GORBACHEV'S RADICAL ECONOMIC REFORM PACKAGE: AN INITIAL EVALUATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000300900001-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 25
• Document Creation Date: December 22, 2016
• Document Release Date: March 7, 2012
• Sequence Number: 1
• Publication Date: December 1, 1987
• Content Type: REPORT

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Directorate
Intelligence
An Initial Evaluation
Gorbachev's "Radical"
Economic Reform Packa e:
SOV 87-10081
December 1987
224
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Directorate of Confidential
Intelligence
An Initial Evaluation
Gorbachev's "Radical"
Economic Reform Package:
Analysis.
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sovs7-loose
December 1987
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Gorbachev's "Radical"
Economic Reform Package:
An Initial Evaluation
Scope Note This paper provides a detailed description and initial evaluation of General
Secretary Mikhail Gorbachev's program of economic reform as it is laid
out in several major decrees adopted in 1985 and 1986 and in the
documents approved at the Central Committee plenum in June 1987. The
paper does not deal with the experimental reforms carried out during the
period 1985-87 or the continuing debates over reform provisions. The paper
also does not address the political consequences of the June plenum or the
political aspects of the economic reforms per se.
Confidential
SOV 87-10081
December 1987
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Gorbachev's "Radical"
Economic Reform Package:
An Initial Evaluation
technological level of the capital stock and the quality of products.
Key Judgments Following a period of debate and experimentation, the Soviet Government
Irdormation available in late June 1987 adopted a set of documents mandating the most
as of 13 November 1987 comprehensive reform of economic management since the introduction of
was used in this report.
Stalinist central planning in the late 1920s. The key documents are the
Basic Provisions for Fundamentally Reorganizing Economic Management,
the Law on the State Enterprise, and 11 decrees dealing with major aspects
of the reform. Supplemented by several decrees adopted in 1985 and 1986,
this package provides the present operational blueprint for Gorbachev's
"radical" economic reform and the timetable for carrying it out. Through
these reforms and a spate of policy measures already adopted, the
leadership hopes to achieve a sharp acceleration in economic growth, a
major breakthrough in productivity, and a drastic improvement in the
The major provisions of the reform package are the following:
? Reduction in the directive role of central plans, reducing details and
changing forms.
? Redefinition of functions of the central bureaucracies and ministries,
reorganizing them and cutting their staffs, but also creating new
superministries to manage various economic complexes and large, state
production associations to manage groups of enterprises.
? Extension of the authority of republic and local governments, especially
in matters concerning consumer welfare.
? Considerable expansion of the autonomy of enterprises, which now will
be required to formulate their own five-year and annual plans on the
basis of state-set parameters and to finance their activities from their
own revenues. Provision also is made for election of enterprise managers
and establishment of enterprise labor councils.
? A gradual conversion of much of the present system of rationing raw
materials and capital goods to a reliance on wholesale trade.
? Revision of centrally set prices to raise their level and to link wholesale,
procurement, and retail prices for all important products; considerable
expansion in the use of contract prices negotiated between enterprises.
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? A complete overhaul of wage and salary scales and work norms intended
to link each worker's pay to his productivity.
? Delegation of limited authority to ministries and enterprises to engage
directly in foreign trade and to undertake joint ventures with firms
abroad.
? Expansion of the scope accorded to economic activity by private individ-
uals and producers' cooperatives.
? Management of agriculture and related industries through a new super-
ministry, with farms directed to operate under essentially the same rules
as industrial enterprises and to organize production on the basis of
contract teams.
The schedule for implementing the reform package calls for it to be almost
fully in place by the beginning of 1991, the first year of the 13th Five-Year
Plan. Parts of it are already in effect. Seven superministries were
established and some ministries abolished, created, and combined during
1985-87, and the wage reform and the new laws on private activity took ef-
fect in the first part of 1987. Reorganization of the central and regional bu-
reaucracies is supposed to take place during 1987 and 1988. The Law on
the State Enterprise becomes effective on 1 January 1988, and the 1988
plan has been formulated in accordance with the new procedures. All firms
and farms are scheduled to become self-financing by the end of 1989.
Transition from rationing to wholesale trade is to be completed by 1992,
when it is supposed to encompass 75 to 80 percent of Gossnab sales. A ma-
jor revision of industrial wholesale prices takes effect at the beginning of
1990 and revision of agricultural procurement prices one year later.
Although no date has been announced for any revision in retail prices, the
entire price reform is supposed to be completed by 1991.
Taken as a whole, the reform measures put in place in Gorbachev's two and
a half years of tenure are an impressive package that in scope and
specificity goes well beyond the so-called Kosygin reforms adopted in 1965.
It also sets tight schedules for implementation. The intent is to substantial-
ly reduce the role of directive plan targets and of the central bureaucracies
in management of the economy and to provide wide latitude for individual
enterprises to make their own decisions about what and how to produce and
to deal directly with their customers and suppliers through contracts.
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Despite the many allusions to autonomous, self-financed, and self-managed
firms competing to woo customers, the reforms do not go nearly far enough
to create a market environment for those firms, as Lenin did in 1921 with
his New Economic Policy. Nor do they allow the workers' collective to
make the key decisions determining the firm's activities, as is done in
Yugoslavia. Rather, the reform package as now constituted is a set of half
measures that leaves in place the pillars of socialist central planning: state
ownership, the framework of central plans (albeit reduced in detail and
changed in form), numerous old and new administrative agencies oversee-
ing and partially directing the activities of enterprises, rationing of many
raw materials and investment goods, rigid state-fixed prices for key
products and detailed state monitoring of all others, and enterprise
incentives geared to meeting plan goals for output and oriented toward
dealing with administrative superiors, rather than following signals from
markets. Moreover, the reform package contains inconsistencies and
contradictions that, if not resolved, will seriously limit its effectiveness.
Because of such internal contradictions and the retention of so many
elements of the present system, the reforms, even if fully in place in 1991 as
intended, will not create the dynamic, self-regulating economic mechanism
that Gorbachev seeks as the means to reduce or close the technological gap
with the West. The hoped-for acceleration in productivity growth will be
frustrated by the still large presence of those systemic features that
produced sluggish growth in the past. Nonetheless, the reforms may yield
some benefits. The financial pressure on enterprises should lead them to
shed redundant workers and reduce gross waste of materials. Efforts to put
producers more closely in touch with consumers may result in higher
quality products that are better tailored to demand. Consumers will benefit
if private and cooperative activity expands rapidly, as is hoped.
At the same time, vigorous implementation of the present reform package
could seriously disrupt the production process in the next few years. The
pressure now being exerted on the enterprises to meet ambitious plan
targets and to speed up plant modernization increases the danger. Specifi-
cally, the switch to new and unfamiliar supply arrangements may disrupt
the flow of materials to firms and create bottlenecks. Changes in the way
producer goods are obtained could foul up the investment process. Enforce-
ment of self-finance will put many enterprises in severe financial straits.
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Because of the vague and ambiguous language of the many relevant laws
and decrees, the relationships between enterprises and their supervisory
agencies will be confused-a situation hardly conducive to speedy decision-
making. Matters will be made worse because these agencies themselves will
be undergoing reorganization and staff' reductions. The combined impact
of self-finance and the wage reform will create anxiety among workers,
who will be threatened with wage cuts or loss of jobs. The confusion and
disarray will be exacerbated because some firms and sectors will be
operating under the old rules of the game and others under new ones.
How the leadership will react if production falters or workers protest is a
matter of speculation. Although General Secretary Mikhail Gorbachev has
vowed to keep up the momentum of "restructuring," the leadership may
elect to stretch out the schedule for implementing the present reform
package, and also could acquiesce to adjustments in it that, in effect, would
preserve the present modus operandi. Alternatively, it might try to force
the pace of implementation, accepting a period of disruption, in the
expectation that economic performance will improve markedly when the
reforms are fully in place in the framework of the new five-year plan for
1991-95. Although it seems unlikely that the main parameters of the
present reform package will be changed soon, Gorbachev might push
through some major innovations in agriculture, in the hope of getting a
quick boost in performance there; he has said that a Party plenum would be
scheduled to deal with agriculture. In the long run, however, he probably
will be disappointed in the results of his present package of reforms and, if
his zeal continues, can be expected to push for further reform.
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Scope Note iii
Key Judgments v
Description of the Reform Package 1
Position of the Enterprise 2
The Role of Central and Regional Administrative Bodies 3
Superministries 4
Regional Bodies 4
The Supply System 5
Prices and Wages 5
Wages 6
Foreign Trade 7
Private and Cooperative Economic Activity 7
Agricultural Reforms 7
The Schedule for Implementation 8
The Package as a Whole 9
Key Parts of the Package 10
Central Planning and Management 10
The Position of the Enterprise 11
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Gorbacbev's "Radical"
Economic Reform Package:
An Initial Evaluation
of the 13th Five-Year Plan in 1991.
On 30 June 1987 the Supreme Soviet approved by
decree a package of measures designed to alter the
ways in which the Soviet economy is managed. These
measures are set forth in a document, Basic Provisions
for Fundamentally Reorganizing Economic Manage-
ment, approved a few days earlier at a plenum of the
Central Committee of the CPSU. Eleven decrees
dealing with major aspects of the reform were subse-
quently issued by the CPSU Central Committee and
the Council of Ministers.` The Supreme Soviet also
adopted a new Law on the State Enterprise, which
forms a key part of the reform package. Also included
are the decrees adopted in 1986 mandating an over-
haul of the entire wage and salary system, reorganiz-
ing foreign trade administration, expanding the rights
and responsibilities of regional authorities, sanction-
ing expansion of the scope of economic activity by
private individuals and producer cooperatives, as well
as actions taken during 1985-87 to establish new
bureaucracies, reorganize old ones, and reform incen-
tives in agriculture. As a whole, the program provides
the present official blueprint and time schedules for
putting into place a "new economic mechanism" that
is supposed to be almost fully operational by the start
This paper will describe and evaluate the changes laid
out in this highly complex set of reform documents.
We consider, in turn, nine major aspects of the
package: the role of central planning, the position of
the enterprise, the role of central administrative bod-
ies, the system of material/technical supply, prices
and wages, finance and credit, the conduct of foreign
trade, private and cooperative activity, and agricultur-
al reforms. Then we evaluate the package as a whole,
focusing on the extent to which its provisions as now
spelled out alter the basic features of the present
economic system. We also assess the likely conse-
quences of the concerted attempt to implement those
provisions under pressure from a determined leader,
which now seems likely. In a speech at Murmansk in
October 1987, Gorbachev stated "... we have adopt-
ed the appropriate documents. They were approved by
the June plenum of the party's Central Commit-
tee.... Now the next phase has arrived. Everything
that has been decided must be implemented."
The Role of Central Planning
The Basic Provisions stress that the economy is to
continue to be planned and managed as "a unified
national economic complex," as the principal means
of carrying out the party's economic policies. These
policies are to be embodied in a 15-year plan that sets
goals and priorities and outlines a program for imple-
menting them. This plan, which is to contain specific
targets for the 15-year period, is to be the basis for
detailed formulation of the plan for the initial five-
year period, with a breakdown by years. As now, this
plan will be worked out by Gosplan and sent down to
republic Councils of Ministers and to ministries.
These bodies, in turn, send "initial planning data" to
firms, on the basis of which they work out and ratify
their own five-year and annual plans. Plans are
reviewed annually and revised if required. Proposals
for revisions are submitted to Gosplan, which reviews
them, revises the five-year plan if necessary, and
submits a report to the Council of Ministers and to
the Central Committee, along with the draft state
budget.
Enterprises receive: (1) "nonbinding control figures"
that specify value of output, profit, foreign currency
receipts, and major indicators of scientific and techni-
cal progress and social development (the list is to be
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fixed by the USSR Council of Ministers); (2) a
mandatory bill of state orders for output that "ensure
meeting society's priority needs" (the bill includes
commissionings of facilities financed by state central-
ized investment and products required to carry out
essential state tasks in the areas of social develop-
ment, scientific-technical progress-including impor-
tant new products-foreign economic relations, de-
fense, and deliveries of farm products to the state);
(3) allocations of rationed goods and centralized in-
vestment funds; and (4) "long-term economic norma-
tives" Zaccording to a list approved by the Council of
Ministers, regulating, among other things, growth of
total wages, payments for capital and labor, and the
allocation of profits among various kinds of taxes and
funds set up by ministries and enterprises (three major
funds are the bonus fund, the social development
fund, and the fund for financing research and devel-
opment and investment).
Clearly, the state intends to determine the rate and
direction of most investment. How much will depend
on how state-centralized investment is defined. The
state also intends to determine the directions of
economic development and to enforce programs of
scientific-technical progress that are worked out from
the top. Through the system of state orders, the
government will continue to dictate production and
allocate the requisite materials for some part of total
output, but the share of state orders in total output is
supposed to gradually decline. Determining these
orders is the "most important task of Gosplan,"
according to Premier Nikolay Ryzhkov.
Position of the Enterprise
The new Law on the State Enterprise fixes the
intended status of the firm under the reforms in
considerable detail. The law takes effect on 1 January
1988, and firms are to be put under its full provisions
gradually during 1988 and 1989. As now, firms,
which are founded and liquidated by superior bodies,
are accorded legal rights of "possession, use, and
2 For example, normatives specify the percentage of enterprise
profits that must be paid into the state budget in each year.
Normatives also specify the allowable growth of average wages
relative to the growth of labor productivity; for example, a 0.6-
percent increase in wages for each 1.0-percent increase in labor
disposal" of physical assets-which remain under
state ownership. Firms are formally subordinate to
government agencies (ministries or regional bodies).
The law, which is long on reform rhetoric and short on
precise legal language, supposedly expands greatly the
decisionmaking authority of the firm by providing
that it "is entitled to make on its own initiative any
decisions provided that they do not run counter to
existing legislation." The law endows the firm with
"rights whose observance is guaranteed by the state"
and provides means by which the firm may obtain
redress if superior organs violate such rights. The law
also spells out in considerable detail the rights and
obligations of the firm in a number of key areas that
are the focus of the reforms and of current policy.
Finally, the law explicitly makes it possible to declare
bankrupt and liquidate firms that persistently make
losses. Displaced workers are to be given severance
pay and helped to find new jobs.
The firm is now to "independently" work out and
approve its five-year and annual plans, based on
"nonbinding" control figures, mandatory state orders,
central allocations of materials and investment, stable
economic normatives, and contracts with customers.
The law states, "The enterprise is obligated to strictly
observe plan discipline and meet plans and contractu-
al obligations in full." It states further, "Fulfillment
of orders and contracts serves as the most important
criterion for evaluating the activities of the enterprise
and providing material rewards for its employees."
Managerial bonuses are fixed by the ministry and
paid out of incentive funds formed from enterprise
profits; the present "Recommendations" promulgated
in implementation of the general wage reform decree
of September 1986 link bonuses to 100-percent ful-
fillment of contracts and other key plan targets and
specify ceilings on amounts
The reform documents require the firm "as a rule" to
finance all of its current and capital expenditures
from its sales revenues and other internally generated
funds-a condition labeled "full economic account-
ability and self-finance." With its superior organ's
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approval, the firm may choose one of two approaches
to defining its "economically accountable income"
(khozraschetniy dokhod):
? As the sum of the wage fund determined by norma-
tives plus the profit remaining after payment of all
taxes, obligatory contributions to ministerial funds,
and payments of interest on bank credit. This
residual profit is allocated via state-set normatives
(percentages) to the three incentive funds-for fi-
nancing investment and R&D, for financing housing
and amenities for workers, and for awarding
bonuses.
? As the residual that remains after deducting from
total revenues the sum of material and related
outlays, taxes, contributions, and interest payments.
From this amount are then deducted the payments
into the investment and social-cultural funds (deter-
mined as prescribed shares) to leave a single fund
for remunerating labor.
various inplementing documents.
The first approach is the usual practice now, but the
second is a feature of the continuing wage reform in
the retail trade sector. The principal difference is that
in the second approach all of a worker's income
depends on the firm's profits, whereas only bonuses
depend on profits under the first method. The firm
can decide for itself how to spend the money in its
three funds, within the limits on their use specified in
Furthering Gorbachev's call for "more democracy,"
the new Law on the State Enterprise, amending the
1983 Law on the Labor Collective, provides for
elected enterprise labor councils and elections of key
managerial personnel. The council, which must meet
at least every quarter, is elected by the work force by
secret or open ballot for two- or three-year terms. No
more than one-fourth of the members may be repre-
sentatives of management. The council is empowered
to decide a variety of matters relating to the use of the
enterprise incentive funds and to the pay, discipline,
and training of the work force; its decisions are
binding on both the administration and the work
force. According to the new law, "enterprise manag-
ers, heads of divisions of associations, production
units, shops, departments, sections, livestock units and
links, as well as ...foremen and brigade leaders" are
to be elected by the appropriate work force. Enter-
prise managers are elected "as a rule on a competitive
basis" at a general meeting of the collective by secret
or open ballot for afive-year term, and the selection
must be ratified by the appropriate superior organ.
Managers may be removed by vote of the collective.
Heads of associations are to be elected at a conference
of representatives of labor collectives of components.
The procedure for electing leaders of lower level
bodies is the same, except that election results are
ratified by the enterprise manager. The Basic Provi-
sions recommend that work collectives set up councils
and elect leaders in 1987 and 1988.
The Role of Central and Regional
Administrative Bodies
The reform documents make clear the leadership's
intent to carry out a major shakeup of the central and
regional bureaucracies-revising their functions, reor-
ganizing their structures, and cutting their staffs.
According to Premier Ryzhkov, all this is to take
place in 1987 and 1988. Gosplan's staff is to be
reorganized to deemphasize sectoral subdivisions in
favor of "economic complexes," such as "machine
building," "energy," and "social development." Gos-
plan is supposed to concentrate on long-range strate-
gic planning and development of methods for manag-
ing the economy primarily through "economic
levers"-long-term plans and normatives, prices, and
financial and credit policy. More specifically, Gosplan
is supposed to coordinate the work of all central
bodies dealing with the economy, work out five-year
and 15-year plans and transmit them to executants,
determine the composition of state orders, and com-
pile material balances and plans of distribution "for
the most important types of output." The State
Committee jor Science and Technology is also to be
reorganized to carry out its main functions: working
out state scientific and technical (S&T) programs;
formation, distribution, and monitoring of the bill of
state orders for development of such programs; and
guiding the work of intersectoral S&T complexes,
whose role is to be expanded.
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Superministries. These bodies, which are directly
under the USSR Council of Ministers, oversee groups
of related economic activities and are an ingredient of
Gorbachev's reform package. Each superministry has
several ministries under its aegis and can reallocate
investment among them. Seven superministries were
set up during 1985-87: State Committee for the
Agroindustrial Complex, State Committee for Con-
struction, State Foreign Economic Commission, Bu-
reau for Machinebuilding, Bureau for the Fuel and
Energy Complex, Bureau for the Chemical and Tim-
ber Complex, and Bureau for Social Development.
The authority of these organizations has not yet been
spelled out. The Basic Provisions merely call for
improving the work of such bodies and focusing it on
"the tasks of carrying out a radical reform of econom-
ic management."
Ministries. The ministries are to be reorganized to
gradually eliminate sectoral subbranches (glavki) and
to reduce staffs. In place of the glavki, the new
scheme is to have "several thousand" large units
directly subordinated to the ministries; this is to be
accomplished by continuing the process of amalgam-
ating enterprises into production and science-produc-
tion associations and by creating new groupings called
state production associations, which are supposed to
be intersectoral and to integrate all phases of the
research-production-marketing chain. Heavy industry
is to be managed by all-union ministries. In late 1987,
the union-republic ministries of Coal, Power and
Electrification, Ferrous Metallurgy, Nonferrous Met-
allurgy, Geology, and Petroleum Refining and Petro-
chemical Industry were transformed into all-union
ministries. The internal reorganization of the minis-
tries is supposed to be completed by the end of 1988.
While supposedly being relieved of the functions of
day-to-day control over firms, the ministries are still
given enormous responsibility. According to the Basic
Provisions, the ministry "is responsible to the nation
for satisfying demand for the branch's product, pre-
venting disproportions, ensuring that the product
meets world technical and quality standards, and
developing and implementing branch S&T pro-
grams." As now, it serves as an intermediate level in
the planning and administrative process. While it is
enjoined to strictly observe enterprise rights as set
forth in the new Law on the State Enterprise, that law
and the decree on the ministries make clear the large
role that the ministry is expected to play vis-a-vis
subordinate associations and enterprises. Specifically,
the ministry is directed to "counter monopolistic
tendencies of firms and to take measures to prevent
inflation in costs and prices, stagnation in scientific
and technical progress, and restriction of production
of goods in demand." Ministries set up centralized
reserve funds financed by deductions from enterprise
profits and used to fund ministerial staffs and aid
subordinate firms. They establish and liquidate firms,
monitor and conduct annual audits of enterprise
activities and may guarantee the bank loans of firms
in trouble, underwrite the expenses of planned-loss
firms while working out means to make them profit-
able, and help out firms temporarily short of cash.
Ministries also define control figures, state orders,
limits, and economic normatives for each firm or
association; "ensure" that the five-year and annual
plans drafted by enterprises are coordinated and
consistent; ratify appointment and dismissal of elected
firm directors and administer the awarding of bonuses
to them; and interact with central and local bodies in
carrying out a variety of activities for which all are
held mutually responsible.
Regional Bodies. The Basic Provisions (and the de-
crees of July 1986 and July 1987) convey the intent to
accord the republic Councils of Ministers and their
subordinate bodies, notably the local Soviets, a great-
er role and responsibility for regional economies,
especially those aspects relating to the welfare of local
populations. These bodies, too, are supposed to be
reorganized to improve administration; thus, new
"production-economic departments" are to be set up
under local Soviets and other regional bodies. Specifi-
cally, the Basic Provisions call for: concentrating the
administration of enterprises that primarily serve
local markets in republic and local bodies; working
out 15-year plans for the economic and social develop-
ment of regions; distributing centralized investment
among sectors and ensuring that allocations for social
development depend on the overall economic perfor-
mance of regions; and channeling more funds into
local budgets through taxes on the profits of local
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enterprises while giving more autonomy over their
budgets to local authorities. The Basic Provisions
make republic Councils of Ministers and their sub-
units responsible for coordinating the activities of all
enterprises located on their territory with respect to
provision of goods and services for the populations,
seeing to it that all local enterprises participate
actively and cooperate fully with the local Soviets in
their endeavors on behalf of the local populace, and
requiring the local Soviets to monitor such enterprise
activity.
The Supply System
The Basic Provisions call fora "decisive transition
from centralized allocation of material resources and
the attachment of users to producers" to "wholesale
trade in the means of production," to be completed in
four to five years. The decree on the State Committee
for Material and Technical Supply (Gossnab) charges
that body with the task of organizing wholesale trade.
The process is to start with "groups of goods of
greatest importance for consumer goods production,
agriculture, construction, machinery production, and
the needs of cooperatives and private producers."
Only "particularly scarce" goods will continue to be
rationed, but the list includes the allocation of inputs
that are required to fulfill mandatory state orders.
Wholesale trade, which is to become the main form of
supply, is to take the form of "free" purchase and sale
under direct contracts between enterprises or with
state wholesale organizations, primarily regional bod-
ies, and with manufacturers' direct outlets. Regional
units of Gossnab are to play the major role in
organizing supply. The Law on the State Enterprise
gives firms the "preferential right" to retain present
arrangements, expand long-term direct ties, and select
the form of supply. That law, along with existing
decrees on product deliveries and contract law, exten-
sively regulates the mutual responsibilities of parties
under contracts. Early in 1987, the Supreme Court
adopted a law that strengthens the system for settling
contract disputes by transferring the State Board of
Arbitration from the jurisdiction of the Council of
Ministers to the jurisdiction of the court system. ~
According to Ryzhkov, only 5 percent of Gossnab's
total deliveries consists of genuine wholesale trade at
present, presumably the sales of several hundred
wholesale stores in cities and recently permitted un-
funded purchases by a variety of small-scale users. A
Council of Ministers decree adopted on 17 July 1987
instructs Gossnab to bring the share of wholesale
trade in total supply to 60 percent by 1990 and to
"complete the transfer" by 1992. That percentage
apparently refers to the activities of Gossnab. Other
supply networks exist in the agroindustrial complex,
in the State Committee for Supply of Petroleum
Products, and in the separate supply networks of
many ministries. At present, Gossnab sales account
for 80 percent of all industrial production that is sold
through trading organizations. Gossnab officials have
recently indicated that in 1992 wholesale trade will
comprise 75 to 80 percent of Gossnab sales and two-
thirds of total sales. These officials have stated that
wholesale trade will not include electricity, crude oil,
gas, metal ores, rolled metal, various kinds of special-
ized equipment, and products supplied for export,
defense, and "market stocks" (presumably grain).
Prices and Wages
Prices. The Basic Provisions call fora "radical"
reform of prices to be completed by 1990, so that the
new prices can be used in developing the 1991-95
plan. Specifically, the decree on price formation states
that revised industrial wholesale prices and tariff
rates in transportation and communications are to
take effect on 1 January 1990, and new construction
and agricultural procurement prices are to be intro-
duced on 1 January 1991. No date was set for
introduction of new retail prices, except that the price
reform as a whole is supposed to be completed by
1991. Unlike its predecessors, this reform is to encom-
pass all forms of prices-wholesale, procurement, and
retail prices and rates, with changes in the various sets
of prices to be interconnected. Centrally set prices, the
share of which is to be "sharply reduced," are to be
determined as part of plan formation and fixed on the
basis of "socially necessary expenses of production
and sale, utility, quality, and effective demand." They
are to take into account the charges for natural
resources, capital, and labor that enterprises will now
be required to pay and the costs of environmental
protection. They also will have to incorporate the new
amortization rates to take effect on 1 January 1988.
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More specifically, prices of fuels and raw materials
are to be raised sharply to ensure "normal profitabili-
ty" for those branches, and some machinery prices are
to be reduced. Contract prices and those set indepen-
dently by enterprises are to become more common
and are to be set on the same basic principles as state-
set prices. Those principles and procedures are to be
laid down, and all prices closely monitored, by state
organs-mainly the State Committee for Prices,
whose membership now includes representatives of
Gosplan, the Ministry of Finance, the State Commit-
tee for Statistics, and the Central Council of Trade
Unions. The Basic Provisions call for establishing "a
single state system of price control."
The sensitive issue of revising retail prices to conform
to the new pricing formula is addressed by calling for
a broad public discussion of the price reforms and by
stating that changes in retail prices "not only must
not reduce living standards of workers, but also must
raise them for some groups and more fully promote
social justice." At present, some foods and some
services are heavily subsidized, costing the state bud-
get 73 billion rubles. Alcoholic beverages, clothing,
many durables, and luxury goods are heavily taxed.
Wages. The Basic Provisions incorporate as an essen-
tial ingredient of the package the major overhaul of
the entire wage and salary structure in the production
sectors; this change was launched by decree of the
CPSU and the Council of Ministers in September
1986. The wage reform is to be carried out branch by
branch and firm by firm during 1987-90. To imple-
ment the decree, two lengthy sets of "Recommenda-
tions" have been issued under the joint imprimatur of
the State Committee for Labor and Social Problems
and the All-Union Central Council of Trade Unions.
Differentiated by sector and branch of the economy,
this pay reform establishes new labor grade structures
and base rates for production workers, with base rates
being raised by an average of 20 to 25 percent;
provides for a review of existing assignments of jobs to
labor grades and of individuals' assignments to jobs;
mandates a revision of work norms and piece rates to
make them more "progressive"; and establishes new
salary scales for white-collar workers, raising the
average salary rate by 30 to 35 percent. The reform
also gives enterprise managers a variety of options for
adjusting job rates and awarding bonuses to encour-
age efficiency and to ensure that each worker's earn-
ings accord with his productivity, and specifies that
the reform is to be put into effect in each firm
whenever its ministry determines that it can finance
any resulting increases in average wages within the
limits of the allowed wage fund and some transfers
from the bonus fund financed from profits. The Law
on the State Enterprise broadens the rights of direc-
tors in matters of labor and wages, in collaboration
with the enterprise trade union and the Labor Coun-
cil. It also specifies, as do the Basic Provisions, that no
ceiling shall be put on individual earnings. But the
size and growth of the total wage and bonus funds are
regulated by various ministry-set normatives.
The intent of this sweeping reform of the pay system
is to raise the role of job rates in workers' earnings (to
70 to 75 percent compared with 50 to 60 percent at
present), make bonuses harder to get and more closely
dependent on the efficiency and quality of perfor-
mance of both the worker and the firm, tighten work
norms (which were regularly being overfulfilled by
large margins), and contribute to more general reform
objectives of enforcing self-finance, eradicating
"wage-leveling," and encouraging work effort and
acquisition of skills by the work force.
Finance and Credit
This section of the Basic Provisions mainly demands
that the banks and other financial agencies promote
the effective implementation of the principle of self-
finance by enterprises. Separate decrees spell out the
role of the banks and the Ministry of Finance. These
agencies are told to put the country's financial house
in order by ceasing inflationary practices such as
printing money to back up bank credit. More specifi-
cally, as in past reforms, bank credits and interest
rates are to serve as important economic levers in
promoting efficient use of resources in enterprises,
and bank credits are to become a more important
source of financing investment. The banking system
has been reorganized to create six major banks-
instead of three as now. The six banks are: State
Bank; Industrial Investment Bank; Bank for the
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Agroindustrial Complex; Bank for Housing, Munici-
pal Services, and Social Development; Savings Bank;
and Foreign Trade Bank. Banks and insurance agen-
cies are supposed to operate on the principles of
economic accountability and self-finance. Budget-
supported institutions are to be provided with incen-
tives to become more efficient. Finally, enterprise
payments for resources are to provide the main source
of budget revenues from public-sector activities. Al-
though highly differentiated now, these charges ulti-
mately are supposed to be uniform for all enterprises
developing exports and on arranging mutually benefi-
cial ventures with socialist countries. The firm has the
right to keep part (determined by long-term norma-
tives) of the foreign currency earned from exports to
purchase goods from abroad and is held responsible
for the "rational" use of such funds. Higher authori-
ties are forbidden to confiscate unused funds. It
seems, however, that firms cannot participate directly
in foreign economic activity without the sanction of
and sectors.
Foreign Trade
Gorbachev's reform package includes an overhaul of
the system for conducting foreign trade. A joint
CPSU-Council of Ministers decree adopted in Au-
gust 1986 established the State Foreign Economic
Commission as a superministry overseeing all facets
of foreign economic activity and reorganized the
Ministry of Foreign Trade to end its monopoly over
trade by transferring some of its Foreign Trade
Associations to the jurisdiction of ministries and other
central bodies. On 1 January 1987 some 20 ministries
and other bodies and 70 selected enterprises were
granted the right to engage directly in importing and
exporting activity with appropriate units in foreign
countries. The decree also directed that foreign cur-
rency funds be established in exporting enterprises
and associations to finance machinery and equipment
imports, gave enterprises extensive rights to engage in
joint projects with firms in other member countries of
the Council for Mutual Economic Assistance
(CEMA), and sanctioned joint ventures with firms in
capitalist countries. Subsequently, regulations were
issued detailing procedures for carrying out such joint
projects.
The Basic Provisions do not include additional foreign
trade reforms; they merely call for greater use of
financial-credit levers in promoting the expansion and
efficient conduct of foreign trade. They do set a goal
for "stage-by-stage" convertibility of the ruble, start-
ing with the CEMA trading system. The Law on the
Enterprise, however, contains a lengthy new section
on foreign economic relations, which details the rights
accorded by the earlier decree to individual firms in
the realm of foreign trade. The emphasis is on
some higher body, presumably a ministry.
Private and Cooperative Economic Activity
The documents from the June plenum strongly en-
dorse reform measures adopted in 1986 that aim to
expand the role of producer cooperatives and private
individuals in the economy, particularly in the provi-
sion of consumer goods and services. As part of a
crackdown on corruption and illegal private economic
pursuits, a Supreme Soviet decree adopted in May
1986 sets stiff new penalties for failure to comply with
existing laws concerning permissible private activity.
A law adopted in November 1986 and effective 1
May 1987 spells out the kinds of permissible endeav-
ors and the groups that are to be encouraged to
engage in them (state employees only outside working
hours, pensioners, housewives, and the handicapped).
Subsequently, the high tax rates on income from
private work were reduced somewhat. In August
1986; the Politburo approved some "basic principles
for development of cooperative forms of production."
They specify that producer cooperatives are to be
organized on a voluntary basis "with the participation
of ministries, departments, and local Soviets." Subse-
quently, the Council of Ministers promulgated de-
crees and model charters for cooperatives that collect
and process waste materials, produce and market
consumer goods, and provide services. The decrees on
expanding the rights of local Soviets and other region-
al bodies give them the major role in developing and
regulating cooperative and private businesses.
Agricultural Reforms
Besides endorsing the 1982 Food Program, Gorbachev
has spelled out his recipe for agricultural reform in
two major decrees. The first, adopted in November
1985, established the State Agroindustrial Committee
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(Gosagroprom), a superministry to manage the pro-
duction, marketing, and processing of farm products.
It was formed as a merger of five ministries and a
state committee, but agencies in charge of grain
production and land reclamation remain independent.
This reorganization also was intended to strengthen
the position of the regional agricultural production
associations (RAPOs) that had been set up at various
local levels as part of the 192 Food Program. The
second decree, adopted in March 1986, was directed
toward increasing the autonomy of farms and improv-
ing incentives. The principal provisions of this com-
plex and ambiguous decree are to permit farms to sell
at market prices a larger share of production, to
introduce measures to market farm products more
flexibly, to extend to farms many of the arrangements
now being applied in the industrial sector (such as
normative planning and self-finance), and to endorse
the widespread use of collective contracts. Gosagro-
prom was instructed to develop further proposals for
improving agricultural management in preparation
for drafting the plan for 1991-95.
The Basic Provisions and the Law on the State
Enterprise apply in general to agriculture. Although
there are few specific references to that sector in these
documents, Gorbachev addressed agricultural matters
at some length in his speech to the June plenum. He
stated that the measures already effected had created
the potential for a breakthrough in farm output. He
strongly endorsed the use of collective contracts,
especially brigades using intensive technology and
family groups. In late September, a CPSU Central
Committee resolution demanded that all production
units adopt contractual forms of labor organization in
1988 and that all agricultural organizations be trans-
ferred to full economic accountability and self-finance
during 1988 and 1989. Finally, Gorbachev has an-
nounced that agriculture is to be the subject of
discussion at a coming party plenum.
The Schedule for Implementation
Gorbachev is a man in a hurry. His program of
reform, far more than its predecessors, imposes a
staggering set of tasks on the central bureaucracies
and on the producing units to be accomplished in the
next three years. At its meeting on 17 July 1987 the
USSR Council of Ministers excoriated one and all for
not moving fast enough on all fronts and imposed
some specific tasks and deadlines. The leadership has
made it clear that all this is to be done by everybody,
while simultaneously guaranteeing fulfillment of the
demanding plan targets for 1987, 1988, and 1986-90.
Gosplan, while undergoing an internal reorganization,
has been required to work out the 19.88 and 1989
plans for firms and sectors operating under both the
new and the old conditions and must begin formulat-
ing the plan for 1991-95 in the reformed format. Two
sets of planning and reporting documents will have to
be devised for 1988-90 and standard sets worked out
for 1991-95. One such instruction (on the plan for
1988) was approved in April 1987 and had to be
revised. Gosplan also will have to fix the annual bill of
state orders to be handed down to ministries and
republic councils of ministers. According to a Gosplan
official, such orders in 1988 will account for 90
percent of the output of the fuels ministries, 60
percent of that of the civilian machinery ministries, 30
groups of chemical and petrochemical products, and
12 kinds of consumer durables. Gosplan will continue
to work out material balances and distribution plans
for 415 major products.
Gossnab must cope with the inevitable confusion that
will ensue from the dual system, whereby state orders
and "freely negotiated" contracts with customers and
suppliers will be in effect for many firms and the old
modus operandi in effect for others. As noted earlier,
the Council of Ministers has instructed Gossnab to
raise the share of "wholesale trade" in the total
volume of its sales to 60 percent by 1990. Gossnab's
role is slated to increase, however, because according
to its chairman the wholesale trade market "is not
spontaneous, but organized." The agency will also
take over from Gosplan the task of compiling material
balances and plans of distribution for over 1,500 key
products.
Goskomtsen, while meeting its present responsibilities
and reorganizing its staff structure, must prepare an
overhaul of the entire system of state-set prices and
rates, ensuring that changes in the various sets of
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not be worked out without them.
prices-wholesale, procurement, retail-are linked to-
gether. It must publish lists of the new centrally set
prices, prepare instructions for setting contract price
and prices set independently by enterprises, and devel-
op a "unified" system for monitoring all prices. This
herculean task is to be completed in time for the new
prices to be used in the 1991-95 plan. Since all
financial plans depend on these prices, the plan and
the reform-related five-year "stable" normatives can-
Those ministries wholly or partially under self-
finance in 1988 will have to plan and conduct their
affairs under the new definitions and procedures.
Numerous instructions must be formulated to guide
enterprises. To carry out the new rules of the game,
the ministries will have to define the bill of state
orders and establish the many normatives for each
enterprise and association individually, because they
operate under widely varying conditions. Ministries
will have to implement the overhaul of wages and
salaries by determining when each firm is financially
ready to effect it. Simultaneously, they will have to
figure out how to manage their branches under the
nebulous conditions imposed by the Law on the State
Enterprise. The minister is held "personally respon-
sible" for expeditious implementation of everything
connected with the new order of things, while also
being accountable for the current production activities
of the branch. Ministries must also amalgamate asso-
ciations and enterprises into new "state production
associations," while reorganizing their own internal
structures and reducing staffs and while under con-
stant threat of being abolished, split, or joined with
another agency. Already, four machinery ministries
have been merged into two ministries and two state
committees into one, and six union-republic ministries
have been converted to all-union status.
reorganization plans.
The situation confronting regional bodies is similar to
that facing the central ministries. They must handle
the new rules of the game for subordinate firms, cope
with the new tasks imposed on them, and devise
schemes for reorganizing their administrative struc-
tures. The USSR Council of Ministers has instructed
the republic Councils of Ministers to submit such
While enterprises struggle to carry out the many
production and investment tasks imposed by the plans
and the new state quality inspectors, they must figure
out how to cope with the intricate new rules of the
game that the Law on the State Enterprise imposes on
them, with the details of the wage reform, and with
the ubiquitous monitors (especially political bodies)
determined to see to it that "priority" matters are
attended to with dispatch. Enterprises will be under
pressure to set up Labor Councils and to conduct
elections of key managerial officials. The electoral
process may well create uncertainty and anxiety
among managers and produce considerable turnover
in their ranks. Potentially the most disruptive facet of
the reforms is the schedule for imposing conditions of
full self-finance on enterprises. In 1987, those rules of
the game affected all firms in five industrial minis-
tries and 37 entities in various others; all together
they represent over 20 percent of total industrial
output and 16 percent of employment. According to
Premier Ryzhkov, self-financed enterprises will ac-
count for 60 percent of industrial output in 1988,
when the new conditions will also apply to all
branches of transportation and a number of other
sectors. The process is supposed to be completed in
1989. The new rules already are creating many
problems for firms, according to press accounts.
The Package as a Whole
Taken as a whole, the package of reform measures
introduced during Gorbachev's two and a half years
of tenure is impressive. It is comprehensive, embrac-
ing nearly every major aspect and sector of the
economy. But a major gap in both the 1965 and the
present package of reforms is the failure to provide a
mechanism for more efficient allocation of investment
among firms and across sectors-a problem that has
proved crucial in the reform process in Hungary and
Yugoslavia. Although the subjects they address and
the direction they take are similar to those of the 1965
reforms, Gorbachev's reforms add to the major areas
addressed in 1965: an overhaul of the wage and salary
system, a reform of the administration of foreign
trade, measures to expand cooperative and private
economic activity, and provisions for election of enter-
prise Labor Councils and key managerial personnel
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by the work force. Unlike its predecessors, his pack-
age spells out the intended reform objectives in fairly
explicit terms and outlines the measures to achieve
them, while setting tight schedules for their imple-
mentation.
But one is hard pressed to visualize the nature of the
economic system that the framers of this package
intend to install, a package variously described as
"radical," "revolutionary," and based on the principle
of "more socialism, more democracy." Its .present
overall design is not that required to install a system
of market socialism or of worker self-management as
those terms are usually understood. Despite many
allusions to creating autonomous, competing, self-
managed business firms, the reforms do not go nearly
far enough to create a market environment as Lenin
did in 1921 with his New Economic Policy, nor do
they allow workers to make the key decisions that
determine the outcomes of the firm's activity, as they
do in Yugoslavia. Gorbachev's reform decrees leave
the pillars of the traditional economic system promi-
nently in place-state ownership, central planning
(albeit changed in form and reduced in detail), numer-
ous administrative agencies overseeing the activities
of firms, rationing of many materials and investment
goods, state control over price setting, and enterprise
incentives still oriented toward plans and output
targets and biased toward dealing with administrative
superiors rather than following the signals from
markets.
Moreover, the package as now spelled out in the
relevant laws and decrees contains inconsistencies and
contradictions that, if not resolved, will seriously limit
its effectiveness. These problems with the design of
the reform will be reinforced by some specific policies
being pursued simultaneously with the implementa-
tion of the reforms. Thus, as of now:
? Ministries and regional bodies are held responsible
for production results in their respective areas and
for ensuring that subordinate firms act "properly,"
while simultaneously being instructed not to inter-
fere in enterprise decisionmaking.
? Through the mechanism of self-financing, firms are
expected to operate efficiently (to produce goods in
demand at least cost), but the price and profit
signals needed to assess the trade-offs are not likely
to be provided by the reform of the pricing process
being heatedly debated.
? The Law of the State Enterprise accords enterprises
wide latitude in decisionmaking, but also saddles
them with many center-inspired recipes and expec-
tations-for example, to introduce multiple shifts,
set up brigades, produce a quota of consumer goods
and services, establish subsidiary farms, and active-
ly support an expansion of private and cooperative
activity.
? The reforms explicitly require stability (for five
years) in a variety of parameters, whereas flexibility
is needed to establish markets and make them work
effectively.
? While inveighing against monopolistic tendencies,
the reforms entail an increase in the already ex-
treme degree of concentration of economic activity
in large amalgamations.
Key Parts of the Package
Central Planning and Management. While calling
for much greater reliance on "economic levers," such
as prices, bank credits, and interest rates, the policy
statements and specific provisions of the reform pro-
gram make it clear that a large degree of central
management of the economy is being retained. They
display the traditional conviction that economic devel-
opment-the composition of output and the allocation
of investment as well as the broad content and
direction of scientific technological progress-must be
managed by the center. The framework of mandatory,
"stable" five-year plans is retained, along with nu-
merous new and old government bodies to help to
formulate them and monitor their implementation.
New forms of central management-supposedly
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"nonbinding" control figures, state orders and "volun-
tary" contracts, and long-term, stable normatives-
replace the familiar categories. That the center is to
slough off a mass of detail is of secondary importance
to the fact that the domain of central administration
is still so great. Moreover, the central bureaucracies
will now have to cope with the confusion and unin-
tended results that will arise in implementing the new
rules of the game.
The Position of the Enterprise. The business firm
remains subordinate to government agencies, which
are to eschew "petty tutelage," while ensuring that
the sector's output goals are met and that the firm
behaves "properly." Absence of "petty tutelage," if it
eventuates, may reduce the frustration of managers of
firms, but ministerial micromanagement, which is
often blamed for all sorts of malfunctions, has been a
minor factor in the past difficulties of the economy.
On the contrary, under the new arrangements the
firm is likely to be eager to have ministerial aid,
particularly with respect to the determination of the
many normatives that undoubtedly will provide a
fertile field for bargaining. While being pushed to
"freely" negotiate contracts for much of its output
with customers and for the requisite raw materials
and capital goods with suppliers in a framework of
competition, the firm will find that the information
and infrastructure needed to support competitive sales
and purchases is almost totally lacking. A rational
(and likely) response would be to seek to have as much
as possible of its product classified as "state orders"
backed up with rationed inputs and to sign long-term
supply contracts with Gossnab for nonrationed goods.
new deal provides the firm with still another partici-
pant in decisionmaking and monitoring-the Labor
Council-and subjects key managers to the elective
process.
Since all of this does not create a competitive market
environment, the enterprise is likely to remain basical-
ly risk-averse and center-oriented. Although the vision
(figuring prominently in the reforms) of autonomous,
self-financing, socialist business firms threatened with
bankruptcy for failure conveys an aura of markets
and competition, its reality in practice is an artificial
accounting construct, both under present Soviet con-
ditions and under those created by the reforms.
Because prices of products and material inputs do not
(and will not even with the upcoming revisions) reflect
the real economic trade-offs, the derivative account-
ing categories of sales, costs, profits, and returns to
capital can be misleading. Managerial decisions based
on them do not necessarily result in efficient mixes of
inputs and outputs, profits do not indicate relative
efficiencies of firms, and failure to earn profits and
thus to go bankrupt need not mean that the firm was
inefficient. The expectation that large gains in effi-
ciency will accrue from enforcing self-finance is there-
Meanwhile, portions of the enterprise's products and
its raw materials will have rigid state-set prices as
now, and the prices it may set or negotiate necessarily
must take them into account along with methodologi-
cal guidelines. Even its independently set prices are
subject to strict state monitoring. The manager's
bonus depends on meeting (planned) contracts for
output (little different under universal contracting
from gross value of output or sales) and on indicators
for several other aspects of performance. Finally, the
fore unlikely to be realized.
Supply. Along with its call fora "resolute" shift of
most purchases and sales of intermediate and capital
goods from central rationing to "free" wholesale trade
between buyers and sellers, the Basic Provisions ac-
cord Gossnab the key role in the process. The Law on
the State Enterprise instructs the firm to arrange for
nonrationed supplies "first of all" via contracts with
regional divisions of Gossnab. How is this process
likely to work out in practice? Contracting is already
widespread: in most
branches of industry 80 to 90 percent or more of total
deliveries are now accomplished through formal con-
tracts, the bulk of them with Gossnab units. Five-year
contracts (termed "long-term direct ties") have been
encouraged and are widely prevalent: in 1986, they
made up 30 percent of total Gossnab sales. Faced with
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the need to nail down through contracts their "inde-
pendently" planned sales and purchases, firms in the
near term, aided and abetted by Gossnab, can be
expected to scramble to keep existing arrangements
and tie up new ones. These arrangements, by and
large, are likely to form the basis in the 13th Five-
Year Plan for the contracts on which the firms are
required to base their plans. All this will make for
rigidity and inhibit the competition among firms that
the reforms aspire to develop. It certainly does not
create a market for raw materials and capital goods.
Even so, the pressure to deration goods and enhance
the role of wholesale trade organizations should bring
some benefits. Above all, elimination of the need for
ration coupons will reduce the amount of time and
paperwork required to arrange sales and purchases.
The drive to shift stocks from enterprise inventories to
wholesale bases and to expand manufacturers' direct
outlets will make supply more flexible. The process
should also benefit to the extent that firms use their
greater authority to sell above-plan output and un-
needed inventory and equipment.
Prices. Flexible prices that reflect supply and demand
reasonably well are crucial to the success of reforms
that accord financial autonomy to enterprises. Yet,
according to the Basic Provisions and the decree on
price reform, the principles on which state-fixed prices
are to be set are similar to those used to guide the
price fixers in past price reforms. The documents do
call for greater attention to be paid to such factors as
utility, quality, and effective demand. Although con-
tract prices are to be set by agreement of the parties,
they will be heavily influenced by such state-set
prices. Contract prices are to be based on so-called
base prices, which may be taken from state price lists,
state-set limit prices on new products, and prices on
"normative-parametric" price lists. The requirement
that state-set prices remain stable for five years and
that contract prices be embodied in planned contracts
preserves the rigidities now prevailing. Although the
intended revision of industrial and procurement prices
will bring them once more in line with costs and newly
imposed charges for resources, prices will remain poor
guides to efficient choice. The removal of producer
price subsidies, however, is a rational step toward
Widespread use of contract prices and prices indepen-
dently set by firms is likely to produce inflation,
unless hard budget constraints are imposed on the
firms. But the reforms as now designed include
provisions, such as ministerial reserve funds, that
could soften the constraints supposedly imposed on
firms by the requirements of self-finance. Clearly, the
government is concerned about the inflation potential
and intends to monitor contract prices closely, an
activity that will require detailed examinations of the
books of individual firms. Finally, the declared intent
to link the three sets of prices-wholesale, procure-
ment, and retail-involves coming to grips with a
major political-economic policy dilemma of what to
do about the existing large subsidies on food and some
services for consumers. Press debate over this issue is
gaining momentum, and we shall have to wait to see
what political will can be mustered.
Incentives. Unlike its predecessor, this round of re-
forms includes a complete overhaul of the wage and
salary structure and of work norms. It also installs
new procedures for forming and using the enterprise
bonus fund. That fund will now depend on its initial
size in the base year and on subsequent changes in it
that will be determined mainly by the level of profits
and the fixed percentage (normative) share of profits
designated for that fund. To effect the wage reform,
the firm must be able to finance the higher rates out
of wage and bonus funds that are determined by
standard procedures (more normatives). While the
timing of the installation of the new scales is supposed
to be discretionary with the firm~epending on when
it can finance them-considerable pressure is being
put on firms to do so with dispatch, and layoffs, wage
cuts, and morale problems are already arising.
The overhaul of wages and work norms could prove to
be highly unpopular. Unlike its predecessor in the
early 1960s, which offered a large carrot in the form
of a reduction in the workweek from 46 to 41 hours,
the current wage reform offers no carrot to rank-and-
file production workers. Although their base rates will
be increased, with the greatest raises going to the
more skilled, work norms will be tightened according-
ly. Blue-collar workers will bear the brunt of layoffs
more efficient use of inputs.
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improve incentives.
and of the pressure to redefine and combine jobs and
work night shifts. Thus, this reform package, unlike
that of 1965, directly and immediately threatens both
the job and the pay of every production worker. At the
same time, ordinary workers will see the salaries of
white-collar workers increase sharply and their total
earnings rise even more, since bonuses are determined
as percentages of base salaries. The lion's share of
wage increases planned for 1986-90 (15 percent) will
accrue to white-collar workers, who make up about
one-fifth of the total in the productive sectors. Blue-
collar workers, long nurtured on egalitarian values,
may well consider those developments to be unfair,
even though wider differentials may be needed to
level.
Since the wage overhaul is being carried out piece-
meal and firm by firm, both between sectors and
within sectors, it is likely to result in sizable differ-
ences in wages for similar jobs in the same area and
thus violate the socialist principle of equal pay for
equal work. Matters will be worsened by the wide
variations in the size of bonus and social-cultural
funds that will prevail among firms. These inequities
will arise because of the highly uneven conditions
under which Soviet enterprises operate as a result of
factors over which they have little or no control. For
example, profit rates of firms differ widely within
industries and among sectors in large part because of
peculiarities of price setting. Thus, prices of products
are determined on the basis of branchwide average
costs plus a fixed profit markup. The quality of capital
stocks differs greatly because of the vagaries of past
investment policy. In short, the playing field is not
Salaries for managerial personnel are to be raised
substantially as part of the reform of wage and salary
scales. In addition, managers are paid bonuses from
the firm's new unified bonus fund, which depends on
profits and the applicable normative. Ministries or
other higher authorities administer the general rules
regulating such bonuses. The latest set of rules (rec-
ommendations) preserves the worst features of the old
system. They tie bonuses to meeting a plan for
production (now defined as 100-percent fulfillment of
contracts for deliveries), thus giving managers an
incentive to avoid accepting difficult orders and to
limit the production profile. They also tie bonuses to
several plan indicators for labor productivity or equiv-
alent measures and for growth of profits or reduction
in costs. Bonuses are to be paid for each separate
indicator, and half of the total must be paid for
meeting contracts. These rules are likely to reinforce
the managers' orientation toward meeting production
goals, toward pleasing superiors in the administrative
hierarchy, and toward avoiding risks. Moreover, a
ceiling is placed on managerial earnings. Unless these
compensation rules are changed radically, they will 25X1
frustrate the reform's efforts to create competitive,
innovative, market-oriented enterprises.
Finance and Credit. Under the reforms, as now,
budget income will come almost entirely from various
levies on enterprises, with the bulk to come in the
form of payments for resources. The charge on capital
is retained and will continue to be highly differentiat-
ed in the near term, as will a new charge on employ-
ment to be introduced in 1988. The labor charge is
slated to be 300 rubles per year for each regular
worker for firms in labor deficit regions and 200
rubles per worker per year for those in labor surplus
regions. The size of these payments for resources is
necessarily arbitrary in the absence of market prices
to establish actual returns to factors. In any case,
imposition of a capital charge has proved ineffective
in the USSR, according to repeated assertions of
Soviet economists, and charges for capital and/or
labor have not proved effective in reforms in Hungary
and Yugoslavia.
The reforms, as they did in 1965, intend to reduce the
budget's role in financing investment. Until prices are
changed in ways that reduce the large variability of
profit levels among firms and sectors, however, the
budget's share will remain large, or, alternatively,
funds will have to continue to be redistributed
through the ministries. They are authorized to estab-
lish reserve funds financed by deductions from enter-
prise profits and amortization charges in accordance
with state-set normatives.
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The reforms establish six large banks, an organiza-
tional change that amounts to dividing the responsi-
bilities of the present Gosbank and Stroybank among
six agencies rather than two. This change does noth-
ing to create a market for investment funds. In any
case, it is clear that the state intends to control the
sectoral allocation of investment, as it does now. Bank
credits and interest rates are supposed to be used as
economic levers and normatives to regulate the finan-
cial activities of firms, and the banks' role as financial
watchdogs is to be stepped up. It seems doubtful that
those approaches will work any better than they have
in the past 20 years, when similar themes have been in
vogue.
Although the reform programs adopted thus far under
Gorbachev add up to a set of half-measures that
retain the pillars of the traditional system, they could
produce some positive results. The financial pressures
on the enterprise will probably reduce redundant
labor and gross waste of materials. Efforts to put
producers more closely in touch with their suppliers
and customers, aided by the recently introduced
system of state inspection (gospriyemka), should yield
better quality products. If the go-ahead for private
and cooperative endeavors produces strong momen-
tum, it will improve the lot of consumers to some
degree. The greater leeway given factories and farms
to dispose of their output and unneeded inputs will
work mainly to that same end. Paring of government
staffs and the consequent forced redistribution of
labor will facilitate adjustment to slow growth in the
labor force. Relatively higher wages for skilled and
efficient workers should improve incentives, provided
that supplies of desired consumer goods and services
are made available.
At the same time, vigorous implementation of the
present reform package has the potential to create
serious disruptions in the production process in the
next few years. The pressure being exerted on the
enterprises simultaneously to meet demanding plan
targets and speed up plant modernization increases
the danger. Specifically, the switch to new and unfa-
miliar supply arrangements may disrupt the flow of
materials to firms and create bottlenecks. Changes in
the way producer goods are obtained could disrupt the
investment process. Imposition of self-finance will put
many enterprises in severe financial straits, causing
them to spend a lot of time and energy negotiating
with the banks and with their superiors in the bureau-
cracy. Because of the vague and ambiguous language
of the many relevant laws and decrees, the relation-
ships between enterprises and their supervisory agen-
cies will be confused, a situation hardly conducive to
speedy decisionmaking. Matters will be made worse
because these agencies themselves will be undergoing
reorganization and staff reductions. The combined
impact of self-finance, the wage reform, and elections
of managers surely will create anxiety among work-
ers, threatened with wage cuts or loss of jobs, and
among managers, threatened with loss of bonuses or
being voted out of their jobs. The confusion and
disarray will be exacerbated because some firms and
sectors will be operating under the old rules of the
game and others under new ones.
How the leadership will react if production falters or
workers protest is a matter of speculation. Although
Gorbachev has warned that the next few years will be
"very difficult," he has vowed to keep up the momen-
tum of "restructuring." Nevertheless, the leadership
may elect to stretch out the schedule for implement-
ing the present reform package; Party Secretary
Ligachev has already warned of the perils of undue
haste. In so doing, it could also acquiesce to adjust-
ments that would, in effect, preserve the essence of the
present modus operandi. Gorbachev has already
shown a willingness to use administrative methods to
resolve problems, as exemplified by the recent decrees
mandating state inspection of output, multiple shifts,
and inventory reductions. Or he may opt to try to
muddle through a period of disruption, in the expecta-
tion that economic performance will improve marked-
ly when the reforms are fully in place in the frame-
work of the new five-year plan for 1991-95. While it
seems unlikely that the main parameters of the
present reform package will be changed soon, Gorba-
chev might push through some major innovations in
agriculture, in the hope of realizing a quick boost in
its performance. He has stated that a forthcoming
plenum is to be devoted to agriculture.
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truly radical reforms remains in doubt.
In the long run, we believe Gorbachev will be disap-
pointed with the results of the present package of
reforms, which do not go nearly far enough to achieve
his ambition to create a dynamic, self-regulating
"economic mechanism" capable of closing the techno-
logical gap with the West. To achieve a breakthrough
in technological progress, the leadership will have to
make radical changes in the present reform package.
If the benefits of a market economy are to be had,
markets must be created by getting rid of the ele-
ments of central planning still in place; freeing enter-
prises from subordination to government bureaucra-
cies and forcing them to produce in accord with
market forces; providing the requisite price and profit
signals by allowing prices to be flexible and to more
fully reflect supply and demand; creating a competi-
tive environment by breaking up the present huge
amalgamations and permitting competition from
abroad; and introducing financial and capital mar-
kets. These are the lessons learned by Hungary in its
20-year effort to reform its centrally planned econo-
my. Whether any Soviet leadership will turn to such
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