SOVIET CONSUMER SERVICES: PROSPECTS FOR CHANGE UNDER GORBACHEV

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• Publication Date: September 1, 1986
• Content Type: REPORT

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Directorate of Secret
Intelligence
Under Gorbachev
Soviet Consumer Services:
Prospects for Change
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Secret
SOV 86-10044
September 1986
ropy 5 O 1
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Directorate of Secret
Intelligence
Under Gorbachev
Soviet Consumer Services:
Prospects for Change
This paper was prepared by
Office of Soviet Analysis.
Comments and queries are welcome and may be
directed to the Chief, National Issues Group, SOVA,
Secret
SOV 86-10044
September 1986
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Summary
/r~/ormation available
as oI1 September 1986
was used in this report.
Under Gorbachev
Prospects for Change
Soviet Consumer Services:
problems as a secondary priority.
General Secretary Gorbachev has made the improvement of consumer
services-from beauty parlors to laundries to auto repair shops-a promi-
nent part of his highly publicized commitment to improve Soviet living
standards. He told the party congress in February that he wants "decisive
measures" to modernize the service sector and to bring supply into line
with demand. He was even more strident in July when he told Khabarovsk
party workers that "all our plans are doomed" unless the country decisively
stops the longstanding practice of treating services and other consumer
The General Secretary's public concern is well founded. He and other
Soviet officials clearly recognize that deficiences in consumer services
impose serious political, social, and economic costs:
? The paucity of supplies and the daily frustrations of dealing with the
ineffective state service sector lower morale and waste consumers' time.
It is estimated that Soviet consumers spend about 40 billion man-hours
annually shopping for goods and services with about one-half that time
spent standing in lines or traveling to and from the service shops.
? The lack of consumer services in rural and remote regions makes it
difficult to attract and retain workers.
of state property and tax evasion are common.
? The scarcity and poor quality of state services spawn corruption and help
create a large underground private sector where illegalities such as theft
to increase the share of labor or investment devoted to services.
There are no easy solutions to the sector's problems. While Gorbachev and
other officials would prefer to improve the existing system first, past
attempts to adjust plan indicators and managerial incentives in the state
service sector have done little to improve performance. Additionally, the
new leadership's commitments to industrial modernization limit its ability
Measures to expand the role of personal initiative and the rewards accruing
to successful entrepreneurs in the service sector offer the greatest potential
payoff, and reform-minded officials and economists have put forth several
such proposals:
? Expanding the use of "collective contract" arrangements, which allow
groups of workers in the state sector to have greater control over their op-
erations, paying all expenses and pocketing a large share of the profits.
Secret
SOV 86-10044
September 1986
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? Emulating Hungary and East Germany in giving more scope to individ-
ual and family-run businesses.
? Reviving the independent, member-run cooperatives employed by Lenin
in the 1920s as part of his New Economic Policy.
Gorbachev's public remarks indicate that he favors this approach. While in
Khabarovsk he called for a search for new forms of "individual work
activity" in the service sector and raised the issue of reviving cooperatives.
Also, in remarks to Leningrad party workers in May 1985, he suggested
that the regime should take a more "realistic" attitude toward the
activities of individuals moonlighting in the service sector.
As in other controversial areas, Gorbachev has been slow to back his
rhetoric with concrete proposals. His caution probably reflects the substan-
tial political and economic risks attendant to any attempt to tamper with
the centralized control and wage egalitarianism that underpin the Soviet
system. Conservative officials have specifically warned that measures of
the sort proposed by reform-minded economists could result in:
? Loss of state control over resource allocation decisions.
? Diversion of workers from labor-short state industries to more lucrative
opportunities in the service sector.
? Garnering of "unjustifiably" high incomes by service-sector workers.
The leadership is apparently attempting to reconcile these concerns by
moving simultaneously along two tracks. A Politburo decision last March
linked measures to expand the role of personal initiative with other steps
that would reduce the level of unauthorized private activities. The regime
has already moved ahead on the latter track with a series of decrees
cracking down on "unearned" income. Although progress on expanding the
role of personal initiative appears to be coming more slowly, the regime has
recently taken some tentative steps. Remarks by Soviet officials indicate
that new legislation regulating individual work activity could emerge in the
next few months. More details concerning the guidelines for the formation
of cooperatives approved by the Politburo in August should also be
published soon.
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Even if the regime enacts measures favored by reformers, it must also
tackle associated problems that have stymied past reform efforts to ensure
that any new steps have a significant impact:
? Ensure operating autonomy. Gorbachev would have to ensure that
central authorities give contract collectives, cooperatives, and private
individuals freedom to run their businesses profitably. This should
include the power to expand operations, control the number of employees,
and adjust prices to reflect supply and demand.
? Provide.facilities and supplies. Gorbachev would have to back up new
organizational arrangements with operating facilities and adequate
sources of supply. The chronic shortages of materials, spare parts, and
equipment that now plague the service sector can prevent state-run,
contract, cooperative, or individual operations from working profitably.
? Increase incentives. Gorbachev will have to ensure a more equitable
division of profits between workers and the state by reducing the
currently high marginal tax rates on the profits of private operators and
by preventing officials from continuing to confiscate the earnings of
highly profitable operations.
Given the limited resources available to devote to improving consumer
welfare, we believe the Gorbachev regime will run the political risks
associated with an expanded role for personal initiative in the services area.
Efforts to enact truly effective measures that address the fundamental
problems of independence, supply, and incentives will surely encounter
formidable resistance from bureaucrats and conservatives who believe the
risks outweigh the potential gains. Progress on such measures is likely to be
deliberate at best, but to a population long accustomed to leadership
indifference, even small steps could provide a psychological boost.
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Consumer Services in the USSR Today
1
The Sorry State of Consumer Services
1
Services-The Stepchild Sector of the Soviet Economy
4
The Costs of an Underdeveloped Service Sector.
7
The Private Sector-Filling the Void
8
Searching for a Solution
8
The Consumer Goods and Services Program
9
The Consumer Services Experiment
9
Proposals for Expanding the Private Sector
10
Conservative Resistance
11
Popular Skepticism
11
Collective Contracts: Personal Incentives in the State Sector
12
Cooperatives-Halfway Houses for Personal Initiative
13
Policy Directions Under Gorbachev
14
The Available Options
14
Seeking Solutions on the Cheap
14
Funding the State Sector
15
Increasing the Role of Personal Initiative
15
Gorbachev's Policy and Perspectives
15
Whither the Gorbachev Regime?
16
Prospects
16
Appendix
Definition of "
Everyday Services"
19
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Scope Note The services we assess in this paper correspond roughly to the US
definitions of "personal services," "automotive repair services," and "mis-
cellaneous repair services." These include laundry, drycleaning, barber,
beautician, and public bath services; repair of clothing, consumer durables,
and housing; and a variety of other services such as rentals of consumer du-
rables. Professional services such as health care are not addressed in this
paper because they are classified by the Soviets under other statistical
categories. Our judgments, though based on a study of Soviet statistics
compiled on the narrower Soviet definition, generally apply to other service
sector activities as well.
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Soviet Consumer Services:
Prospects for Change
Under Gorbachev
Table 1
Growth in Real Per Capita
Consumption
The Sorry State of Consumer Services
In Mikhail Gorbachev's Soviet Union, where criticism
of economic performance is the order of the day, few
sectors provide as much grist for the leadership's mill
as that of consumer services. Premier Nikolay Ryzh-
kov frankly acknowledged the underdevelopment of
this sector in a December 1985 speech in which he
labeled the state of basic services as "embryonic."
Deficiencies in the supply and quality of consumer
services reflect poorly on the Soviet system abroad
and, in the judgment of Soviet leaders and public
figures, are costly in political, social, and economic
terms. Improving the service sector is essential to
addressing problems of sagging morale and productiv-
ity at home and to enhancing the image of the Soviet
economy abroad.
Party chief Gorbachev has given a great deal of
rhetorical emphasis to the service sector, stressing its
importance to his overall economic goals. He told the
party congress in February that the service sector
must be brought up to date as quickly as possible and
that "decisive measures" are needed to bring the
supply of services into line with demand. In a July
speech to Khabarovsk party workers, Gorbachev de-
manded an end to the longstanding practice of treat-
ing the service sector as a secondary priority and
stressed that, if social problems such as consumer
services are not solved, "all our plans are doomed." At
the same time, he expressed his conviction that boost-
ing the output of services is a key factor in improving
labor productivity.
The leadership's concern is well founded. Although
per capita availability of services has roughly doubled
in the past two decades (see table 1), per capita
expenditures on consumer services amount to rough-
ly only one-quarter of the level Soviet economic
Total consumption
2.6
1.9
1.0
Personal care and repair
services a
Total (includes
private sector) b
4.4
4.1
3.1
a Figures are computed according to the methodology in "An Index
for Consumption in the USSR," in USSR: Measures of Economic
Growth and Development, /950-80: Studies Prepared for the Use
of The Joint Economic Commitee, Congress of the United States,
December 8, 1982. Adjustments made to official data on the state
service sector include the removal of services sold to enterprises and
institutions and the addition of the cost of materials used in
providing services.
n As is true of all activity in the so-called second economy, estimates
of the value of private-sector services are necessarily imprecise. We
estimate that the private sector currently provides about a quarter
of the total. This is based on a figure for private services of 5-6
billion rubles given in /zvestiya, 19 August 1985. We assume a per
capita growth rate of these services of 1 percent annually, which
seems consistent with the rise in money incomes.
planners regard as the "rational" standard of
consumption.' (See inset on US-USSR Comparisons.)
In the USSR-as in other countries~onsumer ser-
vices are most highly developed in the cities, but, even
in the largest Soviet urban areas, service outlets tend
' The planners set "rational norms" for consumption, which provide
standards for how much an average Soviet citizen should consume
in food, housing, clothing, and other goods and services. They
generally represent a comfortable living standard, albeit a lower
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US-USSR Comparisons
Services in the USSR compare poorly with those in
the United States. In 1984, jor example, Soviet per
capita expenditure on consumer services was only
about 25 percent that ojthe US level.a These services
constitute only about 2.5 percent ojtotal personal
consumption in the USSR. In the United States, the
proportion is about 7 percent. The USSR, with a
population ojabout 280 million, has about one-third
the number ojservice establishments ojthe United
States, whose population is about 240 million. Com-
pared to the United States, the USSR has one-tenth
the number ojphotography studios, less than two-
tenths the number ojbarbers and beautician shops,
and less than one-twentieth the number ojjurniture
repair and reupholstery shops.
to be scarce. According to Soviet commentators,
moreover, service outlets within the cities are poorly
distributed. It is not unusual to find drycleaning
service available only in one part of town, shoe repair
in another, and watch repair in a third. Even in
Moscow, which Soviet citizens generally regard as the
country's most livable city, only one or two repair
points exist for some kinds of household appliances,
and customers are forced to travel many miles. In a
city of more than 8.5 million people, Moscow has
fewer than 4,000 service enterprises.
Despite Soviet efforts to correct the imbalance, the
picture remains even bleaker in rural areas. In recent
years, per capita consumption of services in rural
areas has been growing faster than in urban areas but
by 1984 had attained only 60 percent that of the
urban level (see table 2). The range of services offered
in rural areas is not as wide as in the cities. Laundry,
Table 2
Growth of Per Capita State-
Provided Services a
Rural
Urban
1971-75
1976-80
1981-84
8.0
10.0
4.9
6.2
5.3
4.0
a Soviet data exclude housing construction and repair services.
Otherwise, the adjustments to the data referred to in table 1 have
not been made here.
drycleaning, and beautician services are particularly
poorly developed in Soviet rural settlements z (see
table 3).
According to Soviet statistics, the availability of
consumer services varies widely in different republics
and regions of the USSR. Residents of the European
republics enjoy the greatest per capita availability of
services, while the Central Asian republics and Azer-
baijan offer the fewest services (see table 4). The
differences among the republics, moreover, are wide,
ranging from 69 percent above the national average in
Latvia to 36 percent below in Uzbekistan.
The multitude of consumer complaints appearing in
the Soviet press makes it clear that the quality of
state-provided consumer services also leaves much to
be desired. About one-third of some 2,800 Soviet
emigrants participating in an interview project con-
ducted by Western academics reported that they were
"somewhat" or "very" dissatisfied with the time it
took to have repairs done by state shops. In Latvia, a
' Available data preclude firm estimates of the amount of services
purchased by rural and urban residents because Soviet data on sales
of services in rural and urban areas represent total purchases in the
respective areas, rather than total purchases by their residents.
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Table 3
Per Capita Sales of Selected Services
in Rural Areas as a Share of
Per Capita Sales in Urban Areas a
a Adjustments to data referred to in table 1 have not been made
here.
b Rural expenditures per person exceeded that of urban in 1984 for
knitwear repair and knitting and in 1975 and 1984 for repair and
production of furniture. We can only speculate on the reasons.
Production of furniture may fill in gaps left by the inadequate retail
trade network in rural areas. Residents in remote areas would
surely have trouble buying furniture and transporting it home. As
for knitwear, such activity requires no equipment and minimal
materials and is something a single employee of a rural services
outlet could easily spend time on.
Includes funeral services and some agricultural services.
1983 survey revealed that frustration with the long
delays in filling orders, poor quality of workmanship,
redtape, and rudeness of service employees had
prompted many consumers to refuse to patronize local
state service shops. What the survey found in Latvia is
reportedly common to other areas of the USSR as
well (see inset on laundry service, p. 5).
Inconvenient operating hours pose another obstacle to
the potential consumer of state-provided services. A
survey conducted in 1983 showed that a large major-
ity of service enterprises open at 0900 or later and
Table 4
Per Capita Sales of State-Provided
Services, by Republic, 1985 a
Relative Level Urbanization (per-
(index: cent share of urban
USSR=100) population in total)
a Adjustments to data referred to in table 1 have not been made
here.
close by 1800-hours most Soviet citizens are at
work. Under former party chief Andropov, an effort
was made to force service enterprises to stay open
longer hours, but recent press reports indicate that
many enterprises have reverted to their former sched-
ule. The major obstacle to lengthening operating
hours is probably the lack of an incentive for manag-
ers to do so; those who can fulfill their sales plans and
earn the regular bonuses during the shorter hours
have little reason to stay open longer. Service employ-
ees are also reluctant to work hours that are not
compatible with schedules for transportation, day-
care centers, and shops. Efforts to encourage factories
and enterprises to open on-site service outlets for their
employees have met with little success.
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Figure 1. Television Repair in
the USSR-The Waiting Game
- Is this.the second month
this shopper hasn't le/t our
store?
- His television set is at the
repair shop."
-- N vro 3roT noKynarena atopow asecay He et~xorgHr H3 Hawera n~araad+Ha?
- A y Hero zeneeHSOp a penaorrre.
Services-The Stepchild Sector of the Soviet Economy
Central planners have traditionally given the service
sector low priority, neglecting its resource needs in
favor of developing other sectors-industry, energy,
agriculture, defense-that they regard as more cru-
cial. To judge from articles in Soviet journals and the
popular press, vast increases in labor and capital
investment would be needed to create a network of
state enterprises capable of adequately meeting the
Soviets' own standards for consumption of services.
According to a recent article in Kommunist, for
example, the State Planning Committee's (Gosplan)
Scientific and Research Institute of Economics has
calculated that the sector would need to double its
present labor force to meet "rational norms" of
consumption for the output of services. An August
1985 Izvestiya article estimated that, given its present
mode of operation, the service sector would require an
immediate infusion of 4 million more workers and 5
billion additional rubles' worth of material resources
to meet consumer demand.
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Laundry Service-Soviet Style
Checking on complaints of poor-quality services in
Orenburg, several Soviet reporters visited a laundry,
and then described for their readers what theylound:
The first thing they did was to hand us a razor
blade and needle. After managing to cut the
buttons off the coats we had brought to be cleaned,
we began sewing on the tags we had been given.
The people, about 40, in the line behind us began to
raise a fuss and urge us to hurry.
We barely finished our sewing when the clerk
disappeared into the back room.... When she
returned 15 minutes later, she didn't even look at
our coats. She tossed them onto a single pile on the
floor, next to some greasy quilted jackets.
The,lournalists did not reveal how their experience
ended, but, presumably, they got their coats back,
unlike some Moscow consumers who wrote local
papers complaining that state laundries had lost their
clothes.
At present, however, the service sector receives only a
tiny sliver of the investment pie-less than one-half of
1 percent of total investment in 1966-80, according to
a 1983 Voprosy ekonomiki article, and there is no
evidence that its share increased in 1981-85. Invest-
ment in services often falls short of targets set in the
five-year plan because construction organizations as a
rule find it easier to fulfill their plan targets by
building large, industrial projects rather than smaller
service-sector jobs. In 1976-80, for example, capital
spending on consumer services totaled 2 billion rubles,
although the plan had set a target of 2.3 billion.
Despite its labor-intensive nature, the service sector
has also been a stepchild with respect to the supply of
labor. According to Soviet statistics, about 2.4 percent
of state workers (some 2.8 million persons) are em-
ployed in furnishing consumer services, up from 2.1
percent in 1970.
The low priority of the service sector is reflected in the
low wages and poor benefits provided its employees.
As a result, the sector suffers a shortage of trained
personnel, particularly qualified appliance repairmen
whose technical skills can get them more prestigious,
better paying jobs in industry. According to a 1983
survey of Moscow service employees, 27.5 percent of
those surveyed had no professional training, including
approximately 30 percent of all hairdressers, 15 per-
cent of radio repairmen, and 75 percent of shoe
repairmen. In addition, the service sector suffers a
very high rate of worker turnover-nearly 25 percent
a year according to some Soviet estimates. Workers
leave for jobs with higher pay, greater prestige, and
better fringe benefits (like access to housing) that are
often available in higher priority sectors. The workers
who do remain tend to be the poorly educated, who
cannot qualify for better jobs elsewhere.
According to Soviet media commentary, shortages of
materials and equipment chronically hamper the op-
eration of state service enterprises. Reportedly, service
shops frequently refuse to do repairs because they
cannot get the required spare parts. The head of the
Belorussian Republic's system of radio and television
repair, for example, complained in a September 1985
article that his organization received less than one-
half its scheduled allotment of integrated circuits to
repair new model televisions. The Russian Republic
(RSFSR) Minister of Consumer Services complained
in a television interview that the machine-building
ministries fail to keep service enterprises supplied with
spare parts, diagnostic equipment, and technical man-
uals needed to repair the consumer appliances they
produce.
Although shortages of machinery and spare parts are
endemic to the Soviet economy, they evidently are
especially acute in the service sector, where enter-
prises often depend on suppliers that specialize in
products unrelated to their needs. More than 20
ministries produce machinery and equipment used in
service enterprises. Drycleaning and laundry equip-
ment, for example, are produced by factories under
the Ministries of Aviation Industry, of Construction,
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PNCYHOK
...N T0I76K0 npNOMHNK MOf74NTl r. At[RPNAHOBA.
Figure 1. Soviet Repair Services-The Missing Krokodlt [983
Spare Part
- No more spare parts!
- We did everything we could!
- We repaired it the best we could!
- ...Only the radio is silent. "~
Road, and Municipal Machine Building, and of Ma-
chine Building for Light and Food Industry and
Household Appliances. Such equipment is a sideline
for those factories, and, according to numerous press
reports, their managers and parent ministries give
priority to fulfilling the plans for their primary prod-
uct line-on which their bonuses depend. As a result,
the service shops are undersupplied and reportedly
must frequently purchase equipment secondhand
from nonservice enterprises.
Flaws in the Soviet incentive system also reportedly
have a detrimental effect on the behavior of consumer
service enterprises. Enterprises are rewarded for ful-
filling targets set from above rather than for satisfy-
ing the demands of their customers (see inset on shoe
service). The main target that central planners set-
total value of enterprise sales-encourages state ser-
vice shops to behave in ways that go against planners'
wishes. According to numerous press reports, for
example, in an effort to achieve their total sales
targets, consumer care and repair shops tend to:
? Concentrate on providing high-cost services, even if
they are not in demand, because such services are
the quickest path toward fulfillment of targets for
total sales.
? Produce for bulk consumers rather than individual
consumers. (Service outlets are authorized to sell
services and a limited amount of goods to institu-
tions: hospitals, boarding schools, hotels, and fac-
tories. The share of sales to institutions has been
rising, even though official policy has decreed its
decline.)'
? Produce goods rather than services. (The service
shops find it easier to meet output targets through
the material-intensive route of manufacturing prod-
ucts rather than by just providing services. Soviet
statistics indicate that production of goods now
accounts for about 40 percent of the sales of service
enterprises.) ?
? Mass-produce goods rather than turn out custom-
made items for individuals, although the latter are
supposed to account for most of what the outlets
produce. The quality of this mass-produced output
' Sales of services to institutions rose from some 4 percent of total
sales of services in 1965 to about 21 percent in 1982, according to
the Soviet press. As one service enterprise employee said in a letter
to a Soviet newspaper in 1983, "Our repair brigades are all too
eager to service various organizations, but they don't want to serve
the public because it is easier for them that way. Why replace a
broken belt in a washing machine or do minor repairs on an electric
razor? It's bothersome and it only yields a few kopecks, while
working in a hospital or a kindergarten you can fix all the
appliances in a block order and there's your plan fulfilled. You
receive bonuses ...and then many of the figures for service
organizations are switched to the consumer services account."
estimates of consumption of services. Although this means that our
estimates of the amount of services purchased are biased upward,
the growth of services is more on target because the share of
production activity in total service enterprise sales has been fairly
constant since 1975. The only service shops where the share of
goods output in total sales has grown-from 22 percent in 1975 to
31 percent in 1982-are those that work on consumer durables.
These shops may be increasingly engaged in production of spare
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The Shoes That Never Returned-Neglecting the
Service Consumer
The Soviet press reported the case of a Moscow man
who answered a knock on his door to find employees
of a nearby state shoe repair shop soliciting shoes in
need of repair. It was near the end of the month, and
the shop apparently had notfulf~lled its monthly
sales quota. Gratified by the unusual exercise of
initiative by state workers, the man handed over a
pair needing repair and, according to the customary
procedure, paid for the repairs in advance. Months
later the shoes were still in the shop, the repairs
unfinished. Once it had the money in hand and
fu(f~lled its sales quota, the repair shop had no
further interest in the customer or his shoes.
is poor, and the Soviet public reportedly finds it to be
as unappealing as that produced by light industry.s
The Costs of an Underdeveloped Service Sector
In the judgment of Soviet officials and economists,
the deficiencies of the state service sector impose
serious political, economic, and social costs. Among
them:
? Inconveniences in state consumer services result in a
great deal of wasted time. It is estimated that Soviet
consumers spend about 40 billion man-hours annu-
ally shopping for goods and services with about one-
half of that time spent standing in lines or traveling
to and from the service shops. Because few shops
stay open after normal working hours, the time lost
is often work time.
? The scarcity of household services adds to the
already heavy burdens borne by Soviet women and
contributes to marital and family problems. Soviet
'This production activity makes a relatively small contribution to
total Soviet output of such goods. We estimate that in 1984
everyday service shops provided less than 10 percent of the value of
total shoe and clothing output and less than 5 percent of all
knitwear. Vestnik statistiki, no. 5, 1983, p.79, and no. 7, 1985, p.
calculations indicate that women can rely on the
state service sector to assist them with only about 3
percent of household chores.
? The lack of consumer services in rural areas and
remote regions of the country makes it difficult for
farms and factories in those areas to attract and
retain skilled workers.
? Poor appliance and auto repair service takes a toll
on the state's resources because repairing an item is
often more cost effective than producing a new one.
The scarcity and poor quality of state consumer
services also have reportedly fostered rampant corrup-
tion, contributing to a mood of cynicism and apathy
among the populace, which, in turn, lowers worker
productivity and undermines public respect for law
and order. According to numerous press reports,
customers must frequently pay under-the-table mark-
ups to service personnel to obtain high-quality work or
repairs that require scarce materials or parts. Some-
times state service enterprises brazenly engage in
practices akin to extortion. A Moscow car owner, for
example, complained to the press that a state auto
repair shop charged him double the official rate to
install a scarce part.
There have been frequent press reports that service
personnel customarily supplement low wages by work-
ing off the books and skimming a portion of enterprise
receipts. According to a 1977 article in one economic
journal, service enterprises end up with 50 to 100
percent more sales revenue on days when they are
audited by State Bank officials as compared with
ordinary operating days when employees apparently
often fail to issue receipts for purchases and pocket
the money instead.b
b This suggests that the level of services reported in Soviet statistics
may be biased downward, although it is not clear to what extent.
We assume that the growth of services is unaffected as long as
there is no acceleration or deceleration in the tendency to pilfer
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The Private Sector-Filling the Void
The deficiencies of the services provided by state
enterprises have caused consumers to turn to the
flourishing private sector where, as a well-known
Soviet economist has acknowledged, service is often
better quality and takes about half the time. Because
much of the activity takes place "underground," the
size of private-sector services is difficult to estimate
accurately. Recent Soviet press comments, however,
suggest that the private sector may provide more than
a quarter of all personal care and repair services. In
an article in Voprosy ekonomiki, Soviet economist V.
Dmitriev suggested that the private sector was about
30 percent as large as its official counterpart. A larger
estimate was provided in an August 1985 Izvestiya
article. According to the authors of this article, the
private sector provides 5-6 billion rubles' worth of
services annually, or 50 to 60 percent as much as
reported sales in the state sector in 1984.' Some 17-20
million workers-14 to 17 percent of all workers and
employees in the state sector-participate in the
private sector, mostly on a part-time basis. They
provide 50 percent of all shoe repairs, 40 percent of
auto repairs, and 30 percent of appliance repairs in
urban areas. Izvestiya estimated that the share of
private services in rural areas is as high as 80 percent
in some categories.
Some types of services can be legally provided by
private individuals who register with the state and pay
taxes on the income earned. These services include
tailoring, carpentry, metalworking, watch repair, ce-
ramics, repair of motor vehicles, hairdressing, and
painting. Proscribed services include processing of
agricultural and food products and transporting pas-
sengers or freight. Republic-level Councils of Minis-
ters and local authorities may add to or delete from
the list of proscribed services; the definition of what is
legal varies from one area to another.
' These figures presumably include some private housing construc-
tion and repair, which we subtract to make our definition of private
The private purveyor of services operates in an uncer-
tain environment often subject to arbitrary action by
local officials. Republic criminal codes, for example,
forbid activity engaged in for the purpose of obtaining
"unearned income," vaguely defined as income in-
commensurate with the individual's labor contribu-
tion. Hence, determination of what constitutes un-
earned income is often left to the discretion of law
enforcement authorities. Unregistered private opera-
tors working full-time outside the state sector also risk
running afoul of laws against "parasitism."
Even legal private activity, moreover, is often associ-
ated with illegalities such as theft and tax evasion.
Often the only method of obtaining tools and materi-
als is theft from state enterprises. State taxes on
income derived from private handicraft or trades rise
to 60 percent of amounts over 3,000 rubles (compared
to only 13 percent for income from state-sector em-
ployment) and 65 percent of amounts over 5,000
rubles. Consequently, many private operators either
underreport their earnings to minimize the tax or fail
to pay taxes at all a
While Soviet officials have long acknowledged serious
problems in consumer services, agreeing on a solution
has proved to be difficult. Before Gorbachev came to
power, Moscow initiated some cautious experiments
in the state sector, and reform-minded economists
began to propose measures that involved more far-
reaching changes. The experiments did little to solve
the problems, while the economists' proposals have
aroused considerable controversy.
A 1983 Pravda article, for example, stated that only one of the 48
craftsmen registered in one district in Estonia paid taxes on his
private income. Some individuals do not even register for licenses.
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The Consumer Goods and Services Program
Preparation of a new package of measures for the
development of consumer goods and services began in
September 1983 with the establishment of a Politburo
commission. By September 1985 the Soviet leadership
had approved a series of targets for the provision of
goods and services during the period 1986-2000. The
targets themselves-an increase in sales of services of
40 percent by 1990 and 140 to 150 percent by the
year 2000-were ambitious, but, as two Soviet ex-
perts on the service sector complained in a January
1986 article in Kommunist, the authorities appear to
have avoided the question of providing the service
sector with additional resources to pay for the planned
increases. Instead, they made the achievement of the
program's goals dependent on gains in efficiency not
previously achieved' and on administrative measures
similar to those that have failed in the past.
' Increased output is to result primarily through "improvement in
production organization, more efficient use of capacities, modern-
ization and retooling of enterprises, the use of modern materials,
reduction in the material-intensiveness of output, and more eco-
their main production targets.
One such administrative measure in the program is a
requirement that all enterprises, regardless of their
main product line, set up facilities to provide services
to their own workers and the public at large. Similar
measures have been tried in the past with little
success.10 Although the authorities have vowed to
make provision of services a mandatory planning
assignment, this additional action is unlikely to lead to
a substantial increase in output. Managers will proba-
bly remain unwilling to divert labor, space, or materi-
als to providing services at the risk of failing to meet
The Consumer Services Experiment
The Soviets have also attempted to better the consu-
mer's lot by implementing experiments designed to
improve the performance of the state service sector
through minor changes in planning and management
procedures. Alarge-scale experiment was launched in
several areas of the RSFSR in July 1984 and expand-
ed to areas in the Ukraine and the Republics of
Belorussia, Latvia, and Estonia in early 1985. Accord-
ing to a November 1985 Izvestiya article, the experi-
ment was to be expanded throughout the USSR in
1986. Its key provisions include:
? A reduction in the number of plan targets that
service enterprises must meet and the introduction
of a new target-sales of services to individuals,
rather than institutions-as a measure of enterprise
success.
? An expansion of enterprise rights to use their profits
to expand production or pay bonuses to workers.
? Increased use of collective contracts: arrangements
that pay small groups of workers according to
performance.
10 For example, resolutions issued in January and March 1983
called on ministries to expand the provision of services at sites of
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? Intensified recruiting of fully employed persons who
wish to moonlight, as well as pensioners, students,
and housewives, for part-time work in the services
sphere."
The experiment has received mixed reviews. A Janu-
ary 1986 Central Committee resolution evaluating the
performance of the service sector in the RSFSR
credited the experiment with increasing growth rates
but noted that it has not yet brought about a turn-
around in service quality. Some observers have com-
plained that, despite the introduction of the new plan
target for sales to the populace, total sales remain the
main success criterion for service establishments. As a
result, enterprises reportedly continue to neglect the
public in favor of pursuing easier means of fulfilling
their sales targets. Other commentators have charged
that service enterprises have been unable to use their
newly granted freedom to spend their profits on new
equipment and supplies because these resources are
simply not available for purchase. Furthermore, as in
similar experiments in industry, the profits of success-
ful enterprises have frequently been siphoned off by
the ministries to subsidize unprofitable enterprises.
Initiatives to increase the use of pensioners and part-
time labor could provide some relief for the labor-
intensive services sector. Perversities in the incentive
system, however, have prevented managers from ac-
tively recruiting part-timers. Managers reportedly
complain that the use of part-time workers compli-
cates the computation of bonus payments and, be-
cause part-timers tend to be less productive, hampers
the enterprise's ability to fulfill labor-productivity
targets. Furthermore, individuals hoping to moonlight
in the state sector may be discouraged by the bankers'
hours kept by most service enterprises.
" Efforts to increase employment of part-time workers include
decrees issued in January 1983 and March 1983, and the Compre-
hensive Program discussed earlier. In addition, in July 1983 the
Council of Ministers approved measures allowing pensioners who
work at consumer service enterprises to receive their full pension
(previously they could not retain their full pensions if they earned
more than 120 to 150 rubles a month) and permitting individuals to
work a second job in a service enterprise for as much as half their
normal work time if the primary place of employment and its trade
Proposals for Expanding the Private Sector
Some Soviet economists have advocated a more radi-
cal approach: allowing the private sector to play a
broader role in providing services as has been done for
years in Hungary and East Germany (see inset on
services in Hungary and East Germany). Legalizing
and expanding the private sector, proponents argue,
could provide several benefits:
? Bringing the private sector above ground would
reduce the level of bribery and corruption currently
connected with the purchase of state services and
raise public morale.
? The private sector could better mobilize currently
underutilized resources such as pensioners and
moonlighters.
? A decentralized network of private service outlets
could respond more promptly and flexibly to
changes in consumer demand and, with a larger
number of small shops, bring services to locations
more convenient to consumers.
Economist Abel Aganbegyan, an informal adviser to
Gorbachev, has been a prominent advocate of adopt-
ing the East European model. Aganbegyan has ar-
gued in newspaper articles that allowing private oper-
ators to rent and run "miniservice points," and
expanding opportunities for individuals and groups to
provide services outside the state sector, could do
much to improve the quality and availability of
benefits.
Some Soviet economists have also proposed following
the Hungarian model of allowing individuals to work
semi-independently, under contract with state service
enterprises. Such arrangements could provide legal
channels for private activities that are currently con-
ducted underground and enable the regime to regu-
late and extract a share of private-sector earnings,
which at present escape taxation. The state, for its
part, would surely have to provide incentives to
persuade individuals to give up their lucrative under-
ground operations and sign such contracts. Among the
incentives it could provide are access to premises,
equipment, training, and supplies and coverage for
social insurance, vacation, sick leave, and pension
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Personal Services in Hungary and East Germany
For years Hungary has relied on legally operating
private businesses to provide a sizable share of its
personal consumer services. Much of this private
business consists ojmoonlighting state workers and
pensioners working on a part-time basis. Measures
introduced in 1981 allow private entrepreneurs to
lease service shops from the state and hire up to 12
workers to run them. Workers mayjorm cooperatives
to go into business on their own or under contract
with their state enterprise employer to do additional
work after normal working hours. Many simple
repairs are done by individuals who work on contract
jor state service shops.
Similar arrangements exist in East Germany, where
large numbers ojprivate hairdressers, tailors, shoe-
makers, and auto and appliance repair shops.flour-
ish. These establishments, which can be cooperative
or individual operations, perlorm about 7S percent of
consumer services. Individuals can hire up to 10
workers-some 82,000 private operations employ
255,000 people. The state makes credit available to
craftsmen, and supplies and materials can be pur-
chased through cooperatives engaging in wholesale
trade. Prices are set by craftsmen themselves and
must be approved by local authorities. Cooperatives
are subject to greater state regulation and are pre-
sented with annual plan output goals. The work of
private craftsmen is not subject to the state plan.
Hungary, East Germany, and especially China, where
measures to privatize certain types of economic activi-
ty have gone the farthest. They argue that expansion
of the private sector in China has produced corrup-
tion, speculation, inflation, and a growing social strat-
ification that, in their view, creates a potential for
class conflict. Ideologically minded officials also have
complained in the press that the private sector lives as
a parasite on the state economy, plundering state
property, benefiting from subsidized rates for pre-
mises, heat, electricity, and transportation, and pock-
eting "superprofits which no capitalist ever dreamed
of."
Even among reformers, moreover, the question of how
much of a role the private sector should be allowed to
play is controversial. Prominent academic Tatyana
Zaslavskaya, author of the iconoclastic 1983
"Novosibirsk Report," which criticized systemic fail-
ures of the Soviet economy and was widely circulated
in the West, has argued in recent press articles that
expansion of the private sector would increase the
level of "injustice" in Soviet society. In her view, the
private sector is unjust because private incomes are
derived through exploitation of market scarcities rath-
er than through hard work. Seeing an increase in the
number of individuals living off such "unearned"
income would, Zaslavskaya argued, further demoral-
ize honest state workers who must live on what they
earn.
Popular Skepticism. Many ordinary Soviet citizens
also balk at proposals to expand the private sector.
Frequent complaints to Soviet media concerning high
Conservative Resistance. Aganbegyan and other ad-
vocates of expanding the private sector have encoun-
tered strong opposition from officials who see danger-
ous social and political consequences attending any
such moves. In a June 1985 Pravda article written
under the pseudonym O. Vladimirov, Boris
Rakhmanin, the first deputy chief of the party Cen-
tral Committee's department for relations with the
"socialist bloc" and a prominent spokesman for con-
servative views, called proposals to expand the private
sector "revisionist" and fraught with serious econom-
ic, social, and ideological consequences. Officials such
as Rakhmanin take a dim view of developments in
prices for scarce food items in collective farm mar-
kets, where prices are set by supply and demand,
testify to a widespread public suspicion of free mar-
kets and market prices. Yevgeniy Ambartsumov, a
senior researcher at the Institute of the Economics of
the World Socialist System and a prominent advocate
of expanding the private sector, told US Embassy
officials that his articles supporting privatization of
services have drawn a huge volume of mail split
almost evenly between support and opposition. In
Ambartsumov's view, the nay-sayers represent a deep
popular fear that privatization would lead to a revival
of capitalism and to "one man becoming richer than
another"
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Although proponents of the private sector see many
economic benefits coming from expansion, other offi-
cials evidently worry about the economic costs that
might attend such a move. In articles in the Soviet
press, for example, managers have expressed the fear
that opening up opportunities in the private sector will
divert manpower from the state sector. Similarly,
officials and fellow workers have complained that
individuals attracted by the possibility of large earn-
ings in the private sector lose interest in contributing
to the state sector or sometimes do not contribute at
all. In late 1985, the official newspaper of the Young
Communist League published several articles calling
for greater regulation of the private sector to ensure
that opportunities to earn money there do not under-
mine incentives to work in the state sector.
Collective Contracts: Personal Incentives
in the State Sector
Service-sector officials in Estonia claim to have found
another way to stimulate personal initiative in the
state service sector. As part of the extension of the
consumer services experiment to Estonia in January
1985, republic officials began an experiment with the
use of collective contracts in radio and television
repair service. The Estonians claim that the quality of
The Tallin Experiment Allowing Firms To Pocket
the Profit
wages and decide how to run the operation.
Izvestiya reported that a state radio and television
repair association has leased a fully equipped work-
shop to a team of repair technicians. The team pays
for everything out of its own pocket-rent, utilities,
new equipment, supplies, and janitorial services. Like
other state enterprises, the team has a plan assign-
ment, but, in a departure from the usual practice,
planners have promised the team a stable plan, that
is, plan targets will not be increased as profits
increase. The plan requires the team to pay 650
rubles per month per man to the state. The team
keeps 70 percent of everything earned above the plan
assignment. A team leader and council determine
According to the authors of the Izvestiya report, the
new system has transformed the way the shop oper-
ates. Average repair time has been cut from two
weeks to three days, and the shop gets few returns
since shoddy repairs reduce the team's earnings.
Paying the bills gives the team an incentive to
economize, and team members have cut consumption
of utilities and spare parts. They also let the janitor
go, deciding they could keep the shop clean them-
selves. The team rented a second service truck and
hired a driver to drum up more business, and, when
members discovered the receptionist's rudeness was
driving customers away, they.fired him. The techni-
cians' earnings have increased to the point where they
are no longer interested in doing repairs "of1"the
books."
repair service has been vastly improved, because the
contracts not only make workers responsible for costs
but also allow them to retain a large share of profits.
An enthusiastic account of this experiment published
in Izvestiya in August 1985 demonstrates how the
collective contract works under ideal conditions (see
inset on Tallin experiment).
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Despite high-level endorsements and enthusiastic
press articles, collective contracts do not appear to
have made much of a splash elsewhere in the service
sector. Use of collective contracts was endorsed in the
consumer services experiment, but press reports indi-
cate that collective contract arrangements in services
and other sectors have encountered many obstacles.
Ideological conservatives reportedly object to the high
incomes earned by contract workers. Some officials
fear that the contract arrangements could lead work-
ers to become preoccupied with making a profit and to
lose sight of the interests of the enterprise and the
economy as a whole.
Press reports indicate that collective contracts fre-
quently cause problems for planning officials and
factory managers, who find themselves compelled to
violate the contracts when unforeseen circumstances
require revision of plan priorities or reassignment of
workers. For their part, the workers find they have no
recourse when management violates the contract,
even if management reneges on promised wage pay-
ments. Contracts stipulate that management is to
provide the collective with necessary supplies, but
managers have little control over sources of supply
outside the enterprise. Frequent supply disruptions
can stop work in the collectives and prevent them
from earning the large amounts they anticipated. In
view of these difficulties, it is not surprising that
collective contract arrangements often do not work.
Cooperatives-Halfway Houses for Personal Initiative
Given the formidable ideological barriers to anything
that resembles individual private activity, it is not
surprising that reform-minded economists have tried
to find a way to get around these barriers. Several
recent press articles have called for reviving coopera-
tives, which played a large role in the economy in the
1920s. Proponents argue that such a move would
provide a quick fix for the service sector while requir-
ing few additional resources and avoiding the undesir-
able side effects that conservatives argue would ac-
company alarge-scale expansion of private activity.
Proponents of cooperatives may be talking about
something comparable to the old style cooperatives or
artels that existed before the revolution and were
revived as part of Lenin's New Economic Policy in the
1920s. These organizations operated much differently
than the cooperatives in the USSR today. They were
independent, self-governing associations of large and
small groups of workers that enjoyed genuine autono-
my from the state-members ran the operation and
divided profits among themselves. By the 1930s,
however, independent cooperatives were either abol-
ished or taken over by the state as a result of Stalin's
imposition of central control over the economy.12 Their
descendants, organizations of the Union of Consumer
Cooperatives that today conduct trade and provide
services mainly in rural areas of the USSR, are
cooperatives in name only. With few exceptions, they
operate like ordinary state enterprises having little
operational autonomy and working under plan assign-
ments that leave little or no profit for the members.
One of the exceptions is a roadside restaurant recently
set up in the Georgian Republic (see inset on coopera-
tive restaurants). Although restaurants do not fall
strictly within our definition of consumer services, the
case of the Georgian restaurant illustrates the advan-
tages proponents see in a revival of independent
cooperatives.
As proponents see it, allowing the revival of old style,
truly member-run cooperatives in the service sector
would have several advantages:
? Cooperatives encourage higher labor productivity
than state enterprises and can more easily make use
of the labor of pensioners, the disabled, teenagers,
and women with young children.
? Cooperatives have a political advantage: They are
seen as ideologically "superior" to private ownership
(although inferior to state ownership) because they
preserve the collective nature of work and control.
Additionally, in taking this road the Soviets could
argue that they are drawing on their own experience
of the 1920s and therefore developing a distinctively
Soviet model rather that imitating the Chinese or
Hungarians.
12 Statistical handbooks for some of the Baltic republics indicate
that, at least in these areas, cooperatives existed in industry up to
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Cooperative Restaurants Don't "Cook the Books"
According to reports in the Soviet press, a roadside
restaurant set up in 1984 by the Georgian Republic
Union of Consumer Cooperatives operates on a col-
lective contract that gives it wide-ranging economic
independence. Employees do the purchasing and set
prices themselves, and prices have gone down. The
restaurant delivers affixed amount o,1'its profits to the
state, but it is free to use above plan profits any way
it chooses. Most of the above plan profit is shared
among employees.
According to media reports, customers claim thefood
is better and more varied than the usual fare in state-
run restaurants. Sales are up, and, with no increase in
stgfJ; the restaurant is now turning over to the
cooperatives union four times the profit it earned
before. Employees earn two to three times their
.former salaries, and the restaurants' defenders insist
that these are achieved without shortchanging the
customer, doctoring the books, or dodging govern-
Despite the advantages claimed by proponents, pro-
posals to revive the cooperatives have encountered
opposition from conservatives who oppose any depar-
ture from state ownership as a retrogressive step.
They see cooperatives as just another way of opening
the door for "exploitative" profits and "unjustifiably"
high earnings that might lure workers away from
labor-short state industries.
The Available Options
To judge from the range of experiments tried and
proposals aired in recent years, the new leaders are
likely to choose one or a combination of the following
options for improving consumer services:
? Seek solutions on the cheap: attempt further adjust-
ment in the management mechanism combined with
disciplinary measures to exact better performance
from workers and managers. This could involve
further adjustment of the planning and manage-
ment system as well as attempts to more strictly
enforce plan assignments for the provision of ser-
vices such as the requirement that all enterprises
provide consumer services.
? Increase funding for the state service sector: provide
it with a larger share of labor, capital, and
materials.
? Enhance the role of personal initiative: expand the
use of collective contracts and create opportunities
for cooperative or quasi-private arrangements.
Seeking Solutions on the Cheap. Recent events sug-
gest that the regime is likely to try to get maximum
mileage from efforts to improve the existing system
before it resorts to more costly measures. In a speech
to the Supreme Soviet on 18 June, for example,
Premier Ryzhkov announced that machine-building
enterprises are being ordered to set up factory service
networks to improve repair service and give the
enterprises a greater stake in the quality of the
consumer goods they produce. Four defense industry
ministers were publicly rebuked in June for paying
insufficient attention to the production of consumer
goods at enterprises they supervise. This action sug-
gests that the leadership may attempt to force minis-
ters and managers to do a better job on other
consumer-oriented assignments.
We cannot rule out the possibility that, despite the
regime's rhetoric on services, it is not prepared to take
economically or politically costly steps and will go no
further than attempting to make the existing system
work better. The long-term economic gains from these
measures, in any case, are likely to be small. To be
effective, Gorbachev would have to resort to disciplin-
ary measures more severe than public reprimands, but
it seems improbable that managers in high-priority
industries would be severely penalized for failing to
meet assignments for the provision of services.
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Funding the State Sector. A substantial increase in
the share of resources allocated to the service sector
could bring a considerable improvement in the supply
of consumer services. Labor is particularly important
in the services sphere. The leadership plans to allocate
the entire increment (3.2 million persons) to the work
force in 1986-90 to the "nonproductive sphere," which
includes health, education, and services. Premier
Ryzhkov told the party congress in March that any
labor freed up in industry by modernization is also
slated for these areas. It is not clear, however, how
much of this additional labor is actually earmarked
for the service sector.
Rhetoric aside, there is no sign that the leadership is
prepared to substantially increase the share of labor
or investment devoted to services. Indeed, in light of
the large, long-term commitments that Gorbachev has
made to his industrial modernization program, his
endorsement of the food and energy programs, and
the continuing needs of Soviet defense, the service
sector is likely to fare poorly in the competition for
resources for at least several years to come. Providing
additional resources, moreover, would do little to
remove the perversities of the incentive system or to
encourage service-sector enterprises to make efficient
use of resources and serve their customers better.
Increasing the Role ojPersonal Initiative. Although
politically controversial, arrangements designed to
stimulate personal initiative among workers in the
service sector appear to offer the greatest potential
economic gain for the least economic cost. Many
obstacles would have to be overcome, but collective
contracts, independent cooperatives, and quasi-private
arrangements have the potential to provide workers
with sufficient scope and effective personal incentives
to produce major improvements in the quality and
quantity of personal services.
Gorbacbev's Policy and Perspectives
Sanctioning arrangements that allow a greater role
for personal initiative in the service sector would
require strong backing from Gorbachev. He has not
taken a clear and consistent public stance in support
of expanding personal initiative, and, in view of the
controversy surrounding such measures, he may well
wish to avoid doing so. Nevertheless, there is evidence
indicating that Gorbachev favors expanding the role
of personal initiative:
? During his tenure as party secretary for agriculture,
he took a favorable view of citizens' private plots.
His call fora "realistic" evaluation of the role of
moonlighters in housing repair in a speech to Lenin-
grad party workers in May 1985 also suggests that
he is sympathetic to expanding the role of personal
initiative in services.
? In his speech to the 27th Party Congress in Febru-
ary, he called for new arrangements that would
allow private individuals to provide services under
contract with state enterprises. He echoed these
sentiments in a July speech to Khabarovsk party
workers, calling for a search for "new forms of
individual work activity." Both at the congress and
in Khabarovsk, Gorbachev endorsed expanding the
role of cooperatives in the service sector. He did not
make clear, however, whether he had in mind the
present ersatz cooperatives or more vigorous, inde-
pendent entities.
? He and other Politburo members have repeatedly
endorsed collective contracts. He told the June 1985
Conference on Science and Technology that such
contracts should be boldly expanded to become the
main form of management. It remains to be seen
whether he will be willing or able to force planning
and ministerial officials to give contract collectives
elsewhere the degree of operating autonomy and
resource support that make the Tallin experiment
work.
The General Secretary's statements on the broader
topics of economic reform and ideology suggest that
he has little sympathy with conservative arguments
that an increased role for personal initiative in the
service sector is ideologically unacceptable. Gorba-
chev has repeatedly expressed his views on the need to
expand the role of workers' initiative in the economy
and to create a sense of "socialist enterprise" among
workers. His remarks have more than once suggested
an impatience with ideological obstacles that stand in
the way of change. Gorbachev warned in Khabarovsk
during his Far East tour that he would not allow
dogmas that conservatives regard as "eternal truths of
socialism" to become an obstacle to progress. He has
given little attention to other, practical obstacles, such
as the problems of supply, taxation, and price setting,
that will also have to be dealt with to successfully
foster personal initiative in the service sector.
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Whither the Gorbachev Regime?
Recent events have added to the uncertainty about
what Gorbachev and his colleagues have in mind for
the service sector. Reiterating his determination to
address the problems of the service sector at the party
congress, Gorbachev proposed atwo-part agenda. He
linked his endorsement of cooperatives and individual
arrangements to measures to crack down on illegal-
ities and abuses in services and other sectors of the
economy, calling for legislation to eliminate "unear-
ned" income, theft, and corruption. Shortly after the
congress, the Politburo seconded Gorbachev's propos-
als and ordered the drafting of new legislation in both
areas.
One part of Gorbachev's agenda was fulfilled in late
May with the publication of a series of decrees on
"unearned income" and corruption (see inset on un-
earned income). Although the decrees contain no new
prohibitions on private activities, they increase penal-
ties for violations of regulations already on the books,
such as tax evasion and theft of state property. At a
minimum, these decrees create a climate in which
private activity is viewed with suspicion and may be
increasingly subject to arbitrary actions of local offi-
cials. If vigorously applied, these measures could
significantly reduce the overall supply of services
available to Soviet consumers by making it risky for
underground private operators to continue to do busi-
ness. Although the decrees pay lipservice to the need
to expand the supply of spare parts and construction
materials sold to the population through legal chan-
nels and to move quickly to expand the supply of
personal services, they provide few clues as to how, if
at all, the leadership intends to accomplish these
tasks.
As yet there has been little progress on cooperatives
and individual labor arrangements-the second half
of this legislative agenda. The Politburo approved
guidelines in August on the formation of cooperatives,
but the guidelines have not yet been published and
there are few clues as to how far they go. It is likely
that conservative resistance is delaying progress on
new legislation to expand individual labor activity in
services. Evidence indicates, however, that discussion
of such legislation is proceeding within the regime.
Aleksandra Biryukova, newly appointed Central
The decrees contain a variety of measures to,further
General Secretary Gorbachev's anticorruption cam-
paign, including steps against corruption by officials
and ordinary citizens. Those measures that will have
the greatest impact on private-sector economic activi-
ty include:
? Closer monitoring oI individual income to identify
those receiving money Jrom illegal sources.
? Increased.financial penalties jor violation oI laws
on taxation and licensing ojprivate artisans and
craftsmen.
? More detailed accounting by state enterprises of
supply inventories to curtail theft by personnel.
Committee Secretary in charge of the consumer
sector, said in a speech on 20 May that legislation to
encourage citizens' individual labor in services is
being drawn up. Oleg Bogomolov, director of the
Institute for Economics of the World Socialist Sys-
tem, told Austrian journalists in April that measures
to permit the formation of small family businesses in
the service sector would be forthcoming.
Prospects
Enactment of genuinely effective measures to expand
the role of personal initiative in consumer services will
be a severe test of Gorbachev's leadership ability and
commitment. Arrangements designed to stimulate
personal initiative will have little effect if they are not
accompanied by effective steps against some of the
planning and management problems that have sty-
mied past attempts at reform in services and other
sectors. Problems that would have to be addressed
include:
? Ensuring operating autonomy-overregulation by
central planners and ministerial officials often de-
prives the collective contract of its incentive effect.
The same fate could befall cooperatives and even
private individuals if they are not given sufficient
independence to run their businesses profitably and
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serve their customers well. This should include the
power to expand operations, control the number of
employees, and adjust prices to reflect supply and
demand.
? Providing facilities and supplies~hronic shortages
of materials and equipment make it difficult for any
type of enterprise to operate profitably. Frequently,
self-financing arrangements are rendered meaning-
less, for example, because construction resources
and equipment needed to modernize or expand
operations are generally unavailable for purchase.
Creation of adequate legal sources of supply will be
essential to the success of contract, cooperative, or
individual operations.
? Increasing incentives-private operators working le-
gally are now required to pay 60 to 65 percent of
their profits to the state in taxes. If private initiative
is to be encouraged, provisions would have to be
made for a more equitable tax rate aimed at
encouraging individuals to operate legally rather
than underground. The regime would likewise have
to set the level of taxes or deductions from profits of
cooperatives and contract collectives at a reasonable
level and prevent planners and managers from
adjusting it upward.
Movement to increase the role of personal initiative
may become increasingly attractive if, as we believe,
efforts to improve the system on the cheap fail to
produce a major improvement in consumer services.
However, in view of the serious economic and political
obstacles to personal incentive measures, change will
probably be slow in coming.
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Appendix
Definition of "Everyday Services"
The services we deal with in this paper largely
coincide with the items in the Soviet category "every-
day servicing of the population." In US national
accounts, these services are classified as "personal
services," "automotive repair services and garages,"
and "miscellaneous repair services." "There are note-
worthy exceptions, however, which mean caution
must be used in making US/Soviet comparisons in
this area:
? The Soviets include some private housing construc-
tion and repair, which, partly for the sake of
manageability and partly because construction is
not a service, are excluded from this study.
Table 5
Everyday Services Sold in State
Enterprises and Estimated Shares of
Total Sales, 1985
Shoemaking and
repair
Knitting and repair
of knitwear
Repair and produc-
tion of household
? The Soviet category "everyday services" includes a appliances
substantial amount of activity that is not actually a Repair and servicing
service, but production of goods.'? According to of automobiles
Soviet definitions, the purpose of the service sector, Repair and produc-
apart from providing services, is to provide the lion of furniture
. , , ? , , , Drycleaning
Beauticians and
barbers
? Soviet data do not accurately represent expenditures Rentals of consumer
by households on these services because the basic durables
data exclude materials (such as cloth used by tailors) Hauling services
and also include purchases of services by state Funeral services e
enterprises and institutions. Processing of agri-
The category "everyday services" encompasses over
900 types of activities, the largest of which are shown
in table 5.
cultural produce and
other agricultural
services a
956
9.9
1,801 1
8.6
461
4.8
1,126 1
1.6
538
5.6
402
4.2
219
2.3
435
4.5
463
4.8
217
2.2
868
9.0
270
2.8
541
5.6
406
4.2
764
7.9
Sources: Vestnik Statistiki, no. 7, 1985, p. 80; and 1985 SSSR V
Tsi(rakh.
a Values for funeral services and processing of agricultural produce
and other agricultural services are estimated based on their shares
of the total for 1984.
25X1
25X1
25X1
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Table 6
Growth of Everyday Services
Provided by the State
Durables (household
appliances, tools,
radios, televisions)
10.5
13.5
10.5
NA
Furniture
xA
13.0
7.2
NA
Automobile repair
and servicing
NA
22.7
13.7
12.1
Production of:
Shoes
9.3
9.4
6.0
NA
Clothing
5.3
4.2
0.5
NA
Knitwear
13.0
9.8
6.0
NA
Metal items
NA
22.2
12.2
NA
Furniture
15.9
10.2
7.4
NA
Other services:
Drycleaning
9.4
5.2
3.2
3.8
Laundry
10.3
6.3
2.8
4.3
Photography
11.3
7.1
5.4
7.7
Public baths
0
2.6
2.4
5.3
Beauticians and
barbers
5.3
5.6
5.7
6.2
Rental of durable
goods
19.4
14.3
12.0
11.6
Freight hauling
services
NA
7.4
7.0
3.2
Sources: Vestnik Statistiki, no. 5, 1983 and no. 7, 1985; 1983
Narkhoz; and 1985 SSSR V Tsifrakh.
The repair and rental of durable goods (including
automobiles) is the largest and fastest growing sector
in "everyday services" provided by the state, account-
ing for about 20 percent of the total in 1985 (see table
6). Their swift increase reflects the rapid rise in Soviet
production, and hence the stock of durable consumer
goods.15 It also is in keeping with the official policy
(originated under Krushchev) of trying to limit the
demand for durables by encouraging the public to
rent rather than buy them. The Consumer Goods and
Services program announced in late 1985 also empha-
sizes the need for more repair and rental services.
Despite rapid growth of repair services, the leadership
has far to go to meet Soviet norms for these services.
According to one Soviet publication, only 15 percent
of the planned consumption norm for repair services is
being met, as compared to almost 50 percent of the
norm for customized production and 21 percent of
that for personal services.
15 Automobile repair services in particular are in short supply and
are the subject of much lament in the Soviet press. In 1982 the level
of car servicing was less than one-tenth the planned norm. The
Soviet consumer's insistence on keeping his long-awaited and
expensive automobile past the planned service life of nine to 10
years is aggravating problems with auto servicing. Because retire-
ments are low, the car inventory is growing in excess of plan,
causing the inventory of service stations to fall even further behind
demand. See "The Consumer and the Automobile-What
Future?" USSR Review, February 1985.
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