prices is
on basic commodities, such as fuels, some basic chemicals, and metals,
the production of which has been heavily subsidized. The aim is to
make most enterprises in these branches profitable by raising the
prices for their products. A related aim is to set relative prices in a
way that would promote specific major objectives of the regime's in-
dustrial policy. Thus, while coal prices are scheduled for a large
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increase (75 percent on the average), those for gas will increase less
(55 percent) and those for gasoline and diesel fuel are to remain
practically unchanged to stimulate more extensive use of nonsolid
fuels. While prices for metals are to increase by 35 to 40 percent,
those of chemicals are slated for much smaller changes to stimulate
greater use of chemical substitutes for metals.
The new structure of industrial wholesale prices, now in process
of preparation, will provide the authorities with a better tool for mak-
ing rational economic decisions than they now have. Its chief merit
lies in the fact that it will be based on current costs rather than those
of more than a decade ago (the last general price revision took place in
1955), albeit with some important exceptions. A. notable improve-
ment is its provision for capital and (on a limited scale) rent charges,
which will make prices a more realistic reflection of full production
costs. The reform will also introduce more rational relative prices
than now exist, particularly in the sphere of "substitute commodities"
where errors in pricing are most readily apparent and most easily
remedied. As a result., such regime policies as the promotion of wider
use of nonsolid fuels, the substitution of chemical products for metals
and agricultural materials, and, in general, reorienting the economy
toward wider use of chemicals, will be furthered.
Nevertheless, as it now stands, the wholesale price reform-like the
broader economic reform-is essentially a product of indecision, im-
provisation and compromise among those who have fashioned it
rather than of strictly economic calculations. The announcement of
the reform and related official statements make it plain that while
the leadership ,has made certain basic decisions on the methodology of
price formulation, there are still a number of "questions of principle"
which remain unresolved. The announced admission of serious lags
in the pace of fixing the new prices in a number of important areas
raises doubts whether the final version of the current 5-year plan
(1.966-70), apparently bogged down by other problems as well, will
be ready before the latter half of 1967.
Much of the rationality of the price reform is vitiated by the nu-
merous built-in safeguards or "shock absorbers" and exceptions, all
of which add to its complexity. These largely take the form of
differentiated rather than uniform capital charges and profit rates,
direct and indirect subsidies, and "accounting prices"-all of which
amount to setting different rules for different players of the same
game and which are intended essentially to preserve the existing
industrial structure intact, with changes to be introduced only grad-
ually and by administrative fiat rather than via the price system.
More important, the wholesale price reform carefully avoids any
concession to spontaneity in the formation of prices, making it clear
that the latter shall remain the sole preserve of the central authorities.
Nor will prices be allowed to serve any regulatory function such as
the elimination of inefficient producers or the allocation of resources.
The latter will in the main continue to be determined centrally and an
political rather than economic grounds, although an improved price
system will enable the authorities to make more rational economic
choices among alternative ways of accomplishing a given objective.
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[From Problems of Communism, November-December 1966, pp. 43-55]
ECONOMIC REFORMS : A. BALANCE SHEET
(By Gregory Grossman)
The year 1905-like 1953 and 1950-was a memorable landmark in the post-
war history of Communist Europe: it was the year of economic reform. An-
ticipated quietly by East Germany in 1963-and, of course, by Yugoslavia a
decade earlier-nearly all the countries of Eastern Europe succumbed within a
span of 12 months, one after the other, like so many dominoes, to the winds
of economic change : Czechoslovakia in January 1905, Poland in July, the Soviet
Union in September, Hungary in November, and Bulgaria in early December.'
Just a fortnight before the year ran out, East Germany tinkered further with
its "New Economic System." And as though to insure its reformist lead
on its neighbors to the east and north, Yugoslavia took another long forward
step in July 1965. Only internally rigid Rumania, still too successful with
Stalinist economic methods to fully realize their defects, and tiny Albania, de-
fiant in Balkan manner behind its Chinese wall, have so far escaped the epidemic
of economic reform.
The East German "New Economic System" is the sole reform system function-
ing at this time. In all the other cases the reforms have proceeded no further
than stated intentions on the part of the ruling regimes, or at best some pre-
liminary steps in the promised direction. The next 2 to 3 years will test each
regime's capacity and resolution to do the job. How far and how fast the
reforms will eventually go is still largely a matter of conjecture-fascinating
conjecture, given the welter of economic, political, ideological, and international
factors impinging on their progress. We shall take a brief look at some of
these factors in the present essay. But from the outset we must recognize
that if each country's announcement of an economic reform represents the
end of one era of political struggles and doctrinal debates, it also marks the
beginning of a new era that will produce clashes no less intense. In what
follows we are concerned with the U.S.S.R. and other Soviet-type economies,
and only incidentally with Yugoslavia.
Problems and causes
The readers of this journal-and especially of the series of articles on "Eco-
nomics and Politics" in its recent issues-need hardly be reminded of the main
problems associated with the traditional Soviet-type "command" economy, and
hence of the considerations that have prompted some sort of reform in all the
countries in question. Very poor articulation of demand and supply ; accumu-
lation of unwanted goods ; highly wasteful use of resources in production ; a
relatively low share of the national product going to the consumer and, within
the limits of this share, poor attention to his interests ; generally low quality of
products, which among other things affects the competitiveness of exports on the
world market; undistinguished performance of the agricultural sector: these are
some of the well-known "static" defects of the Soviet-type economy. On the "dy-
namic" side, we note considerable declines in the traditionally high rates of
growth in all the countries in question after the turn of the decade ; correspond-
ing declines in annual rates of increase of labor productivity and consumption
levels ; disappointing-though in themselves often quite respectable-rates of
technological progress, in part owing to opposition to innovation from below ;
falling increments in product per unit of investment, and so forth.
Underlying these negative phenomena are such institutional causes as over-
centralization of decisions and correspondingly overextended lines of communica-
tion ; exceedingly complicated administrative structures ; primitive methods of
planning ; reliance on crude physical indicators ; information that is at once ex-
cessive in volume and poorly adapted to sophisticated decisionmaking; faulty
signals, chiefly owing to irrational pricing practices ; a rigid system of materials
allocation ; suppression of initiative and impairment or misplacement of incen-
tives ; political interference at all levels of the economy; dogmatically" rooted
impediments, such as evidenced in pricing principles and in the opposition to vir-
tually any private enterprise, even where it would be clearly beneficial to eco-
1 The cited months refer to, the meetings of the central committees of the respective
parties at which the initial decisions to proceed with the reforms were taken.
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nomic performance. These causes, no less than their effects, are well known both
to outside students of the Soviet economic system and to domestic critics.2
Yet the picture must not be painted in unduly dark tones. With some notable
exceptions-such as the total halt in Czechoslovakia's growth rate in 1962--64,
and the chronic ills of agriculture in most of the countries-the European Com-
munist economies are continuing to grow at respectable rates, albeit less rapidly
than before. Consumption levels are continuing to rise, and technological stand-
ards are advancing. The point is that these increases are inadequate from
the standpoint of both the regimes and their populations. At the same time, it
would be shortsighted to see the case for reforms as resting on economic grounds
alone. There is little doubt that at this juncture in history the pressure for re-
form in Communist countries is rooted not only in economic expectations but also
in political and moral aspirations. The decentralization of the economic struc-
ture is undoubtedly favored by some of its partisans as a step toward the
eventual democratization of political and social life, as well as for its economic
benefits.
External influences
A. number of forces from the outside world have also given a push to the reform
movement. The importance of the Yugoslav example-"Socialist" and Marxist,
but with a fundamentally different institutional system-can hardly be exag-
gerated. However wanting Yugoslav reality may be in relation to its own. ideal
or to the more advanced and sophisticated economies of the industrial West., its
strengths often lie precisely where the major weaknesses of the Soviet-type econ-
omies and societies are to be found. Its market mechanism permits the supple-
ness and the dispersed initiative that the command economy lacks. There is
greater acceptance of small-scale private enterprise. Its system of workers' self-
government strives at that measure of industrial democracy which is conspic-
uously lacking in other countries proclaiming themselves to be Socialist. Nor
has Yugoslavia had to pay a price for these advantages in terms of economic
growth, for its growth rate compares favorably with those of its more orthodox
neighbors. Last'but not least, Yugoslavia's economic reforms have been ac-
companied by some (if so far quite limited) liberalization and democratization
in the cultural and political spheres. The party's role is society has become more
circumscribed. In sum, by its mere existence Yugoslavia serves as an example
of a workable, and in many respects attractive, form of Socialist economy and
society.
If the capitalist economies of the West do not represent an alternative for the
Soviet-type countries in the same sense in which Yugoslavia does, they nonethe-
less provide forceful examples of technological modernity and consumer well-
being that are not lost on either the regimes or the populations of Eastern
Europe. At the same time, Western economics-especially that part of it which
concerns itself with the maximization of social objectives through rational
resource utilization-has made a profound impact on at least a part of the
economics profession in the Communist countries. Being largely apolitical,
this body of Western economics is in principle easily transferable into a Socialist
context, where it has a high potential impact because of its profound implications
for rationalizing,'planning, and management. Moreover, its arrival in the East
tends to deideolagize and dedogmatize the Communist political economy, thus
smoothing the way for pragmatically motivated institutional changes.
Lastly, the importance of foreign trade in preparing the ground for the -reforms
must not be underrated. All the European Communist countries have continu-
ously faced serious shortages of foreign exchange, and for all of them, except
the Soviet Union, rapid industralization without relatively large importations of
goods-whether raw materials of highly fabricated goods (especially machinery),
or both, depending on the particular country-is impossible. Extensive credits
are difficult for them to obtain. Thus, they must export on a large scale, both
to the East and to the West. In doing so they submit their goods to a severe
competitive test in terms of quality and technological modernity ; and their eco-
nomic institutions undergo a similar test in terms of adaptability to changing
external conditions and overall effectiveness. Frequently they have found both
2 For an extensive analysis of the problems faced by the Soviet economy, see "New
Directions in the Soviet Economy," pts. I-V, report of the U.S. Congress Joint Economic
Committee, Washington, D.C., U.S. Government Printing Office, 1966. For an excellent
shorter treatment of the subject, see Robert W. Campbell, "Economics : Roads and Inroads,"
Problems of Communism, November-December 1965, pp. 28-33.
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COMMUNIST ECONOMIC REFORMS 59
their goods and their institutions to be seriously wanting on these scores. In
all the countries, with the exception of the U.S.S.R., a major argument for
thoroughgoing economic reform has been the need to render their economies
more effective in both the "capitalist" and the "Socialist" world markets.
But the influence of foreign trade on reformist thinking does not stop here.
The "Socialist world market.," in which the European Communist countries
transact about two-thirds of their external trade, is after all a market. As such,
it has served as a school, and a very compelling one at that, in which the logic
of market relations among Socialist entities was inevitably learned by the regimes
in question. Among other things, they learned in this school that rational eco-
nomic decisions cannot be based on irrational price structures,, and that every
resource use has its opportunity cost-elementary verities! of economics that all
too often have been overlooked by Communist leaders and planners when not
subjected to the discipline of the external market and the relentless need to earn
foreign exchange.
Furthermore, a country which desperately needs to earn foreign exchange
soon begins to think of it as a main objective of economic policy. Because
foreign exchange is a relatively simple, quantifiable, and even almost unidi-
mensional criterion 3 of national-economic success (compared, say, to such do-
mestic objectives as industralisation or the improvement in living standards).,
it can be easily incorporated into formal theories or mathematical expressions
that purport to specify the conditions of efficient resource allocation. One
thousand more dollars (or marks, or pounds, or even foreign trade rubles) is
always better than 1,000 less when foreign exchange is desperately scarce, and
therefore a pattern of resource use that earns the extra thousand is clearly
better than one that does not. From this point on the rational economic calculus
can take over. Hence, the chronic shortage of foreign exchange was a kind of
blessing in the guise of a crisis-at least in the sense of opening the door to the
intrusion of rational methods into Communist political economy and to the slow
exit of scholasticism and dogma. This is just what has been happening in
Eastern Europe since the mid-1950's, when formal theories of "foreign trade
efficiency" began to make their appearance. There is thus a direct intellectual
link between the primitive formulas for foreign exchange maximization that
appeared in Hungary in 1954 and the elaborate theoretical and philosophical
underpinning of that country's far-reaching economic reform a decade later.
The reform proposals
Since the syndrome of economic malfunctioning is largely the same in all
Soviet-type countries, it is not surprising that the remedial measures proposed
by the current reforms consist of essentially the same ingredients, though often
mixed in different proportions. To indicate the main ingredients we can do no
better than to reproduce a list that was prepared by the research staff of the
United Nations Economic Commission for Europe :
(i) Broad directives seeking to improve central planning techniques, re-
quiring, in particular, greater reliance on the medium- and long-term plans
which are regarded as devices for achieving greater stability in the conditions
under which enterprises operate ;
(ii) Changes and reductions in the centrally planned targets that are
mandatory for the enterprise, together with greater emphasis on gross
income (i.e., net value added), profit, and rate of profitability as criteria for
judging the enterprise's success ;
(iii) The expansion of decentralized investment funds available to enter-
prises and the larger economic units, and a greater use of bank credits ;
(iv) The introduction of a capital charge on the fixed assets of enter-
prises, which will play an increasingly important role in transferring a
proportion of profits to the budget ;
(v) A strengthening of economic incentives (amounting in some cases to
changes in the wage system) by establishing closer ties between the re-
muneration of employees and the enterprise's performance;
(vi) The promotion of direct contracts between economic units which, in
contrast with the old system, are no longer conceived simply as instruments
8 What prevents it from being a unidimensional criterion is the earning of nonconvertible
currencies, an important qualification in the case of the Communist countries since most
of their trade is with each other ; i.e., in nonconvertible currencies.
4 Cf., Frederic L. Pryor, "The Communist Foreign Trade System," Cambridge, Mass.,
MIT Press, 1963, pp. 106 if.
74-194-67-5
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60 COMMUNIST ECONOMIC REFORMS
for the implementation of national plans, but rather as a means of guiding
the plan itself ;
(vii) Price reforms, which include changes in the determination ofprices
and in the price structure;
(viii) The concentration of industrial enterprises into larger units (sonne-
times accounting for a whole branch of industry) * * * [having) administra-
tive responsibilities but being called upon to operate to a greater extent as
economically accountable organizations ; and
(ix) The streamlining of the administrative apparatus responsible for the
management of industry, and/or various administrative changes having more
specific objectives e
The basic thrust of all the reforms is in the direction of decentralization, which
is natural considering that the ills of the traditional system have been largely
ills of overcentralization. But the various reforms differ greatly in the extent
and comprehensiveness of the decentralizing measures. On this, more presently.
One feature should he noted here, however. In all the reforms except the most
conservative, the Soviet, and the most daring, the Hungarian, the decentralization
is in large measure not to the level of the individual enterprise but to that of
the newly created (or strengthened) "associations" into which the enterprises
of whole industries have been or are being combined. (See item (viii) above.)
This i,s important.
One reason given for creating powerful "branch associations" is that they
can take over much of the burden of centralized planning, coordination, and
management from the national planning agencies, and thus allow the latter to
concentrate on broader and more basic problems. The associations are closer
to the enterprises and can plan and manage them more effectively than can the
top planners. The second reason for emphasizing the associations is that they
have some distinct advantages over enterprises in terms of economies of scale :
insuring large production runs where possible, centralizing research for the
industry, standardizing technology and design, dealing with foreign buyers.
We may add a third reason: it is easier for central authorities to maintain
economic and political vigilance over 100-odd associations than over thousands of
enterprises, especially if some devolution of decisionmaking power is to take
place.
But what remains unclear in all reforms that place heavy emphasis on the
branch associations-including the East German case where the new system has
been in effect for several years-is how the coordination between branches is to
he achieved without depriving the associations of their autonomy. If the refornns
stop short of creating a workable market mechanism, there is always the danger
of either permitting the associations to develop into autarkic empires, with
consequent loss: of efficiency and progressivity, or, to avoid these defects, back-
sliding into the old-style command economy by recentralizing to the top level.
On the other hand, should a market mechanism he introduced, the Socialist
country would enter the new era with a structure of supermonopolies, with all
that again implies for efficiency and progressivity. Of course, insofar as the
associations will be marketing abroad, they will be in salutary competition with
foreign producers. But their domestic markets are likely to remain well pro-
tected, if only because foreign exchange shortages-which are sure to persiq
for a long time yet-will forestall active competition on the side of imports.
It is also necessary to take note of what the announced reforms are not to
change-even on paper, let alone in the process of their realization :
(1) They assuredly are not intended to overturn the political monopoly of the
party, the exclusive power of the regime, the basic commitment to a Socialist
system, or the proclaimed advance toward full communism and further rapid
industrialization.
"United Nations Economic Commission for Europe, "Economic Survey of Europe in
1965," pt. 1, p. 57.
~' In East Germany there are some 90 such branch associations (designated as VVB--
Vereininglingen voike(,igener Betriebe), while in Czechoslovakia there are about 100 "con-
cerns" (vertically integrated large enterprises) and "trusts" (horizontally grouped enter-
prises in a given branch). In his speech announcing the Soviet reform (Sept. 27. 1965).
Mr. Kosygin spoke of the creation of a "net" of branch associations on a level between the
ministry and the enterprise, but it is not clear what is being done on this score. (The
proposed "branch" associations are not to be confused with the firmy-horizontal group-
ings of relatively smaller enterprises--that have been created by the hundreds in recent
years in the U.S.S.R.)
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COMMUNIST ECONOMIC REFORMS 61.
(2) The reforms do not challenge the principle of central planning of all the
important "proportions" of the economy and of its speed and direction of develop-
ment. Even should some of the reforms go so far ,as to establish Socialist market
systems, they will continue to be subject to comprehensive national planning and
central control and regulation.
(3) Moreover there is little indication that the resources of each country will
cease to be under great pressure. While the national plans in the future may be
less ambitious-not to say fanciful-than in the past, they will most likely con-
tinue to call for the highest degree of resource utilization. A corollary is that
sellers markets are likely to persist.
(4) Because of this, and because of fear of inflation and uncontrolled redistri-
bution of income, prices on all or nearly all important producer goods are likely to
remain under control for some time. (We shall return to the question of prices at
a later point in this essay.)
(5) The physical allocation (rationing) of producer goods (materials- and
equipment) continues in all the countries, and-in part because of points (3)
and (4) above-is likely to continue for some time. There is talk, even in the
U.S.S.R., of eventually abolishing materials allocation and going over to "whole-
sale trade" in producer goods, and the talk itself represents a significant change.
But for some time it is likely to remain talk.
(6) The functionaries of both the Government and the party on levels above
the enterprise remain largely the same, although they may change offices and
"hats." And their mental habits remain the same. This is surely one of the
more important reasons to expect a conservative bias in the implementation of
the reforms.
(7) The principle of "one-man" management in the enterprise is not being
significantly diluted, and the manager is still accountable only upward, not down-
ward. In other words, the Yugoslav institution of "workers' self-management" is
not being adopted. This is not an oversight ; rather, it is a deliberate decision,
common to all the regimes in question, to retain political as well as economic
power where it now resides.7 More on this below.
(8) Lastly, so far the institutional reforms have touched agriculture only
marginally if at all, although in some of the countries (especially the U.S.S.R.
and Hungary) additional resources in the form of higher prices and larger capi-
tal allocations have been channeled into the agricultural sector with the aim of
improving its performance.'
The lineup of forces
The question of economic reform has been one of the most intense political
issues to arise in Eastern Europe in the last several years. It has been as
widely debated in professional journals, in the daily and specialized. press, in
academic forums, and in high councils, as any economic measure in any part of
the world in recent history. It has profoundly divided the economic profession
(though not in equal measure in different countries), and it could not help but
cause deep,division within the leaderships as well. Yet we know relatively little
of the political side of the coin.
We do know that some of the most ardent advocates of reform-that is, of some
reform of a decentralizing and rationalizing nature-have been academic econo-
mists (including those affiliated with research institutes) rather than the eco-
nomic experts involved in actual planning or administration. But we also know
that there have been, and continue to be, great differences in approach and
opinion within the profession, ranging from preference for relatively mild
tinkering with prices and organizational structures in advocacy of a Socialist
market economy that is highly decentralized, at least for current production
decisions and a portion of investment. Academic economists-some of them
young and quite mathematically (or at least "Western") oriented ill their eco-
nomics-seem to have played an especially significant role in working out the
4 True, there has been considerable discussion of the augmented role of the official trade
unions and of the intraenterprise "production conferences" (or similar worker-manage-
nZent councils). But these appear to be token moves; no serious step in the direction of
Yugoslav-type worker self-management is to be inferred. In fact, in Hungary, the `fac-
tory councils" (which succeeded the autonomous "workers' councils" of 1956 vintage) are
now being dissolved. (For a summary survey see "Economic Reform and the Changing
Trade Union Role," Research Department of Radio. Free Europe, Aug. 31, 1966, mimeo-
graphed.)
8 On recent policy regarding agriculture in the U.S.S.R. see the contributions by J. F.
Karz and Keith Bush in "New Directions in the Soviet Economy," supra, pt. II-b, sec. 3.
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62 COMMUNIST ECONOMIC REFORMS
blueprints of the two most far-reaching reforms, those of Czechoslovakia and
Hungary. In the Soviet Union, where the generational pattern was more severely
imposed by the preceding decades of Stalinism, the division among economists
has been in good measure along age lines. But even there, some of the abler
and more vocal proreform leaders belonged to a venerable generation : the late
17. Nemchinov, V. Novozhilov, A. lTainshtein, and (the somewhat younger) Ye.
Liberman.
Much of the discussion among economists has been characterized by polemical
intensity, which is not unusual for economic debates conducted in the shadow
of political. and ideological authority. The would-be reformers show a mis-
sionary zeal that is compounded of deep dissatisfaction with the status quo and
faith in newly discovered (or resuscitated) economic truths. Their opponents
have reacted to the challenge of their traditional axioms and habitual modes
of thinking with predictable immoderation. Such, however, is the sweep of
economic reformism in Eastern Europe (except in Rumania and Albania) that
the Stalinist model seems to be no longer openly defended.
We know from their writings and from other evidence that some of the
managers have been proreform, or at least in favor of lightening the weight
of the superordinate bureaucracy and doing away with some of the irrationalities
and inefficiencies of the existing system. But it would be overly hasty to assume
that the vast majority of managers were in favor of the reforms, let alone of
thoroughgoing decentralization. After all, the managers of today are the ones
who succeeded under the old system by virtue of appropriate abilities or right
connections. They are part of the Communist "establishment." Must we assume
that they would overwhelmingly favor a change in the rules of the game?
What the man in the street or at the workbench has thought of the reforms
while they are being debated in the press, after their announcement, and dur-
ing the initial phases of their implementation, we simply do not know. Some
may welcome the reforms for their promise of higher living standards. But
many may fear for their jobs. In countries-notably Czechoslovakia.--where,
for incentive purposes, greater wage differentials have been advocated by the
proponents of reform, the average (or below average) man may well feel appre-
hension. But we might also guess that having seen many a reform under the
Communist regime in the past, the average citizen is prone to take an agnostic
if not a cynical view.
Information on this score is fragmentary, but it seems that the chief opponents
of the reform, and the chief obstructionists to their successful implementation
at this stage, are to be found in the intermediate and upper layers of the party
and governmental bureaucracy. The reasons, no doubt, are complex : fear of
losing position or status, fear of opening a Pandora's box, ideological rigidity,
and so forth.'
Comparisons and contrasts
Since the reforms in the individual countries have already been discussed in
separate articles of the present series, we shall restrict ourselves here to point-
ing out the considerable range in the degree of "reformism" that the various
measures-or, at this point more correctly, their language-represent. The
most conservative, those of Poland and the U.S.S.R., bear a resemblance which
seems to derive as much from shared caution or indecision as from anything
else. Since the Polish reform was only recently discussed at some length in
this journal by Professor Smolinski, we shall concentrate here on the Soviet
reform as an example of a conservative measure."
The Soviet reform. consists of two distinct, if interrelated, parts: (1) the abo-
lition of Khrushchev's sovnarkhozy (regional economic councils) and the re-
establishment of "branch" ministries on the pre-1957 model ; and (2) the reform
"proper," which amounts to some vertical decentralization, together with related
measures in the realms of prices, incentives, and management.
The reversion to a ministerial organization-a move of some significance but
not of central importance for our present discussion-was carried out - imme-
9 Cf. J. M. Montlas. "Economic Reform in Perspective," Survey, April 1966, pp. 3s-69.
19 The Soviet economic reform was discussed by Michel Tatu in the January-February
1966 issue of this journal, but is reviewed here for comparative purposes. Leon Smolinski's
article "Reform in Poland" appeared in July-August 1966. For analyses of the East
German and Bulgarian reforms-which appear to be intermediate in their degree of "re-
formism"-see Dorothy Miller and Harry G. Trend, "Economic Reforms in East Germany,"
March-April 1966, and J. F. Brown, "Reforms in Bulgaria," May-June. 1966.
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COMMUNIST ECONOMIC REFORMS
diately upon its enactment in early October 1065, even without waiting for the
end of the plan year. This haste is rather difficult to understand; it must have
caused considerable confusion for a while.
The Soviet reform "proper" is being put into effect much more slowly, and by
stages. It is to be fully implemented only after the revision of the price struc-
ture is completed-supposedly by 1967-08. The main features of the reform are:
(a) replacement of the "gross value of output" target by the "value of
sales" target as the chief success indicator for enterprises;
(b) an enhanced role for profit as a criterion of successful operation, al-
though at this point it is unclear to what extent it will challenge the primacy
of the sales target in this regard ;
(c) a reduction, but apparently not a drastic one, in the number of physi-
cal production targets;
(d) somewhat more freedom for management in the selection of inputs
(labor, materials, equipment) and in inventory holdings;
(e) the shift of production planning toward more reliance on mutual
orders among enterprises (so-called direct links) ;
(f) greater freedom for industrial enterprises to decide their own invest-
ment and to finance it from internal funds or bank credit, rather than from
budgetary allocations ;
(g) financing of some new projects by bank credit rather than budgetary
allocations ;
(h) charging of interest (though not under this name) for all the capital
invested in an enterprise ; and
(i) use of a part of the profit earned by an enterprise for bonuses to its
management and staff, linking the bonuses to the amount of profit earned.
Many of these measures-particularly those giving management somewhat
greater leeway as well as a financial inducement to economize-are so common-
sensical that one wonders why it took 35 years, to introduce them. The substi-
tution of the sales target for the gross output target will presumably eliminate
or reduce the ridiculous but not infrequent situation of enterprises producing
utterly unsalable goods. (On the other hand, it may in some cases only enhance
the producers' efforts to pass on their low-quality wares.) Perhaps the most
reformist of the features is the granting of considerable autonomy to enterprises
in the realm of investment, especially for modernization and rationalization. By
1967, a quarter of gross fixed investment in industry will supposedly have been
"decentralized" in this fashion. The catch here, however, is whether the enter-
prises will be able to obtain the necessary materials and equipment, which con-
tinue to be tightly rationed, and whether they will have the requisite incentives
to undertake the investment. Moreover, the economic rationale of decentralized
investments, even if profit-motivated, remains under a cloud until the price
structure is rationalized.
The Soviet reform is qualified here as a conservative one because it retains
(1) most of the physical production targets, and (2) the rigid system of materials
allocation. Both of these holdovers from the past will present serious handicaps
to attempts by enterprises to adjust production to demand and to select economi-
cal input mixes, even if the role of the profits target under the new system is less
equivocal than it seems to be. Lastly, the same functionaries staff the new min-
istries and bureaus, and complaints are already being voiced in the Soviet press
that the bureaucracy refuses to give up its habitual modes of operation.
Some 700 industrial enterprises were converted to the "new system" by mid-
1966. It was said in March that by the beginning of 1967 one-third of all indus-
trial workers would be brought under the system, though it is not clear whether
the conversion of enterprises implies adoption of all or only some of the above-
enumerated changes. The crucial test will come, however, in regard to the
revision of the price structure. It is here that much of the current discussion
and struggle is centered. Should the price revision. follow orthodox lines-
eliminating most subsidies but paying little heed to the equilibration of demand
and supply-as now seems likely, then (as we shall presently argue) it will be
very difficult, even with the best will in the world, to get rid of materials allocation
and physical production targets, with the result that no major decentralization
can take place.
11 See the contribution by Morris Bornstein in "New Directions in the Soviet Economy,"
supra, pt. I.
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64 COMMUNIST ECONOMIC REFORMS,
At the other extreme of the spectrum are the Czechoslovak and Hungarian
reforms.' The former entered its first phase of implementation at the beginning
of 1966; the latter is about to be launched. In both cases, the accompanying
rhetoric is more impressive than the institutional reforms themselves. In Czecho-
slovakia-where growth had ground to a halt and other economic difficulties- were
pressing-the dominant tone of published economic opinion swung from deep
orthodoxy to extreme liberalism (in the Communist context) within a matter of
months during 196.3-64. In Hungary, economic opinion shifted more slowly and
over a longer period, but by now has arrived at a frontier of liberali,sm similar
to the Czechoslovak.
The current rhetoric in these two countries consists of scorn for orthodox,
Soviet-type economic institutions (though with a bow to their contribution to
'`extensive" growth in the early postwar period) and lavish praise for the market
mechanism, profitmaking, and competition. To be sure, the profitmaking and
competition are of the Socialist variety, and the market is to be a handmaiden of
the national plan. But nonetheless it is hard to believe that statements like
"the market is the final touchstone of the social usefulness of expended labor,"'
or the "uniform and single criterion [for economic decision] is profit," A4 emanate
from Communist economists writing in official publications. The infatuation
with the market-now evident among economists all over Eastern Europe and
in the U.S.S.R., as well as in the two countries mentioned-may be an under-
standable and even salutary reaction to its former dogmatic rejection ; yet this
optimism will doubtless be followed in time by a swing toward the center, when
A is realized that the market raises its own difficult problems.
The actual reform measures adopted in Czechoslovakia and Hungary do not
fully share the economists' infatuation with the market. These reforms-
though far reaching, in comparison to the system they aim to supersede-are
much more cautious and compromise-ridden. The leitmotif is of course de-
centralization. We have already noted the agglomeration of Czechoslovak
industry into 100-odd concerns and trusts, leaving little prospect for domestic
competition. Physical production targets are not entirely eliminated ; they
remain (in Czechoslovakia) for several dozen commodities of key importance.
such as items for which there are definite export commitments: 6 Insofar as this
writer is able to discover, the rationing of some scarce producer goods is likely
to continue into the near future. Lastly, most producer-goods prices are to be
either fixed or subject to ceilings (which amounts to the same thing, since pres-
t,ure on them is likely to be upward).`
The formal introduction of the Czechoslovak reform began almost a year ago.
and some useful lessons are already discernible. One of the most significant
lessons is that the reforms are destined to have rough sledding, just as they have
]lard even in the far less radical Soviet ease. Usually blame is attached to deliber-
ate sabotage or resistance on the part of the hostile and entrenched bureaucracy.
(Similar charge, have been continually made in Yugoslavia, culminating in the
purge of Rankovi(- and his associates in mid-1966.) Quite possibly, this is
where most of the blame belongs. Yet, we should also realize that decentralized
decisionmaking simply cannot do a proper job when the signals (prices) are
still faulty and the economy is still ridden with scarcities. Under such condi-
t:ions there may be very good social reasons to keep close rein on the enterprises
and the trusts. And a way to discredit the reform would be to decentralize too
f a,4, before prices were properly revised.
Prichig problems
It is often said in relation to the East European reforms that their success
is predicated on the establishment of rational price structures. This is not
12The Czechoslovak reform is covered in detail by Harry G. Shaffer and Vaelav 1-folesov-
1,ky in "Problems of Communism," September-October 1965; on the Hungarian reform, see
Joseph Held's article in this issue.
is Zdyslav Shults, "Creative Development of Marxist Economic Thinking," Problems of
Peace and Socialism. June 1965.
tk JBzsef Bognar. "Overall Direction and Operation of the Economy," the New Hungarian
Qnarterly, spring 1966, p. 13,
"6'I'he number of compulsory targets in the national economic plan is said to have been
reduced from 1.200 to 67.
16 In Czechoslovakia, free wholesale prices are to account for only 7 percent of the value
of industrial output, and free retail prices for only 11 percent of retail sales. See useful
summaries in Economic Survey of Europe in 1965, supra, pt. 1. p. 65, and Ekonom.ichcskaia
gazcta, No. 9, 1966. p. 41. In Hungary. free wholesale prices are to apply to 29 percent of
;all?) goods, Pravda, June 20, 1966, p. P.
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quite correct, if in this context "rational prices" 14 mean what they usually
mean to economists; namely, a set of prices which-together with appropriate
managerial rules and incentives, and in the light of society's resources and
technological knowledge-will maximize some kind of index of social welfare.
Of course, in an authoritarian society this index is largely defined, if only im-
plicitly, in an authoritarian way.
Needless to say, prices in no actual economy are "rational" in this- theoretical
sense. An economy can function quite well, albeit at less, than 100 percent theo-
retical efficiency, if the actual prices deviate moderately from the theoretical
norm ; and many doh To be sure, the price structures of the Communist
economies probably deviate more than "moderately" from the theoretical norm.
If the efficiency of the economies is to be raised substantially, the price struc-
tures will have to be revised to conform more closely to a rational norm-even
though complete coincidence is not to be expected.
What is meant by the reforms succeeding, however, is usually something else;
namely, that the decentralizing and initiative-stimulating measures survive an
initial test period, and that the economy performs in a reasonably satisfactory
fashion thereafter. Insofar as prices are concerned, the crux here is that the
price structure should not be such as to force major recentralization of eco-
nomic decisions, and this is achieved by the use of equilibrium prices. By "equi-
librium prices" we mean prices which serve to equate demand and supply for
each individual commodity, service, or resource. In the abstract model of a
perfectly efficient economy, rational prices are also equilibrium prices. But in
practice they are not the same, as attested to by every market economy without
price control.
To see why equilibrium prices come close to being a necessary condition for
the success of the reforms-in the sense in which we have just interpreted
"success"-we need only inquire what will happen if the Soviet-type economies
are organizationally decentralized, but prices are fixed at levels substantially
deviating from equilibrium levels. Since these economies are likely to be experi-
encing high overall demand in relation to their productive capacity ; i.e., infla-
tionary pressure, the fixed prices soon become too low to equate demand and
supply. (As we shall presently see, a main reason for price fixing is precisely to
resist inflationary pressure.) For the sake of simplicity, let us focus on pro-
ducer-goods prices at wholesale.
Because prices are too low and demand exceeds supply, all important goods
must be allocated (rationed) to reserve them for higher priority purposes, as
indeed will continue to be the case under the reforms. As a result, enterprises
are severely constrained in their efforts to maximize profits by using the best
(i.e., cheapest) combinations of inputs, and one of the chief aims of the re-
forms is thereby already frustrated.
Moreover, to allocate materials effectively the authorities must take care that
the expected supplies are forthcoming. Yet the fixed prices may render the
production of some goods unprofitable. Hence, there will be a strong temptation
on the authorities' part to keep direct control of production, which means to
assign physical production targets to enterprises. (If instead prices should be
manipulated to elicit the requisite supplies, which is what the market mechanism
would call for, then the objective of a stable price level would be endangered and
the specter of inflation would loom larger.) But physical production targets
have a well-known tendency to proliferate-and before long most important
decisions in the economy are recentralized.' Even if a reform had gone so far
as to establish a market mechanism, the retention of tight materials 'allocation
and other physical controls would tend to undermine the "market" progressively,
until finally the command economy was reestablished.
Furthermore, the complex and arduous process of price fixing in itself
strengthens the hand of the bureaucracy, diverts the attention and efforts of
"Also known to the economist as "efficiency prices." In the current terminology of
Soviet economics they are often referred to a?s "prices of the optimal plan," and are a close
kin to L. V. Iiantorovich.'s "objectively determined valuations" or V. V. Novozhilov's
"differential costs."
1 It has been lately argued by a number of Western economists that the deleterious
effects of price distortion through resource misallocation are very small, at least in some
market economics. See, for example, Harvey Leibenstein, `Allocative Efficiency Versus
'N-Efficiency,' " American Economic Review, June 1966, pp. 392-415.
19 I have discussed elsewhere the penchant of the command economy for "creeping re-
centralization." See Gregory Grossman, "Notes for a Theory of the Command Economy,"
Soviet Studies, October 1963, p. 114.
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COMMUNIST ECONOMIC REFORMi
enterprises away from production and selling, and retards the depoliticization
of economic life (which is one of the desirable corollaries of the market). Even
with more or less equilibrium prices, the authorities and the bureaucrats might
not wish to relinquish materials allocation, either because they want to hold on
to their power or because they fear (in part justifiably) that the market alone
will not be able to insure the satisfaction of national priorities. But without
equilibrium. prices, there is little chance that materials allocation will be dis-
mantled.
Thus, equilibrium prices are a necessary-or almost necessary-condition of
the success of the decentralizing reforms. Yet, it does seem that in any of the
countries in question the impending price revision will result in bringing whole-
sale prices of producer goods to equilibrium levels, or at least in leaving- them
there for a critically lengthy period of time. First, as we have noted, in all
cases price revisions will hardly depart from the traditional principle of fixed
prices. Second, while lipservice is often given to the equilibration of demand and
supply through prices-especially in the case of Czechoslovak, Hungarian, and
(more recently) East German materials-the more concrete and authoritative
statements offer little hope on this score.YO Rather, the usual formulation is
that "prices must be fixed for all important commodities that are still in short
supply," which is to say that prices are to be fixed at below-equilibrium levels.
Third, in any case it is very bard to compute in advance what the equilibrium
level of any price will be while all prices are changing at the same time (and
the ground rules of economic behavior as well). And those prices that are set
too low are likely to be kept there as the authorities strain to hold the general
price line. Which brings us to the fourth point. While much lipservice is also
paid to some minimal price flexibility, the arduousness of price calculation, the
complexity of the procedure, the desire to hold the line against inflation and
the "politics" of the matter-all these considerations rather suggest that once
prices are revised they will tend to remain fixed for lengthy periods. Which is
to say that even if producer-goods prices start at or near equilibrium levels, they
are not likely to stay there very long as supply-demand conditions change.
But why fix producer goods prices? Why not let them fluctuate freely? The
reasons are many. The ideologically conservative are repelled by the idea of the
"chaos" of freely fluctuating prices under socialism. The top leaders and plan-
ners are reluctant to forswear what will become in the process of the reforms
a most important instrument of control over the economy. (We may recall
here, for example, the danger of monopoly inherent in the newly formed or
strengthened "associations.") Bureaucrats do not wish to deprive themselves
of their functions, power, and jobs. Some managers may fear the uncertainty
that would accompany freely moving prices. It must be noted that price un-
certainty is now much more unsettling to enterprises than before, given the en-
hanced role of profit as a success indicator, as a source of personal income
for management and staff, and as the chief determinant of internal investment
funds.
Still another major reason for opting for fixed prices is the fear of inflation.
Communist governments have always been sensitive on this issue, although---or
because--their record on this score is none too strong. There is a good deal
of validity to the fear of inflation at the present juncture. Reforms or no,
the pressure of overall demand on resources is likely to continue to be strong.
In the labor-short countries (Hungary, Czechoslovakia, and East Germany), the
tightness of the labor market will continue to put upward pressure on labor
costs. In the labor-surplus countries, rural-urban migration will continue to
be rapid, continuing to swell money incomes. Relative wages and other in-
comes may have to be readjusted-for this is one of the rationalizing aspects
of the reformsy-but the days when it was politically possible to readjust relative
incomes by pushing some money incomes down are long gone In the countries in
question. Thus, the danger of cost inflation by dint of an upward drift in wages
and other incomes casts a long shadow on the reforms, even allowing for their
expected boost to efficiency. Not surprisingly, wage and salary rates remain
generally under central control in all the reforms. But control of wage rates
and even of total wage payments is not enough because of the profit-sharing
features of the reforms. Hence, there is also an argument for simultaneously
23 Cf. Bornstein, be. cit., and "Economic Survey of Europe in 1965," pt. 1, pp. 56 if. An
example of the equivocating approach to price revision that apparently prevails in high
places can he found in Bhla Czlkbs-Nagy (head of the Hungarian Price Office), "Die
Ungarisehe Preisreform." Osteuropa-Wirtschaft, No. 3, 1966, pp. 269-219.
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COMMUNIST ECONOMIC REFORMS 67
fixing prices;. The effects of an inflation of producer-goods prices (in the Socialist
sector) would be serious, even in the Socialist economy, and especially after the
reforms. It might lead, via a "cost push," to inflation of consumer-goods prices,
with likely negative political effects. It might also bring about an undesired
redistribution of income via the profit-sharing schemes. And it would likely
distort the direction of investment to the extent that investment is now de-
centralized.
As we have" just noted, wage and salary rates will, as a rule, continue to be cen-
trally set under all the reforms in question. However, as a means of checking
inflation this control is imperfect, since the central authorities cannot oversee
the classification of each employee, a matter which remains dependent in part
on individual bargaining between employee and employer. Thus there is reason
to limit or restrain the total outpayment of wages and salaries by each enter-
prise. The reforms provide a range of techniques. In the more conservative
reforms, such as the Soviet, the old practice of assigning a maximum wage fund
to each enterprise is preserved, although the fund is no longer to be broken
down into subdivisions for specific categories of workers and employees. At
the other extreme, in Czechoslovakia, there is apparently no such limit on each
enterprise, but wages are taxed (via a tax on so-called gross income) and new
"stabilization payment" is being introduced, which is a 30-percent tax on wage
payments above a stipulated minimum.'
In sum, the need for rigid physical controls would be lessened, price flexibility
would more likely be allowed, and hence the decentralizing reforms would be
more likely to succeed, if the overall pressure on resources-which is to say, the
ambitiousness of the national plans and goals of the countries in question-were
to be restrained. To some extent the ambitiousness of the national goals is a
delayed response to the long-repressed material aspirations of the population.
But the pressure on resources also derives in large measure from more tradi-
tional Communist objectives-rapid industrialization, military power, etc. In
this regard it is worth noting that an improvement in the international climate
might well have a significant eff ect both directly and indirectly on the course
of the reforms."
The question of viability
,Flow viable are these reforms on purely economic grounds? It has already
been noted that the "blueprints" of the reforms vary considerably along the
scale of liberalization in terms of the decentralization of production and invest-
ment decisions-but that everywhere prices and wage rates' are to remain under
rather tight control, and that (most significantly) materials allocation is to be
continued. Clearly the more conservative reforms, especially the Soviet and
Polish, fall far short of envisioning anything like a functioning Socialist market
economy. The Czechoslovak and Hungarian blueprints, in both language and
design, come much closer to instituting a market mechanism, at least for current
production decisions.
We must bear in mind that the implementation of every reform, however
liberal or conservative on paper, is likely to suffer from a conservative bias.
This is so because, first, the detailed implementation is inevitably in the hands
of the bureaucracy and party apparat-that is, largely in the hands of the re-
forms' opponents. But, secondly, there are also good "objective" reasons for
the bias. In the course of implementation there will be innumerable specific,
detailed problems to be resolved. They will mostly be problems of coordinating
separate activities and insuring harmony between the dispersed decisions and
the national goals. As a rule, such specific problems can be resolved only by
centralizing certain particular decisions and actions, not by leaving them to be
handled at the enterprise level.
Thus, the implementation of the reforms is likely to fall short of the decen-
tralizing reach of their blueprints. Will the resultant halfway or quarterway
solutions be viable? One wonders. If the market mechanism is not strongly
enough established-and most of the reforms do not even intend to establish
it-then the burden of coordination among the millions of economic decisions
and activities will largely remain with the central authorities. To do this job-
zi See East Europe, September 1966, p. 53. The "stabilization payment" Is a two-edged
sword. It may hold wage payments down. But it may also contribute in part to the
"cost push" and thus to inflation.
22 See this author's "Soviet Economy and the Waning of the Cold War," in Robert A.
Goldwin, "Beyond the Cold War," Chicago, Rand McNally & Co., 1966.
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68 COMMUNIST ECONOMIC REFORMS
and to protect its owl! positions-the bureaucracy is likely to resume the process
of centralization. In this it will be strongly abetted by the persistence of mate-
rials allocation and by the fear of inflation, as has already beenargued. More-
ov(n-, the partial decentralization of investment in the absence of a suitable
price system may well channel resources into directions that the central author-
ities; deplore and that they will therefore attempt to thwart by adminisl.rative
means. In general, effective decentralization in a centrally administered econ-
omy can take place only when carried out on a very broad front all at once,
which requires intervention from higher quarters and calls for big political
battles. Centralization, however, can and often does proceed in little steps,
virtually unnoticed but important in aggregate impact.
Of course, many of the sensible features of the present reforms are likely to
survive the recentralizing process. Such measures as the substitution of the
sales target for the gross output target, the charging of interest and economic
rent, a moderate amount of profit sharing, need not fall victim to recentral-
ization.
To sum up, the more conservative reforms involve relatively little liberaliza-
tion to begin with, and to the extent that they do, they are soon likely to begin
drifting back toward the status quo ante (at least in the absence of additional
broad decentralizing measures). The countries with more liberal reforms are
also likely to experience recentralizing tendencies soon after the new institu-
tions make their appearance. But here-which is to say, primarily in I:[ungary
and Czechoslovakia-the repudiation of the old system has gone so far that the
result is more likely to be a lengthy epoch of drift rather than a -substantial
reversion to the former extremely centralized setup-unless, of course, more
resolute liberalization is decreed from above to establish a viable, market-bound
alternative to the command economy.
It should be noted that the chances of such resolute liberalization do not seem
to be high for the foreseeable future. No doubt voices will continue to be raised
in favor of a fuller role for the market mechanism. The struggles and debates
will go on. But, by having gone as far as it has already. "by consenting to re-
form the old bankrupt planning system, the regime hopes to gain a new lease
on life, not to abdicate."' Economic liberalization is pregnant with political
risks-the more liberalization, the higher the risks-and the first Imperative
of each regime is to retain power, not to endanger it for the sake of better
economic performance. In this it has the more-than-willing support of the
bureaucracy and the apparat. On the other hand, it would be foolhardy to
exclude altogether the prospect of "marketization" of the present command econ-
omies. Yugoslavia has accomplished a form of it. although under very specific
conditions. The Soviet world is in flux and ferment ; the chain of surprises
has not yet come to an end. There may be a lesson in the fact that few competent
observers would have predicted 3 or 4 years ago that the cautious Czechoslovak
and Hungarian regimes were about to sanction their economic reforms, even
if only on paper.
Political implications
What, then, of the future? We noted at the start that economic deeentraliza-
tion should not be confused with sociopolitical democratization. True, in all
East European countries the launching of the reforms was preceded by a re-
markable broadening of the limits of economic discussion. Some extension of
the bounds of permissible discussion also occurred in other social sciences (so-
ciology and law) and in cultural affairs. Yet the launching of the re-forms
themselves need not at all imply further liberalization in the intellectual and
cultural spheres. Indeed, the opposite may happen, should the regimes feel that
the potentially centrifugal effect of the economic reforms ought to be contained by
stricter ideological and social controls: or should bargains be struck between
various factions in the leadership, in the sense that the "price" of economic
liberalization becomes retrenchment on other fronts. Such seems to have been
the case in the U.S.S.R., as evidenced by the divergent lines laid down at the
23d Party Congress (March 1966), where the economic reforms of the preceding
autumn were reaffirmed, together with a distinct hardening of ideological and
cultural positions. A similar trend has also been evident in Hungary. Nor
need we expect that the purely economic successes of the reforms--if they
ma.terializemust perforce increase freedom and democratize political life in
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COMMUNIST ECONOMIC REFORMS
the Communist countries. Greater economic freedom for managers is not yet
political freedom for everyone, and improvement in material conditions of life
can come without the multiparty ballot.
It would be convenient to leave the argument at this point, but much too easy.
For one thing, a successful decentralization of the economy-should it occur
despite the various handicaps, that have been outlined above-would tend to
change the role of the party in society. Today, the lower and intermediate party
levels owe their functions and powers in the economy precisely to the failure of
economic institutions. So far, these levels of the apparat have had a job to do
because of inadequate incentives, improper signals, imperfect coordination
within the economy, conflicting goals and standards, shortages of all sorts, and
other functional defects. In all such cases the party has had to step in to keep
the wheels of the economy turning. But if the economic mechanism, itself is so
improved as to provide adequate and proper signals, incentives, and coordination,
then most of the party's economic functions at the intermediate and lower levels
disappear. The basic question of what role the party is playing in society,
already looming on the horizon, will become even more apt and timely. Will the
parties in the other Communist countries be prepared to restrict their day-to-day
economic roles as the Yugoslav party has done?
Seen otherwise, the political implications of the reforms depend largely on
the extent to which economic decentralization survives the initial test-about
which we have already expressed considerable doubt-and proves capable of
creating alternate nodes of power that in some measure escape the full control
of the regime. The great autonomy of enterprises (or "associations") creates
some measure of power that-almost by definition-is not under the close control
of the party leaders. But whether this can contribute to the growth of
meaningful political pluralism remains to be seen. On the other hand, enterprise
autonomy may stimulate the appearance of labor organizations such as workers'
councils (as distinct from the regime-controlled trade. unions) with which to
confront management "from below." Any such institutions would be potentially
significant sources of power in that they would be relatively independent not
only of management but of the existing political authority. Enterprise autonomy
is conducive to labor autonomy, and it is the latter that poses by far the greater
challenge to the existing order. Could the conservative opposition to economic
reform be motivated in part by fear of this possibility? If so, the Yugoslav
experience with workers' "self-management" offers nothing to allay the con-
servatives' apprehensions.
That the present European Communist regimes (except Yugoslavia) have
little liking for autonomous workers' councils is clear. Where such councils
arose spontaneously-in Poland and Hungary in 19.56-they were quickly
suppressed or subverted after the new regimes reestablished internal control.
They are most conspicuously absent from all the blueprints of economic reform,
although some token gestures are made in the direction of worker participation
in decisions at the enterprise level. Yet it is hard to believe that in time the
issue of autonomous workers' councils and meaningful workers' "selfananage-
ment" will not come to the forefront. When it arises, it will be inevitably
linked with the issue of more meaningful enterprise .autonomy, for without the
latter, workers' councils or "self-management" lack substance. And at that
juncture the political implications of economic reform will become much. more
profound than now.
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The following is a list of the names and titles of foreign govern-
ment and private individuals; with whom members of the Subcom-
mittee on International Trade conferred between December 7 and 17,
1966. It does not include, the names of U .S. Embassy officials with
whom the group met.
ROME, ITALY-DECEMBER 7
Istituto Mobiliare Italiana
Stefano Siglienti, president.
Dr. Silvio Borri, director general.
Giorgio Cappon, vice director general.
Astorre Oddi Baglioni, general manager.
FIAT
Prof. Vittorio Valletta, president.
Mr. De Regibus, secretary general.
BELGRADE, YUGOSLAVIA-DECEMBER 9-12
Dr. Slavko Komar, President, Commission for the Banking and
Credit System.
Nikola Miljanic, Governor Yugoslav National Bank.
Milenko Botanic, General llirector, Yugoslav Investment Bank.
Srdja Prica, Counselor to the State Secretary of Foreign Affairs.
Nikola Dzuverovic, Federal Secretary for Foreign Trade.
BUDAPEST, HUNGARY -DECEMBER 13
Janos Nyerges, Chief, Department of International Organizations,
Ministry of Foreign Trade.
Janos Fekete, Managing Director, Hungarian National Bank.
Odon Kallos president, chamber of commerce.
Dr. Janos M'eszaros, Director, Hungarian National Bank.
Endre Kovacs, commercial counselor, Hungarian Embassy, Wash-
ington, D.C.
A. I. Lengyel, desk officer, U.S. Ministry of Foreign Trade.
PRAGUE, CZECIIOSLOVAISIA-DECEMBER 14-16
Vladimir, Babacek, Deputy Minister of Foreign Trade.
Dr. Frantisek Kriegel, Chairman, Foreign Affairs Committee, Na-
tional Assembly
Dr. Zdenek Trhlik, Chief, Sixth Section, Ministry of Foreign
Affairs.
71
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72 APPENDIX
Richard Dvorak, Minister of Finance, member of the Central Com-
mittee.
Dr. Otakar Pohl, Director, Czechoslovak State Bank.
I )r. Jaroslav Nydrle, deputy general manager, Commercial. Bank.
Dr. Jaromir Balcar, vice president, chamber of commerce.
Dr. Milan Kubat, Director of Engineering, Ministry of Heavy
Engineering.
I)r. Jaroslav Jirasek, Director, Institute of Management.
Josef Keller, Director, Ministry of Foreign Trade.
Otto Kykal, United States-Canadian Affairs, Ministry of Foreign
Trade.
Zdeuek Matousek, deputy general manager, Centrotex.
Egon Busch, editor-in-chief, International Politics.
Frantisek Lebenhart, editor-in-chief, Czechoslovak Life.
Emil Sip, foreign editor, Rude Pravo.
Karel Kynci, foreign editor, Mlada Fronta.
Milan Weiner, foreign news editor, Czech Radio.
Arnost Vrajik, journalist.
Prof. Ota Sik, director, Institute of Economics, Academy of
Sciences.
Josef Karlik, director, Czechoslovak Airlines.
I)r. Josef Stastay, Chiefi Department for Foreign Affairs, Min-
istry of Finance.
Karel Doudera, foreign editor, Rude Pravo.
Milan Bretys, chief, foreign news department, C:TK.
N. D. Komarov, Deputy Minister, Ministry of Foreign Trade.
V. N. Sushkov, Chief of the Main Administration for Import of
:Machinery from Capitalist Countries, Ministry of Foreign 'Trade.
A. N. Aanzhulo, Chief of the Administration for Trade with West-
ern Countries, Ministry of Foreign Trade.
N. V. Zinoviyev, Deputy Chief of the Administration for Trade with
Western Countries, Ministry of Foreign Trade.
V. I. Khazanov, Chief of*the American Section, Ministry of Foreign
'Trade.
V. I. Ivanov, Deputy Chief of the Foreign Exchange Adininistra-
i ion, Ministry of Foreign Trade.
V.. A. Salimovskiy, chairman of Litsenzintorg.
(From ]inaineas Abroad, May 30, 1966, pp. 30-31]
FIAT MAPS A NEw ROUTE IN WORLD BUSINESS
ITALIAN AUTOMAKER'S PACT TO MAKE CARS FOR MOSCOW ACCELERATES EAST-WEST
TRADE ACTIVITY; OTHER FIRMS ALSO LINING UP TO TALK WITH RUSSIANS
MILAN.-FIAT'S $900 million Soviet deal concluded early this month is an
economic landmark for both Italy and the Soviet Union. It also has broad
implications for world business.
Five years in the making, the agreement was signed in Turin by Soviet: auto
industry Minister Alexander M. Tarasov and FIAT's just-retired 82-year-old
President, Vittorio Valletta. It calls for FIAT to build a plant in the Soviet
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APPENDIX
Union capable of turning out 2,000 cars a day-roughly 000,000 a year-a little
less than the 1965 output of the Buick Division of General Motors. It is the
biggest deal ever made between a private company and the Russians.
The car to be manufactured is the new FIAT 124, modified for Russian
weather and roads (less window glass, far tougher suspension, and a 1,400 cc.
engine instead of the standard 1,200 cc.). Most likely sites are Moscow (where
assembly plants already operate), Minsk, Gorki, or Zaporozhe, an island in
the Dnieper.
For FIAT, the deal means building a plant almost two-thirds as big as its
sprawling Mirafiori works at Turin-a complex which accounts for 3,200 of
FIAT's 4,000-car-per-day capacity. And this means business for many com-
panies besides FIAT.
"Construction of a plant two-thirds the size of Mirafiori is a $1 billion job,"
says one Italian banker. "It can't be done for less." And, he addsi significantly,
"FIAT can't do it all."
An Italian industrial engineering consultant familiar with FIAT's production
line agrees. "This deal will mean lots of business for non-Italian firms * * ".
There's an awful lot of non-Italian equipment in FIAT.
"The Orinoco steel mill in Venezuela, also built by Italians, is a good example
of how this works. The prime contractor there was Innocenti, but a good 35
to 45 percent of the job was handled by non-Italian companies-mostly Ameri-
can, but everybody got into the act-and that project was only half the size of
this one."
Soviet consumers gain
For the Soviets it will mean quadrupling annual auto output from 200,000
to 800,000 by 1970 and a giant first step toward a consumer economy. (At the
start of 1965 the U.S.S.R. had only 926,000 passenger cars,oone for every 235
persons, compared to one for every two persons in the United States.) At the
same time, by dealing with FIAT the Soviets avoid the embarrassment of
teaming with a firm from a country that is a traditional enemy (West Germany),
a potential foe (the United States), or a political question mark (France).
A real consumer revolution in the Soviet Union would, of course, have signifi-
cance far beyond the business pages, and it is therefore easy to overstress moves
in that direction. The Soviets' decision to commit nearly $1 billion in foreign
exchange to establish an auto industry does prove, however, that Government
emphasis on the consumer sector is going far beyond mere words. And experi-
ence suggests that the consumer-American, Italian, or Russian-becomes more
eager for goods as his standard of living rises.
Experience in Poland shows that auto owners forgo necessities for the luxury
of a car. A study by the Polish Main Statistical Office shows that car owners
spend 37 percent less on food than carless families of similar income.
The FIAT deal also confirms the Soviet policy of using scarce foreign exchange
to buy manufacturing plants and sophisticated capital goods that cannot be pro-
duced in the U.S.S.R. The consumer revolution will have to, go a long way
before large-scale importation of Western consumer products is likely.
Italy looks East
For Italy, the deal means a big headstart in the race for East Europe's auto,
market and a shot in the aria for the entire Italian economy. It also shows
Italy's growing role as an international financier. Istituto Mobiliare Italiano
and Mediobanca are reported extending $200 to $300 million of the credit, at
terms estimated as long as 7 years. This follows IMI's $74 million contract
awarded to the Italian consortium to construct the giant Rio Montaro darn
project in Peru.
The Italians are making up for lost time in East Europe. FIAT is also ex-
panding its Yugoslav plant, negotiating to build two plants in Rumania, and
is expected to take over a medium-sized assembly plant in Poland.
Last December Montecatini signed a $112 million contract to build six chem-
ical plants in the U.S.S.R. Sant' Andrea of Novara, heading a consortium,
picked up a $25.6 million order to supply the Soviets with a wool textile com-
plex. Pirelli has deals for a $6 million rubber regenerating plant and a $1.3
million latex glove factory. Chatillon (of the Edison Group) put up a rayon
textile mill. Other Italian firms have supplied the Russians with plants to
make everything from hosiery and chocolates to spaghetti.
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Another Italian heavy machinery and machine tool manufacturer busily talk-
ing to the Russians is Innocenti of Milan. One of the first Italian companies
to look East for additional business, it has been a steady supplier of milling and
boring machines and presses of all types to the Soviet Union since 1901. The
most recent shipment included special machines for stretching seamless tubes.
Innocenti's new sales director, Dr. Gianfranco Rodocanachi, who just this
month concluded another round of talks with Soviet economic officials here for
the FIAT deal, smiles mysteriously and says : "We're doing lots of talking * * *
have quite a few things on the fire."
Firms which have not yet tied up deals with the Russians are queuing up
at the door. Olivetti, apart from whatever side benefits it may get from the
Soviet-FIAT deal, has its hands full already. Olivetti signed a technical col-
laboration protocol with the Soviets last December, and is now working to turn
it into something really big-like supplying the electronic data processing sys-
tems for the Soviet Union's new and expanding consumer industries.
If that; deal matures, it would also be a coup for General Electric, a partner
with Olivetti in its EDP activities.
THE ITALIAN AUTOMAKER'S DEAL TO HELP MAKE CARS IN RUSSIA WILL GIVE $320
MILLION BOOST TO ITALIAN INDUSTRY. NOW FRANCE'S RENAULT AND JAPAN'S
TOYOTA MAY FOLLOW ITS LEAD
It was about quitting time for factory workers in Turin, Italy, last Wednesday
when a peppery little Italian industrialist and a rotund Russian bureaucrat de-
cided to sign their contract and do business together. Then, FIAT's honorary
president, Vittorio Valletta, and Soviet Automotive Industry Minister Alex-
ander Tarasov toasted each other with champagne.
Each had reason to grin. With a stroke of his pen, Tarasov thrust the Soviet
Union further into the automotive age than it has ever been. For his part, Val-
letta plunked FIAT right in the middle of the biggest industrial deal the Rus-
sians have ever made with Western companies. It could lead to more of them
in Eastern Europe.
FIAT contracted to help engineer and set up a plant in Russia capable of pro-
ducing 2,000 cars daily, or about 600,000 a year. The cars will be versions of
FIAT 124's, reportedly modified with a larger engine (1,400 to 1,500 cc.), more
rugged frame, less glass area, and better battery shielding as protection against
Russia's primitive motoring conditions and harsh climate.
Impressive
While the secretive Russians didn't want to talk publicly about money, the
deal by any standard is a whopper. Estimates of total cost run as high, as $800
million, although slightly more than half of this may be local expenditures.
Certainly, the Italians came up with attractive financing. Istituto Mobiliare
Italiano, the Italian state financing organization, agreed to finance $320 million
of the deal, 'the part to be spent in Italy. The loan is repayable in 81 years after
delivery of goods at about 61/_., percent interest. About 65 to 75 percent of the
$320 million will be spent to buy machine tools and other equipment from Italian
companies besides FIAT (Tarasov visited the Innocenti machine tool plants and
the headquarters of Pirelli, Italy's biggest tiremaker). Other orders may be
placed with other European and perhaps even some American companies for
supply of additional machinery.
Construction of the plant probably will begin next year, with the first cars
rolling off the line by 1969 and full capacity output probably several years later.
No announcement of the plant's location was given, but Moscow sources men-
tioned as possible sites the Moscow area, Gorki, and Zaporozhe. All three are
currently centers of vehicle production ; Zaporozhe, in the Ukraine, also has a
steel mill. An estimated 2,000 Italian technicians will be sent to Russia to
oversee engineering and construction of the plant.
Now outlook
The FIAT deal reflects a changed Soviet attitude toward the passenger car in
recent years. Both Stalin and Khrushchev were against private passenger cars
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on principle on the grounds that they tended to promote a private enterprise
mentality and that they wasted resources. Premier Alexei Kosygin, however,
has said it is wasteful for Soviet officials to ride around in trucks and commercial
vehicles. In any case, he ordered Soviet passenger car production increased
from about 200,000 a year currently to about 800,000 by 1970. Some of the new
cars will become taxis and a few will go to private use, but there is no indication
yet that the Kremlin will devote sizable resources to mass construction of roads,
service stations, and repair facilities typical of motorized societies in the W'1'est.
Since the FIAT plant won't go into quick production, it is expected that
the Russians also will expand existing plants-and possibly contract to buy
others in the West to reach an output of 800,000 cars by 1970. They have been
dickering with France's Renault for a plant with the approximate capacity of
the FIAT plant; a Renault mission is to leave Paris for Moscow later this month.
Japan's Toyota Motor Co. has had preliminary talks with the Russians on a
plant capable of producing 300,000 to 400,000 units a year, and the company is
drawing up plans, to submit to the Russians this summer. Renault may at least
get some of the equipment for the FIAT plant.
The origin
FIAT clinched the Soviet deal after 4 years of trying. In 1962, Valletta flew
to Moscow to open a large FIAT exhibit at an Italian trade exhibit there.
Valletta met Khrushchev, and the two talked about possibilities for plants to
manufacture cars, tractors, or both.
Subsequently, Valletta hosted delegations of Soviet technicians visiting FIAT
factories in Turin. Last July, Valletta and Khrushchev's successors signed a
protocol for the joint study of scientific and technical problems. While the lan-
guage was. obscure, it was widely believed that FIAT and the Russians were
working on a deal for building plants to make autos and tractors.
Nothing more was said about the deal until mid-April when Tarasov went to
Italy at the head of a big technical delegation. Almost immediately, Italian
sources hinted the deal was close to completion and that the Russians were
mainly concerned about technical aspects of the car model and financing.
FIAT. according to Italian sources, offered the Russians the 124 model, a new
five-passenger four-door sedan with an engine in the 1,200 cc. range.
But the Russians wanted a bigger engine. They also didn't like the large
expanse of glass, possibly because it would be harder to, seal out the Russian
cold, and in general they wanted the car to be more rugged. They eventually
got what they wanted. Says an Italian auto executive : "The result will only
be a second cousin to the 124 model that we know."
Built on experience
FIAT has had considerable success dealing with Communists. Its smallest
car is made under license in Yugoslavia, and it has had other experience selling
in Eastern Europe. But there may have been other factors in FIAT's success :
Italians buy about 20 percent of Russian oil exports annually, and they are
known to have been talking with Moscow for some time about the possibility
of importing natural gas from the Ukraine. In any case, the Russians are in a
good position in service credits because of their mounting trade surplus with
Italy (nearly $100 million last year).
The deal stirred a flurry of interest in the United States, although none of the
big three auto companies-General Motors, Ford, or Chrysler-showed any
immediate desire to inquire about the possibilities for following in FIAT's tracks.
For one thing, present U.S. policy is to limit credits to Eastern European Commu-
nist countries to 5 years. U.S. trade with Russia is too small to make a FIAT-
sized business deal plausible now. Beyond this, the Russians have made no
bones of their reluctance to improve relations with the United Sfates in any
field as long as the Vietnam war goes an. For the same reason, U.S. companies
would be wary of making deals with the Soviet Union which could be used
against them by their competitors.
Still, U.S. participation in the Soviet automotive industry has a precedent;
in the 1920's, Ford sold thousands of trucks and tractors to Russia and later
cooperated with the Russians in setting up a large automotive factory at Gorki
as well as ? a smaller assembly plant in Moscow. Many Ford engineers visited
the Soviet Union and Russians visited Dearborn, Mich., in those days.
74-194-67- G
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APPENDIX
NOT MANY PEOPLE WANT To TALK ABOUT IT, RUT THE FACT IS THAT U.S. INDUSTRY
HAS A MAJOR ROLE IN TIIE SOVIET UNION'S PLANS FOR A VAST NEW AUTOMOBILE
INDUSTRY
This is the story behind the story that appeared in the New York Times of
May .i.
It's true, as the Times and other newspapers reported, that Italy's FIAT auto-
mobile company has made a deal with Alexander M. Tarasov, the Soviet Minister
for Automotive Production, to help the Soviet Union build a modern automobile
plant with a capacity of about 600,000 small- and medium-sized cars a year.
What they didn't report was that FIAT will be serving as a middleman for
the U.S. machine tool industry.
Three-quarters of the machinery that FIAT installs for the Russians will come
from the United States, either directly or indirectly through European sub-
sidiaries and licensees of American firms. It will really be the United States
that puts the Russians on wheels.
Until now, the U.S. Government has refused to permit the export of U.S.
Machine tool technology to Iron Curtain countries on the grounds that it would
help them build up their armed forces. However, this arrangement has the
approval of both the State Department and the Department of Commerce. Prof.
Vittorio Valletta, FIAT's 83-year-old former chairman and managing director,
cleared the political roadblocks in advance in conferences with Secretary of
State Dean Rusk and Secretary of Commerce John T. Connor in Washington
early this year. The Office of Export Control stands ready to issue export
licenses to U.S. machine tool manufacturers who participate in the deal. About
30 are expected to eventually.
Millions involved
The bait is tempting: big money-really big money. The plant is expected
to cost $hS7 million. Of this, FIAT'S share will be $322 million. How much of
the $322 million the American manufacturers get cannot. yet be estimated. It
will depend on how much of the machinery FIAT buys directly from the United
States and how much it buys indirectly. The only certainty is that it will run
to a substantial amount.
Some U.S. machine tool makers already have agreed to supply FIAT with
machinery for Russia. Among them is Cleveland's TRW, Inc., which makes
steering linkages and sodium-cooled valves. Says John Corson, TRW'i"s sales
director for international automotive equipment.: "We're supplying them with
steering linkages' but. I'm not sure about the sodium valves." Corson cleared
TRW's participation in the deal with State and Commerce "even before we
talked with FIAT." He says TRW's motive in supplying equipment for the Soviet
plant is not so much the money it will make but fear that, unless it (lid go into
the deal, it might lose FIAT'S future business.
Another U.S. company already participating in the deal is U.S. Industries. Inc.
Its Clearing Division automated stamping machine presses are sold around the
world under license by such companies as Innocenti of Italy and Vickers-
Aen)strong of England. Says Chairman Clarence J. Plisky : "We'll be supplying
the major portion of the presses for the Soviet plant, but it's not clear yet -whether
it will be through Innocenti or some other licensee of ours in Europe."
Gleason Works, of Rochester. N.Y., will supply gear cutting and heat treating
equipment for the plant through FIAT. "This is just a pure business deal as far
as we're concerned." says Irving W. Peachey, vice president in charge of sales.
"It's just a straightforward business deal, that's all. We have competitors over-
seas. If we don't supply the Russians, they will."
New Britain Machine Co. will contribute automatic lathes. Says Chairman
Julian C. Pease: "Most of the automotive machine tools, not only at FIAT but
throughout Europe, are from this country either directly or indirectly through
European subsidiaries. FIAT is heavily U.S. tooled because U.S. equipment is
just more productive. Now the U.S.S.R. wants American machine tool tech-
nology, too."
Says J. C. Danly, president of Chicago'.- Danly Machine Specialties, Inc., the
Nation's largest manufacturer of automotive presses : "We haven't yet been ap-
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proached by FIAT to supply presses for the U.S.S.R. facility, but we sure would-
as long as the Office of Export Control said it was Oh," Ile added : "As far as
presses are concerned, regardless of where they might actually be manufactured,
I'm sure that at least 75 percent would have originated in this country. We have
the technology."
Dissenting opinions
Not all U.S. machine toolmakers are this eager to get into the deal. Says
John F. Ilerkenhoff, president and chairman of Minster Machine Co., of Minster,
Ohio : "There's just too much intrigue in this deal for us. It's for the big boys
inthis business that have been after the [Soviet] market for years."
Russell A. Redden, president and general manager of Sheffield Corp., which
manufactures automotive gaging equipment, thinks that business is business and
the subterfuge sheer stupidity. "I think we should be in this FIAT deal directly,"
he says. "If not, then it's just a case of letting our European subsidiaries have
the business, using our technology. In other words, we'll let them pick our
brains and then sell to the Russians, agreeing to settle for less for our technology.
That's ridiculous."
State and Commerce Department officials have kept the U.S. role in the FIAT
deal as hush-hush as possible. They were shocked when they heard Forbes had
learned of Valletta's conversations with Rusk and Connor. They are frankly
scared that, as the real story of the deal emerges, a clamor will arise to prevent
U.S. firms from participating. The Department of Defense still could block the
export of machine tools by declaring it against the national interest.
The Russians, in contrast, are quite talkative. Serge! A. Shevchenko, chief
commercial counselor of the Soviet Embassy in Washington, frankly told Forbes
that his Government was perfectly aware of the fact that a great percentage of
the machine tools would come "from sources other than FIAT."
State's rationale
In off-the-record conversations, State Department officials defend the decision
to let the Soviet Union get the machine tools by saying that it will help make
the Russians more consumer goods minded. They reason in this fashion :
In years past, the Soviet Union has been able to devote an extraordinary
amount of its gross national product to defense production by keeping consumer
production to a minimum. Steel that might have gone into autos, for example,
went into tanks and guns. The Soviets have been turning out a mere 201,000
cars a year at two antiquated plants in Moscow and Gorki. Only one Russian in
every 250 owns a car. The figure in the United States 'is nearly one in every two.
By not producing automobiles, the Government has been able to cut down on
many other expenditures, diverting the money to defense. There are less miles
of paved highway in the Soviet Union than in California and Illinois. Along one
1,000-mile stretch of road, there are only six motels. In Moscow, a city of nearly
7 million people, there are only eight garages. While the armed forces burn up
gasoline, a Russian citizen has to stand in line at his city hall for a coupon book.
The State Department officials believe the Soviet Union is due for an "auto-
indbile explosion." It's clear the Kremlin in. a sharp reversal of policy, now
wants its citizens to have cars, they say. Not only has it made the deal with
FIAT, it also has asked Renault to help itexpand and modernize the Moscow
plant. By 1970, that plant will be turning out 000,000 cars a year, too. And
there is reason to believe the Russians want the Ford Motor Co. to expand 'the
Gorki plant, which was built by Ford in the thirties President Arjay R. Miller
recently visited the Soviet Union. The company denies that he talked business
there, but a Soviet source told Forbes that he spent a good deal of time with the
Soviet Minister of Foreign Trade.
As the Soviet newspaper Izvestia editorialized recently, "The desire of the
people for automobiles is as irresistible as technical progress." So the people
are going to get them.
A State Department official said : "The psychological and economic impact. of
the decision to mass produce automobiles is hard to overestimate. Look at what
has happened in this country."
More to conic?
The psychological and economic impact of the U.S. Government's decision to
permit the export of machine tools to Russia is also hard to overestimate, for
it could set a precedent that would throw wide open the gates to East-West trade.
If U.S. machine tool manufacturers can export to Russia through FIAT, why
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couldn't General Electric, for example, do the same with its computer technology,
using Olivetti as its middleman? Olivetti has a joint-venture agreement with
GE for European computer sales.
Commented one machine tool manufacturer : "Throw the gates wide open?
Hell, this might tear them off their hinges." A bad trend? Perhaps. But will
the United States really gain by refusing to deal with the Russians in something
that they are going to accomplish even without us?
[From Economic Survey ofEurope 1985, Economic Commission for Europe (U.N.), Geneva,
Switzerland, Oct. 10, 1966, pp. 56-701
Actual or contemplated changes in the systems of economic planning and man-
agement continued to preoccupy governments in 1905. This move toward eco-
nomic reform, which had originated in Poland and Hungary in 1956 and 1957,
has since spread to all countries of the region with the exception of Rumania
and Albania, and, more recently was adopted in a particularly far-reaching
fashion in highly industrialized and foreign trade dependent Czechoslovakia and
Eastern Germany. The general nature of the changes tends to be similar, irre-
speetive of levels of development and economic size, but the detailed measures
adopted in particular fields vary considerably from one country to another. The
first part of this section lists the major developments of 1965 and discusses the
general features of the reform,' while the second part reviews the changes
carried out or contemplated in individual instances.
General features
Following the prolonged discussion and series of experiments reported in last
year's Survey, the adoption of an outline for a reform of the planning and man-
agement system was announced in the Soviet Union. This outline was sub-
mitted by Mr. Kosygin, as part of a general report, to the plenary session of the
Central Committee held at the end of September. In Bulgaria, where some
experiments had been conducted with almost no publicity, the basic principles of
a new economic system were prepared by the political bureau of the party and
published on December 4.
In countries where the broad principles for economic reforms had been pre-
viously adopted or where, as in Poland and Hungary, the original system had been
experiencing gradual modification for some time, new moves were also witnessed.
The broad outlines of the Czechoslovak reform adopted in January 1965 were
formulated in greater detail, and the proposed changes which could be imple-
mented at an. early stage were introduced. In Poland, a 5-year program for
improving the system of planning and management was adopted and published
by the Central Committee of the party, indicating that it is the Government's
intention to deal with the relevant problems in a more systematic way. A brief
review of the present Hungarian system and a rather general outline of the
changes envisaged was submitted to a session of the Central Committee by Air.
Nyers (Secretary of the Central Committee) in November. Progress was also
reported in the implementation of the new economic system in Eastern Germany.
With the announcement of the economic reforms undertaken by the Soviet
Union and Bulgaria, and with more information available about the measures
taken or to be taken in other Eastern European countries, the common logic
and features of these various attempts to improve methods of planning and
management systems are emerging with greater clarity. Each of these govern-
ments seems to be genuinely concerned to formulate and adhere to those prin-
ciples which are born out of its own experience and adapted to the prevailing
internal conditions. Nevertheless, their common basic objectives combined
with more or less the same points of departure-in the form of the old systems-
lend considerable similarity to the basic issues and the main lines of action.
Broadly speaking, all the governments aim at establishing a more appropriate
balance between centralized and decentralized decisions in order to give greater
i See Economic Survey of Europe in 1964. ch. I, sec. 7, for developments in the preceding
year, and "Economic Planning in Europe," Economic Survey of Europe in 1962, pt. 2,
especially ch. VI. for an analysis of the evolution of the systems of planning and manage-
ment and the early moves toward economic reform.
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scope to the initiative and responsibility of enterprises whilst preserving those
central controls-that increasingly take the form of indirect policy measures-
that are deemed necessary for the guidance of the economy. By implication,
the scope of central planning is to be reduced, but improved planning techniques,
a better coordination of planning at all levels (frequently requiring greater use
of econometric methods), the concentration of industrial units and a more
efficient administrative framework should all help to raise the effectiveness of
central planning.
In order to attain these objectives, a list of measures or proposed modes of
action to be undertaken at various levels of the economy has been formulated
in each country. Some of these are rather specific and apply only to certain
countries, but the principal measures, constituting the general framework of the
reforms, are virtually the same in all countries. An attempt to generalize about
the type of action which has been undertaken leads to the following list :
(i) Broad directives seeking to improve central planning techniques, re-
quiring, in particular, greater reliance on the medium- and long-term plans
which are regarded as devices for achieving greater stability in the con-
ditions under which enterprises operate.
(ii) Changes and reductions in the centrally planned targets, that are
mandatory for the enterprise, together with greater emphasis on gross in-
come (i.e., net' value added), profit and rate of profitability, as criteria
for judging the enterprise's success.
(iii) The expansion of decentralized investment funds available to enter-
prises and the larger economic units, and a greater use of bank credits.
(iv) The introduction of a capital charge on the fixed assets of enterprises,
which will play an increasingly important role in transferring a proportion
of profits. to the budget.
(v) A strengthening of economic incentives (amounting in some cases
to changes in the wage system) by establishing closer ties between the re-
muneration of employees and the enterprise's performance.
(vi) The promotion of direct contracts between economic units which, in
contrast with the old system, are no longer conceived simply as instruments
for the implementation of national plans, but rather as a means of guiding
the plan itself.
(vii) Price reforms, which include changes in the determination of prices
and in the price structure.
(viii) The concentration of industrial enterprises into larger units (some-
times accounting for a whole branch of Industry), with administrative
responsibilities but being called upon to operate to a greater extent as
economically accountable organizations.
(ix) The streamlining of the administrative apparatus responsible for
the management of industry, and/or various administrative changes having
more specific objectives.
In addition to these common types of action, there is also a great degree of
uniformity in the general approach to economic reform and its implementation.
As reported in the Survey for 19t4, discussions and experiments of varying
depth and scope preceded the formulation and adoption of the principles of the
reforms almost everywhere ; and in all the countries in question, the process of
elaborating and implementing the principles adopted is to proceed by stages that
are phased over a period of years, partly reflecting the time that is required to
carry out the necessary price reforms.
Within this common framework, the actual solutions adopted in. Individual
countries differ significantly. The choice and number of the centrally fixed tar-
gets are nowhere the same. There will be significant differences in the relative
shares of the decentralized investment funds, and probably also, at least at the
outset, in the actual freedom with which enterprises can dispose of these funds.
The principles on which the concentration of industrial establishments is based
are far from uniform in all the countries ; nor will the role assigned to the new
composite economic units be the sane. Approaches to wage and price policies
differ between countries, but there are certain important common features.
These two fields are particularly relevant to the main objectives of the reforms
and, at the same time, give rise to a number of complicated problems of a more
general nature.
Differences between countries are more apparent in the case of wage policies
than in that of price policies, since there seems to be a certain hesitancy on the
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80 APPENDIX
part of the authorities in most countries to tackle the price problem in a more
definitive way.2 The latter may reflect not only reluctance to depart radically
from systems employed in the past but also fears that, in certain circumstances,
enterprises (and the associations) may tend to take advantage of monopolistic
and oligopolistic conditions, should prices be left to any significant degree to the
free play of market forces. However, it is interesting to note that those coun-
tries which are prepared to abandon the central control of wages also intend
to grant enterprises a certain degree of freedom in the determination of prices.
In all the countries reviewed in the present section, workers and employees
will continue to be paid within the main accounting period according to the
basic wage and salary scales established centrally. However, the total amount
paid (i.e., the basic wage fund) may or may not be subject to direct central
control. Where Such control is retained, profit (or the rate of profitability)
tends to be considered as a. most important criterion of enterprise performance.
This criterion is replaced by "gross income" (profits plus basic wages) in coun-
tries where direct central control has been abandoned, though profits may also be
used as an indicator. In both cases, basic wages will be supplemented by pay-
ments of premiums and bonuses at the end of the relevant accounting period in
accordance with the economic results achieved by the enterprises. The absence
of any central control of the basic wage fund tends to increase the freedom of
enterprises in resl'x'et of decisions about both current production and investment.
However, the authorities are also concerned with maintaining a balance between
consumers' income and supplies. Such considerations were responsible for the
Soviet authorities' decision to retain the basic wage fund as a mandatory indi-
cator and to establish conditions for the payment of bonuses and premiums out of
realized profit. On the other hand, in Czechoslovakia where such control has
been surrendered, the growth of wage payments will be kept in check by fiscal
measures.
The mature of the price reforms reflects both the greater emphasis being
placed on gross income and/or profit criteria and the disparities which exist
between the relative price and cost structures. All countries seem to adhere to
the principle that prices should correspond to "the cost of socially necessary
labor" but there are no generally accepted views about how prices should be
constructed. Other questions that are the subject of discussion and which
give rise to different solutions are the degree of stability which is appropriate
for individual prices and the respective merits of centralized and decentralized
price fixing. All governments seem to favor stable and centrally determined
prices for the most important commodities such as basic raw materials and
foodstuffs, but some countries intend to introduce a system by which certain prices
may be fixed by enterprises within certain limits established by the authorities
whilst others are left entirely free. Other countries favor central price fixing,
subject only to minor exceptions (e.g., in the case of outdated products), but
this does not necessarily exclude a certain flexibility for adjusting prices to
market conditions. In any case, the establishment of direct links between enter-
prises and, in particular, between producing and trading enterprises should pro-
mote a more efficient adjustment of supply to demand.
The extent to which profits or gross income can be meaningfully employed
as important indicators of enterprise performance and as a base for rewards
depends not only on the price system in operation but also on the circumstances
of individual enterprises. Assuming similar prices for similar products, it
cannot be expected that an enterprise, operating with obsolete capital;' and
enjoying only limited "external economies." can perform as well in terms of
profit or gross income as a modern enterprise engaged in the same type of
production and working under favorable external conditions. In some countries,
attempts are being made to solve these problems. by establishing a system under
which producers receive different prices as determined by the associations con-
cerned. Of course, the associations may also take action to eliminate the need
for such price differentials by the appropriate use of their investment funds and
other measures.
An intercountry comparison based on the official doclnuents at present avail-
able gives the impression that the economic reform in Czechoslovakia represents
2 This summary of wage and price policies does not refer to a number of Important details
which are examined below in the individual country sections.
0' It is very unlikely that the capital charge could entirely offset the "objective differences
in conditions of production" that exist between enterprises.
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APPENDIX
more radical departures from the old system than is the case in other countries
of the area, especially the Soviet Union where the scope for decentralized deci-
sions may well continue to lie within fairly narrow limits. However, a hasty
conclusion at such an early stage could quite easily be misleading. Despite all
the care with which the economic reforms have been formulated and the
experience acquired in the course of various experimental schemes, such large-
scale departures from a long-established system are bound to give rise to
unexpected problems and difficulties. It would be unrealistic to expect that the
changes will proceed smoothly according to predetermined schedules, and it is
almost certain that certain decisions will eventually need to be reconsidered in
the light of later experience, even if the general direction of the changes remains
undisturbed. The attitudes adopted by the domestic bureaucracy may also have
an impact on the implementation of the reforms, particularly so, since some
individuals or groups are not unlikely to have vested interests in the old
system. The behavior and the general attitude of the managerial staff will need
to adapt itself to the new conditions. Some of the managers reared under the
old system may find themselves unable or even unwilling to assume the re-
sponsibilities which the new system will require, and they will have to be
replaced by newly trained !cadres. But at the same time it is questionable
whether, at least in some countries, the rules of the new system will provide
sufficient latitude for all the decisions which managements may deem necessary
in order to allow the enterprise to meet its greater obligations successfully.
The balance envisaged between centralized and decentralized decisions may
sometimes prove inappropriate, and further- shifts may be required in order
to allow the management to assume full responsibility for conducting the
necessary business activities.
In these circumstances, it will not be surprising if, in the course of implement-
ing the reforms, a country where the process had started earlier and/or with
greater intensity happened to be overtaken by other countries which in the
beginning had tended to lag. In this context, it should be noted that the extent
of the changes contemplated by the various countries is not necessarily the
same in each of the fields covered by the reforms. A country where the general
attitude toward change may appear to be relatively conservative can neverthe-
less produce more radical solutions in certain specific fields. The changes
provided for in the outline of the Bulgarian reform. for instance, may on the
whole appear rather modest, but the abolition of direct control of the wage
fund may well have important implications. The outline of the Soviet reform
also contains provisions which, if consistently applied, may set in motion
dynamic forces that lead to additional changes. In particular, the development
of horizontal ties between economic units-strongly emphasized in Mr. Kosygin's
report-has potential implications for a simplification of the system of planning
and management envisaged for the fu?ture. A wide network of relations between
enterprises established on the basis of contracts will probably gradually render
some of the central controls maintained by the present reform superfluous while,
on the other hand, a smooth functioning of a system of horizontal ties, based on
the principles of profitability and accountability, may itself require that a new
line be drawn between centralized and decentralized decisions.
The, Soviet Union
According to the report' presented by Mr. Kosygin and approved by the Central
Committee, the economic reform aims at improving the scientific efficiency of
state planning procedures, increasing the independence and initiative of the
enterprise, and strengthening economic incentives by means of changes, in prices,
bonuses, premiums, credits, etc. These objectives, which were emphasized in the
report, were formulated with a view to remedying certain shortcomings of the
planning procedure which had become apparent in the past. These shortcomings
had led to the disturbance of the prescribed structural balance between the
various branches of the economy and, in particular, to a lagging of output in
the agriculture and consumers' goods industries, which inevitably had adversely
affected the growth of the population's real income and material incentives.
Output per ruble of fixed assets had also tended to decline, largely owing to
delays in new investments reaching full capacity production. In present condi-
tions, characterized by rapid technological development, slow rates of construe-
tion can often make new equipment obsolete even before it is used. In order to
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82 APPENDIX
avoid such problems, the planners have been requested to improve the scientific
efficiency of planning procedures by paying particular attention to the following
points :
(1) The rates of growth of production and of national income together
with the basic proportions provided for in the national economic plans should
insure the best and most effective use of available resources ;
(ii) Planning should provide for the latest achievements of science and
technology to be rapidly assimilated into industrial processes ;
(iii) The plans should pay due attention to the prospects for scientific
and technical progress ;
(iv) The role of the long-range plans should be emphasized more; and
(v) A system of scientifically substantiated planning normatives should
be formulated.
The improvements in planning methods are to be accompanied by measures
which seek to enlarge the rights of the enterprise ; develop the initiative of, and
iincentives for, management and working collective ; and to reinforce the
principle of accountability both within and between individual economic units.
Proposals concerning changes in the status of the enterprise, in fact, con-
stitute the hard core of the reform. However, in order to present a true picture
of the new system, certain proposed changes in the administrative machinery
concerned with industrial planning and management must receive due attention.
As indicated in the introduction to this section, such changes are also
envisaged in other countries, but in the case of the Soviet Union the relevant
measures seek to reaffirm the branch principle for guiding industry, as well as
to strengthen the discipline of vertical planning in a situation in which more
independent decisions at the enterprise level and direct ties among economically
accountable units are expected to become more important features.
The first group of measures directly affecting the position of the enterprise
consists mainly of changes in the system of the centrally planned indicators that
regulate the enterprise's activity. In place of the large number of previous indi-
cators which had varied between enterprises, henceforth the management of the
enterprise will be required to observe only eight mandatory targets, the others
being left to its own decisions. The eight centrally determined indicators are :
(1) The volume of sales of output ;
(ii) Production assignments (in physical terms) for the most important
products ;
(iii) The wage fund ;
(iv) Profits and the rate of profitability ;
(v) Payments into, and appropriations from, the budget ;
(vi) The volume of centralized investment and the operation of productive
capacity and fixed assets ;
(vii) The basic assignments for the application of new techniques ; and
(viii) Indicators relating to material and technical supplies.
A significant step toward the enjoyment by the enterprise of greater autonomy
has been made by replacing a number of centrally fixed targets pertaining to
labor by a single one. Under the old system, the enterprise was required to
observe four mandatory targets, relating to the wage fund, the average
wage, the number of employees, and labor productivity ; in the future, only the
size of the wage fund will be determined outside the enterprise. Mr. Kosygin
stated that the possibility of abandoning even the centrally planned wage fund
has been seriously contemplated, but it was decided that with present condi-
tions, which still require that money incomes of the population be carefully
balanced against the quantity of consumers' goods available, such a step would
be premature. The question will be reexamined in the future and, when condi-
tions are suitable, the centrally planned wage fund will be abandoned first in the
consumers' goods industries.
The report presented by Mr. Kosygin is also quite explicit in the case of
production assignments. In future, this indicator will be restricted to the
":most important nomenclature" of goods and the number of goods covered will
be gradually reduced until, finally, production targets will be expressed in terms
of groups of products, not individual goods.
The volume of sales of output is a new indicator which has replaced global out-
put-the main performance indicator under the old system. Prior to the reform,
with emphasis placed on production rather than on sales, the plan could be ful-
filled almost irrespective of the quality of output and the pattern of demand.
In future, enterprises will have to pay more attention to their customers' re-
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quirements. This development will be reinforced by the forging of direct ties
between productive and trading enterprises!
The shift in emphasis from production to sales suggests that, in general, enter-
prises will have greater independence than hitherto in deciding the volume, as-
sortment, and quality of their output. However, the freedom of the manage-
ment in this respect will continue to be limited by central control of the wage
fund, by central allocation of certain types of equipment and material and, to
some extent at least, by central supervision of the distribution of other supplies
which, as will be shown later, is to be the responsibility of a new institution.
On the other hand, a greater reliance on direct ties between enterprises, taken
in conjunction with rising production, is likely to offer scope for a gradual re-
duction in the extent of central planning and central control of supplies, par-
ticularly in the case of consumers' goods industries. The need to evolve a net-
work of, relationships between economic units, based on the material responsi-
bility for the fulfillment of contractual commitments, was stressed more than once
in the report, and reiterated by Professor Liberman in a more recent article,
where he defined the direct ties between enterprises as "the horizontal com-
plement of vertical, central planning." 8 Account should also be taken of the
experimental scheme of 1964 and 1965 which appears to have produced highly
satisfactory results. As reported in the Survey for 1964,7 this scheme is based
on contracts drawn up between producers and trading organizations, which en-
ables the latter to order goods of a. specified quality and variety whilst giving
the directors of the producing enterprises some latitude in formulating their
plans for dealing with the volume of output and the use of production factors. It
has not yet been announced in the central press whether or not further elabora-
tion of this scheme is being contemplated, but it may be assumed that the experi-
ence gained to date will influence the pattern and nature of future relationships
between enterprises.
The second set of measures affecting the enterprise is concerned mainly with
changes in the investment system. The need to strengthen the principles
of the accountability and responsibility of management and to reinforce their
interest in making better use of the enterprise's productive assets requires that
the enterprise should rely more on its own decisions and means in this particular
field. The reform provides for the creation within each enterprise of a develop-
ment fund to be used by the management for investment purposes. The fund
will be financed by allocations from the profits made by the enterprise and it will
also absorb the funds set aside for the replacement of fixed assets, which previ-
ously could only be used with the approval of the central authorities! Second,
the system of centralized investment based on grants from the state budget is to
be gradually converted into a system of long-term credits, and the grants for
additional working capital will also be replaced by credits;? A capital charge
on both the fixed and working capital of the enterprise is to be introduced. The
norms for this charge, which will probably be differentiated by industrial
branches (though not stated explicity in the report),, are to be established for
periods of several years in such a way that the "normally" operating enterprise,
after the payment of the charge, will possess sufficient resources for building
up its various funds and meeting planned expenditure. In the long run, the new
capital charge is to become important as a means of channeling the enterprise's
contribution to the budget, whilst other payments-for example, the turnover
tax-will be gradually reduced.
The third group of measures aims at strengthening those material incentives
which heighten the interest of the workers in the enterprise's results and forge
a closer link between the size of their earnings and profits. Part of the profit
of the enterprise will be used to create a material incentive fund, divorced en-
5 However, the effects of the new indicator on the quality of output may vary greatly
according to the market situation. Where there is a buoyant sellers' market, quality im-
provements, at least in the case of certain specific products, may not be very significant.
9 Pravda, Nov. 21, 1965.
7Ch. I 55-56.
B The p. of the resources for net investment at the disposal of enterprises under the
new system should not, however, be overestimated. According to Mr. Kosygin, outlays
from the enterprises' fund's in 1964 for the introduction of new technology and develop-
ment amounted to 120 million rubles which, together with bank credits, gave a total of
720 million rubles. Under the new system, development funds are expected to amount to
some 4 billion in 1967 but out of this 2.7 billion represent depreciation charges.
The new system of long-term credits will first be applied to investment in enterprises
already in operation. In the case of entirely new projects this system will be introduced
if the repayment period is expected to be relatively short,
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APPENDIX
tirely from the wage fund. The amounts to be paid for high work performance,"
in the form of bonuses in the course of, and/or rewards at the end of the year,
will be determined by the enterprise, whereas increases in basic wage and salary
rates will continue to be regulated centrally. In order to discourage the long-
standing device, by which enterprises deliberately sought to obtain relatively
modest targets, the incentives paid for overshooting the profit target will be
lower than those for fulfilling the plan. Allocations to the incentive fund are
to be based on norms which will be stable for several years and differentiated by
branches. Their size should be proportionate to the volume of sales or to the
profit and profitability levels stipulated in the plans. A fund for social and
cultural purposes (housing, rest homes and sanatoriums, etc.) is also to be estab-
I islced in each enterprise.
The importance of improving the price system was also emphasized in Mr.
Itosygin's statement, though it seems fairly clear that this particularly thorny
problem will continue to be handled with the utmost caution. While some of
the participants in the discussions which preceded the reform (in particular, the
late Academician Neiuchinov) advocated a more flexible system of price fixing,
roughly similar to the Czechoslovak reform, it seems unlikely that any departures
from the traditional system of centrally fixed prices are being contemplated at
this stage. A state committee for prices has been set up, and its basic proposals
are to be drafted by the beginning of 1966, whilst the introduction of new prices
is to be spread over the next 2 years. Mr. Kosygin's few general observations
on prices do tend to suggest, however, that, contrary to previous practice, prices
will assume a more active role in reinforcing the accountability and developing
the initiative of enterprises. Prices, it is stated in the report, must reflect expen-
diture on the socially necessary labor, and must cover the cost of production
and distribution so as to insure adequate profits for normally operating enter-
prises. Moreover, they should be such that they stimulate enterprises to improve
the quality of their output and to develop new products. This seems to suggest
that, when fixing the prices of new or improved products, development expendi-
ture as well as the additional benefits derived by the consumers will be taken
irito account, though the appearance of new high-quality goods may, in fact, also
create conditions which are conducive to it decrease in the prices of "old"
products. New administrative measures will also include the state certification
of the quality of products.
In the case of the reorganization of the state machinery for regulating indus-
trial planning and management, the report reaffirms that the branch principle
provides the most suitable method for achieving unity of guidance in production,
technological changes, and economic and scientific research. The economic coun-
cils established in 1957 had the effect of dispersing the branches between the
numerous regional units. They are, therefore, to be abolished and it number of
industrial ministries. vested with all the powers necessary for guiding industrial
branches and responsible for their development, are to be created.' These min-
istries, to be manned by a small number of highly competent people (in order
to avoid an undue increase in the size of the administration), will undertake
the nece