Summaries of CIA Files: On the Economy of the Soviet Union

The CIA - despite its obvious bourgeois and pro-US bias - is a very valuable source of information about the Soviet economy. Furthermore, the files confirm the tremendous achievements that the USSR had during the Stalin Era, while shedding light on the revisionist degeneration of the Soviet Union post-Stalin.

The following information is provided exclusively based off of declassified CIA file about the economy of the Soviet Union. The CIA file are summarized with their names in bold. They are also organized according to topics listed in the table of contents.

The parts in which I incorporate my own analysis are in Italics form. Any part that is not in Italics is information directly based on the CIA document.

The Management of the Soviet Industrial Enterprise

Originally Written: August 7, 1956, by the CIA

Note: The document is about the operation of enterprises under Stalin as well as after his death. Although the file is written in 1956, much of the information provided here is about the remnants of Stalin Era policies. In cases where changes occurred post-Stalin and during Khrushchev's decentralization period, the year of these changes has been pointed out explicitly in this document.

The study was conducted based on a variety of sources. It focused mainly on heavy industry that produced machinery but found that these features exist in other industries as well.

Soviet leaders emphasized good management quite more than the American or capitalist leaders because they needed good management for the centrally planned economy. There were thousands of firms and those with a higher positions than the managers in the chain of command were responsible for how the managers performed. The upper echelons were responsible for setting the input limits and the output targets. Although the enterprises made their own plans, the plans had to conform to the central plans. The planning took long periods of time. Several months [because of the low access to technology and scientific knowledge]. As a result, there were inefficiencies. The formal powers of the management have been quite limited despite the doctrine of “one-man responsibility” or Yedinonachaliye.

Recently in 1956, the government took measures to further simplify the planning process. The government began to further decentralize. In 1955, the government vastly expanded the powers of the managers of enterprises and reduced the number of managerial administrative personnel. The government’s measures also allowed the ministries to decide more issues on their own. The government also further simplified the structure of the administration as part of the decentralization platform. The state had measures to increase specialization from each firm and increased cooperation between the different firms to help the process of decentralization.

The Soviet planners at the top could change the plans midway through and the upper echelons in ministries could impose additional requirements on the enterprises. Despite efforts to further decentralize, the State Bank and the Ministry of State Control saw their powers increase.

There are social and economic rewards for over-fulfillment of targets and punishments for under-fulfillment. The excess pressure from above and the infeasibility from below has caused ingenious ways of cheating to get things done. The implementation of the plans and the day to day operations are by each ministry and enterprise.

Soviet planning involved central planning for the major decisions but decentralization for the operational issues.

Policy-Making Machinery

Supreme policy-making power rests with the Supreme Presidium of the CPSU. The Presidium has 11 members, 7 of whom were in the highest executive body of the USSR. The Presidium is in charge of the most important decisions as well as how much of the budget is to be spent on investment vs. consumption, etc. The decisions taken by the presidium also go through the party approval process as well.

Executive and Administrative Structure

All-Union Council of Ministers is the highest executive authority.

The Enterprise

Some of the individual enterprises work independently. However some of them work as “trusts” which are combinations of multiple enterprises of the same industry/product. There are also “combines” or kombinat which are vertical mergers of enterprises - they merge the raw materials enterprises and the processing industries into one.

The point of these trusts and combines is to facilitate management and collaboration. The individual enterprises in combines and trusts work the same way as individual enterprises that are not parts of combines and trusts.

The Individual Enterprise: Managerial Principles and Structures

The central planner state gives the machinery and the factory pieces to the factory and is responsible for the construction of the factory. The enterprise or firm is legally responsible for [the protection of] such machinery. It cannot sell, retire, or divert fixed physical capital without ministry’s approvals

The firm is to meet its production goals.

It has a checkings account in the bank, it borrows from the bank for its production. The enterprise is also responsible for paying its debt to the central bank. The firm has a bank account determined by the central planners.

The firm hires and fires workers on its own. The wage fund - the amount of money going as income for the fixed number of workers - is fixed.

The difference with capitalist countries is that the central planners and ministries can directly intervene in the production process to ensure the fulfillment of goals.

The firm is to exercise initiative to develop new technology and reduce costs.

The formal powers of the manager are to fire or hire employees, insurance of internal order binding on all the employees, management of the financial resources, talking to union leaders, and maintaining discipline.

Khozraschyot:

Firms that operate under the principle of "Khozraschyot" or "Cost Accounting" are responsible for profits, and to reduce costs.

It must be noted that in the USSR, the focus was on output targets. While profit was not in command of the economy during the Stalin Era, virtually all firms were to obtain centrally planned profits. The profits of all firms in the Soviet Union were then directed towards workers' bonuses, cultural events, paying off the debt to the banks, and improving the technical quality of the factory; a part of the profits went to the central government for the workers' state's funds.

Structure of Enterprises

Each individual enterprise has a chief engineer or a deputy director. The enterprise director has almost-full responsibility with the plant. Then, there is the chief which is in charge of the hiring and firing process and many of the managerial roles. Below the chief in the hierarchical structure, there is the foreman which is the captain of a small team of workers. Orders to the workers are channeled through the foreman.

Formulation of the Enterprise Plan

The actual operation of the economy is based on the five year plans and the annual national economic plan which is made up of the plans of all producing units, as approved by the Supreme Soviet.

For individual enterprises, there is the Technical-Industrial-Financial Plan also known as the Tekhpromfinplan.

Enterprise plan components are the following:

1. Production Plan

2. Plan for the utilization of the production capacity

3. Technical development plan

4. Labour plan

5. Materials plan

6. Production cost plan

7. Financial Plan

The plan is binding commitment on the enterprise.

Operativny or the Operational Plan are the plans for the very short term such as the day or month or week.

Governing Directives

In many industries, plan directives require higher norms each year by increasing the production norms by a certain percentage per year.

There is a reluctance [on the part of the central planners and ministries] to accept lower norms.

Drafting of Plans

Not only do managers get to draft the plans for the enterprise, it is mandatory that the workers' union approves of the manager's draft leadership gets involved in the drafting process as well, although given that drafting is a technical job, there is a chance that workers do not involve much.

While the plans are made centrally, local government committees also get involved in the planning in the cases of the need to get involved for the public interest. Ministries and local governments intervened and added extra targets for enterprises in order to account for the local needs.

Each enterprise manager needs to draft a plan for the year; the plan is concerned with the operation details as opposed to fulfilling targets. The target levels would increase for each plan period. If the enterprise manager feels that the targets are 'unfair' or not doable, then he or she could request a different target level from the ministries or the central government.

Note: the Soviets since Lenin's time emphasized one-man management. There was no "worker self-management' in the USSR [unlike in Yugoslavia] because 'worker self-management' was a means by which opportunist currents sought to decentralize the government. In late 1956 and 1957, Khrushchev began a series of decentralization reforms. Involving workers' self-management model in the enterprises was part of Khrushchev's plan.

Nevertheless, despite the fact that there was no workers' self-management under Stalin and shortly after his death, there was plenty of power for the unions, and extensive union democracy so to help in the purge of corrupt Party elements. I have written about this union democratization extensively in my other article "Stalin and the Proletariat's Battle for Democracy."

I must also note that the union leaders, as shown later in this document, also had the role of increasing labour discipline. Therefore, while the democratically elected union leaders had to approve of the operation plan for the factory, they were also responsible for increasing labour productivity.

Procedure

Each enterprise has an experienced engineer who helps make the production plan and takes into account the technical details in cooperation with other departments. The engineer helps determine the production methods, the capaciy, and norms.

'Improving Procedures'

The Soviet leadership after 1953 considered improving the procedure planning by splitting the gosplan into two committees. One concerned with short-term planning and one concerned with long-term planning.

Radical shifts in policy in 1953 with the introduction of attempts to increase spending in consumer products caused disruptions in production. There were a dozen interventions by the ministries onto the enterprises. However, this was criticized in the press reports.

For each enterprise, the indexes that the firms had to submit their results for were criteria like production of output, natural unit of products, the number of workers employed, productivity increases, the enterprise funds, etc.

However, soon after Stalin's death, the number of indexes of success and objectives in the national economic plan, the ministries, and the enterprises were dramatically reduced to promote decentralization. The 1955 plan included 46% fewer indexes than the 1954 plan. The goal of this was to reduce central planning and enhance the “self-management” of factories.

Formerly, five year plans designated for the specific enterprises were done by the ministries. However, after the 1955 decentralization reforms, the enterprises could make their five year plans by themselves. The managers had to make plans. The estimates and plans were submitted by the manager of the enterprise as well as getting the signature of the trade union leaders and the CPSU officials. In case of difference in opinion on the plans, the enterprise officials could provide dissenting opinions for consideration. Following that, the enterprise itself works out the details of its technical-industrial-financial (tekhpromfinplan) and the plan has to be only approved by the manager but gets sent to the ministry only for data control purposes. The detailed enterprise plan must be submitted no later than a month and a half after the approval of the national economic plan. The ministries had been charged with reducing the amount of details in the enterprise Tekhpromfinplans.

Plan Fulfillment and the Council of Ministers

Plan fulfillment in the state enterprises is the criteria for the career of the enterprise manager. The salaries of the manager depend on the success of their management of the enterprise and there is plenty of pressure. Hence the cheating that occurs at times.

The Council of Ministers which is at the executive level and has the top regulatory power of the USSR, not only approves the annual economic plans, but also presents the other priorities that have to be taken into account. Sometimes the Council also makes special decrees to solve very specific problems in specific enterprises. The Council has the power to change the plans and intervene to save the production in enterprises.

Complaints about Failures - The Process

The ministries also got the complaints from the managers and the workers.

If the plans targets are about to not be reached, the enterprise leadership creates all kinds of support networks as well as threats to get the plan done. The departments will also first investigate the reasons for the failures of the plans. If the plans are not met, there will be an investigation on whether the failures were managerial or technical. If managerial, then the officials try to blame each other. There is also a degree of wrath shown to promote discipline, apparently.

The Chief Directorate of State Material Reserves

The Soviet government has a ministry called “The Chief Directorate of State Material Reserves” which holds the key commodities’ reserves for swift supply control. It was meant to keep some goods scarce while introducing them to the economy in case there was too low of supply. It also helped keep the black market economy in check.

Certain goods can be sold by ministries to other ministries. Before 1949, the consumer sector enterprises frequently negotiated with producer sector enterprises directly. There were numerous problems resulting from this, including inadequate control, wasteful pre-contract negotiations and other evils. After 1949 however, the government centrally planned this part of the economy because of its inefficiencies. The ministries controlled the negotiations between the consumer enterprises and the producer enterprises.

One problem with the supply control was that the procurement of supplies by the relevant ministries took too long and the enterprise managers often had to ask for the supply by themselves.

Quality Control and Inspection

The All-Union State Standard (GOST) sets the standards of quality through the (1) description of the product, (2) physical and mechanical specifications, (3) sampling rules or testing methods, and (4) rules for packaging transportation, and storage.

Ministries seek to have broad inspections of the product quality whereas the chief directorates for enterprises specifically supervise the testing procedures.

The inspectors first take a look at the semi-finished parts and assemblies in order to prevent the further processing of poor quality goods. Then, they do spot checks to ascertain the observance of technological rules. Third is the complete examination of finished products.

Defective products are classified as total or correctable rejects.They can be replaced given the funds. If the product is slightly below standard, the inspectors would be generous and find them acceptable.

Delivery of low quality products can get both the inspectors and the plant’s chief engineer and the enterprise director in jail.

The enterprise managers, until 1955, could not transfer employees from one shop to another, could not alter the salaries of the employees, and could not on his own initiative use the fund the buy the needed items of equipment beyond 300 rubles.

In 1955, the powers of the enterprise managers were expanded; the amount that they could spend on the needed equipment increased to 500 rubles; they could purchase goods directly from consumer enterprises. Wage funds saved during one quarter of the year could be used to pay wages in the subsequent quarters and under certain conditions, surplus materials and equipment not used by the enterprises could be sold.

In order to ensure the proper distribution of labour and inter-enterprise help, the enterprises can transfer labour from one department to another under the jurisdiction of the ministry.

The Labour Force

There is a Chief Directorate for Organized Recruitment of Manpower (Glavorgnabor) which has the job of finding local units in different parts of the country to each area. The goal is to transport these units with 1-3 year contracts for working in areas in which there is not a large enough labour force.

The training of the workers was a major issue but the technical schools, education, as well as increased experience at work caused the development of a strong labour force.

For giving bonuses, the directorates consult the trade union leader of the plant. Bonuses or top managerial personnel such as chief engineers, deputy directors, directors, chief accountants, and chiefs of planning and production are awarded by the ministry. For overtime work, the manager has to get the approval of the directorate as well as the trade union leader. There would be bonuses for overtime work, by law.

Role of Trade Unions

Trade unions must support the managers in establishing worker discipline. Worker discipline is strict in the USSR.

There is a widespread use of the production conference, in which a Party group, the trade union represenattives, and the managerial personnel meet to discuss issue with one another. The workers’ demands are often met and labour productivity gets raised. The workers’ grievances gets met at high official positions.

Workers can complain directly to Kremlin, the All-Union Central Council of Trade Unions, and the ministry. Extensive use is made of the grievance mechanism which involves the supreme court at times.

While the manager's enterprise operational plans needed the approval of the union leadership - and they often were approved given the union leaders did not have technical knowledge of the enterprise planning - the unions did not get involved in the management of enterprise itself.

Central Banking and Enterprise Financing

Each industrial enterprise has a portion of its funds in the bank account.

Whereas the Gosbank provides the short-term credits, the Promobank provides long-term credits.

Gosbank:

The Gosbank gives funding to the enterprises based on their purposes. The bank can give loans that are not centrally planned to the enterprise, given it obtains the approval of the ministry or the supervising directorate. The loans bear very low interest and are secured by approved collaterals.

The extension of credit between enterprises is strictly limited, in order to strengthen the bank’s grip over the financial system. The banks supply credits to a specificed proportion of the normal working capital in order to give the bank the ability to have a share in every purchase of materials by the enterprise and allow the central bank to closely regulate activity.

The Gosbank also increases efficiency by categorizing enterprises. The firms that are more successful in fulfilling objectives are more easily able to obtain loans from the bank. The enterprises that are somewhat successful are treated more strictly; and the enterprises that are failing are even more strictly treated by the Gosbank.

The Gosbank closely observes the failing firm’s operations and has various kinds of sanctions for malpractices if observed. If for instance a firm fails to pay its suppliers, the bank may give loans to purchase the goods from the suppliers but the goods cannot be used in production by the firm until the payments to the bank are made.

The bank may also require a firm to pay for the ordered materials to their suppliers ahead of their delivery. If an enterprise improves its operations sufficiently after 6 months, the enterprise is placed under “regular regime” status where the bank still treats it strictly but not as much as before.

Otherwise, the bank may keep the “special regime” status or declare the firm bankrupt. In the latter case, the enterprise is no longer able to use its income, the bank stops credits, and any kind of money transfers virtually end.

In addition, those responsible for the failures could be publicly stigmatized by the Soviet press. With the exception of the income paid to the workers and the salaries from the wage fund which are disbursed by the bank, virtually the entire transactions of enterprises are closely monitored by the banks.

For the wages to be given however, the enterprise managers have to give the details of the wages and the income distribution to the central bank. Through this information, the bank can determine the correct amount disbursed from the enterprise account.

Sometimes the enterprises make up numbers for the gross output so to justify higher wages (because of the piece-rate), but the Gosbank together with the Ministry of State Control and Ministry of Finance can examine the malpractices to find out if there is fraud.

Ministry of State Control

The Ministry of State Control also known as the Goskontrol had the job of inspecting and finding financial defects and corruption. Its inspectors can randomly come and inspect. The financial aspects, as well as the malpractices in production of goods and raw materials.

Goskontrol looks at the quality, the fuel reserves, shipment of manufactured goods, reasons for delays, medical facilities, dormitory, etc. Goskontrol had pervasive powers for finding corruption.

If illegal practices occur, the Goskontrol inspectors are to produce a report called “akt” which should provide all kinds of data, the causes of shortcomings. This akt report is then sent to the Goskontrol headquarters, to the manger of enterprise concerned, to local government and Party organs, and to administrative agencies that are supervising the enterprise.

Managers get the opportunity to explain the shortcomings and defend themselves.

The Communist Party's Role

The CPSU checks the enterprises, makes sure to help them in emergency cases, seeks to be a mediator between trade unions and managers, tries to promote productivity, listens to grievances, etc.

Citation

Central Intelligence Agency (CIA). (n.d.). The Management of the Soviet Industrial Enterprise. Retrieved from https://www.cia.gov/library/readingroom/docs/DOC_0000969891.pdf

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Evolution of the Administrative Structure of Soviet Industry (1917-1957)

The general pattern has been that of a pyramid structure of central planning with increasing specialization.

Citation

Central Intelligence Agency (CIA). (n.d.). EVOLUTION OF THE ADMINISTRATIVE STRUCTURE OF SOVIET INDUSTRY 1917-57. Retrieved from https://www.cia.gov/library/readingroom/docs/DOC_0000292301.pdf

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Economic Relations of Communist China with the USSR Since 1950

Originally Published: May 1959

Soviet trade exports to China decreased after Khrushchev came to power.

Citation

Central Intelligence Agency (CIA). (n.d.). ECONOMIC RELATIONS OF COMMUNIST CHINA WITH THE USSR SINCE 1950 (CIA RR 59-16). Retrieved from

https://www.cia.gov/library/readingroom/docs/DOC_0000313442.pdf

Survey of the Economics of the Sino-Soviet Bloc

Originally Published: September 13, 1957

The revisionists in the Soviet Union rose to power.

“The confidence in the economic strength and solidarity of the Sino-Soviet Bloc which was expressed so firmly at the Twentieth Party Congress of the Communist Party of the USSR in early 1956 weakened by the end of 1956. Strength is still there but the solidarity has been proved not so strong as had been thought, and the internal economic problems of the various countries loom larger than expected. To the critics of the Communist system, events have been encouraging; to the Communists, sobering….

“By early 1956 the Sino-Soviet Bloc had an impressive aggregation of economic power…. Its rate of economic growth was significantly more rapid than the present economic growth of the NATO powers or of the US….

“In the European satellites, there is a modest reorientation of economic objectives away from the exclusive concern of the Soviet-inspired rapid development of heavy industry which characterized the 1950-53 period….

“When a series of speeches intended for Western consumption stated that the Leninist principle was one of the “many roads to socialism” and that rigid adherence to the Soviet model was not necessarily warranted, an opening was created for the Sateellites to press for greater autonomy in economic policy than was contemplated in the then-current Soviet pans for Bloc economic coordination” (pp. 2-3).

Agriculture

Only 10% of Soviet land could be cultivated. To the West of the Urals, 40% of the land was utilized for agriculture. The USSR under Khrushchev began to invest in finding “new lands” for cultivation particularly in Central Asia, in order to invest more in agriculture and compete with the West in terms of the standards of consumer goods.

The expansion of investment in the agricultural sector, the improvement of the political processes for it, the expansion of the technological base all allowed for great rises in output and growth. However, given that the climate did not match agriculture in many parts of the USSR, there were also failures in agriculture.

Note: Khrushchev’s agricultural policy initially saw some success. However, as he ordered the cultivation corn in parts of the USSR that were not suited for corn production agricultural output did not grow as much and the Soviet economy began to fall behind in the consumer sector; all the while, the economy had gotten worse in the producer sector due to the decentralization and the reduction of investment into heavy industry.

“Soviet industry has been characterized by growth more rapid than the present growth of US industry...interruptions to the growth of the US economy, such as prolonged recessions, would simplify the task [of out-competing the US in industrial production] for the Soviet economy.” (p. 13).

The USSR began to rely on the machinery of the European satellite and in exchange gave them raw materials and machinery.

From 1950 to late 1953, East European countries focused on the development of heavy industry. Afterwards, they focused more on agricultural goods. The Eastern European countries did not have to industrialize as quickly anymore.

East Germany suffered the most because of the war. Czechoslovakia suffered the least among the non-Soviet Eastern European countries. Poland became the strongest economy during the 1950s.

Agricultural labour force increased under Khrushchev but a lower rate.The rapid industrialization of the satellite economies during 1948 through 1952 caused the weakening of the agricultural economy. The area which was once the exports of agricultural products became a net importer of these commodities.

Trade between the ‘Socialist’ Bloc countries increased and they also attempted to increase trade with the imperialist countries, however.

The Chinese economy grew at a rate of 10% per year during the 1950s.

Under Mao’s leadership the Chinese economy had massive growth.

Citation

Central Intelligence Agency (CIA). (n.d.). SURVEY OF THE ECONOMICS OF THE SINO-SOVIET BLOC (CIA RR 101). Retrieved from https://www.cia.gov/library/readingroom/docs/DOC_0000326120.pdf

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Brief Guide to the Economies of the Soviet Bloc

Originally Published: November 5, 1954

Soviet government rations the scarce consumer goods by having really large taxes on them.

In the late 1920s, there were increases in wages but the production did not grow as much. As a result, there was inflation.

The Soviets tried to reduce the need for transportation because of the heavy costs of transportation and the vast land that the country was. They instead tried to promote self-sufficiency.

In agriculture, approximately 85% of production is carried out by the kolkhozes.

In the cases of the Joint Ventures that the Soviets set up, the chairman of the board of directors was a national of the satellite country whereas the general manager was a Soviet citizen.

The manager does the banking, personnel, and administrative transactions.

After Stalin’s death, the new government reduced the number of government ministrie from 52 to 25 (page 16). Then by 1954, it rose back up to 46 due to the re-combinations of ministries.

The post-Stalin government tried to broaden its base of support among the military, the managers, and the intellectuals.

In 1954, they continued to invest 50% of the budget on the heavy industry.

How the Soviet State increased investment in agriculture:

1. Channeling greater investment to agriculture in the form of buildings, equipment, and fertilizers

2. Increasing incentives to produce in both the communal and private sectors by raising the prices paid for obligatory deliveries and purchases of deliveries

3. Providing the farms with a larger supply of qualified technicians

4. Increasing incentives for private production by liberalizing agricultural taxation system and facilitating marketing of products

5. Channeling a larger supply of consumer goods and materials to rural markets

6. Bringing under cultivation vast areas of semi-arid land in the eastern USSR and Central Asia

Because of the prioritization of the agricultural sector, the Soviet state abandoned a number of important projects by Stalin including the afforestation program as well as the Main Turkmen Canal [the project started in 1950 and began to construct much of it for irrigation. To this day, it remains the most important irrigation canal despite much of it being abandoned].

Citation

Central Intelligence Agency (CIA). (n.d.). BRIEF GUIDE TO THE ECONOMIES OF THE SOVIET BLOC. Retrieved from

https://www.cia.gov/library/readingroom/docs/CIA-RDP79-01093A000600060003-4.pdf

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Indexes of Prices of Consumer Goods in the USSR 1928-1958

November 5, 1954

The government ‘forced’ savings in the banks. The post-war government however ended this policy because of the major post-war problems that people faced.

The state had to sharply increase its prices during the late 1930s to prevent excess purchasing power.

The agricultural prices were dominated by market forces, rather than much of state control.

The state adjusted prices according to the market prices as well at times.In the post-war years however, prices remained relatively high but stable.

During the 1937-1940 period, there was low supply and excess demand, which caused the farm prices to increase by 130%.

Soviets had central unions for cooperative workers too.

Soviet methods of calculating the indices:

Citation

Central Intelligence Agency (CIA). (n.d.). Indexes of Prices of Consumer Goods in the USSR. Online link no longer available.

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The Current Wage Reform in the USSR

Originally Published: August 9, 1957

In the USSR, work norms did not represent the true output standards, given that they were regularly over-fulfilled by 50 to 100 percent. The progressive piece rates contributed to the persistent over-expenditure of wage funds.

“Within a given industry, favorable rate differentials are usually established for incentive work, for work under difficult or unpleasant conditions, for work in remote areas, and for work in large or important enterprises. Wage rates also vary widely among industries” (p. 6).

All jobs involving output were paid for based on piece-rates. The piece rates were calculated based on dividing the wage fund over the ouptut. The progressive piece rates increased the piece rates after certain levels of output; that is, after the worker produces beyond a certain level of output level, he or she would earn at a higher rate.

Time Rates

Flat hourly or daily rates were for jobs that could not really have norms such as store-keepers, guards, janitors, etc. Managerial and engineering-technical employees were given salaries monthly.

The salaries could increase for better quality work, with the approval of the ministries. Employees that over-fulfilled their monthly production plans got bonuses.

One problem with the USSR was that “there was no central agency with primary responsibility for day-to-day coordination and review of ministerial actions in the field of wages and labor.”

The Soviet wage reforms in the Nonferrous Metallurgy involved the change from 92 labour grade scales and more than 800 base rates being converted to 40 base rates with 8 grade scales. A uniform system of progressive piece rates was established for the metallurgy section.

Technological bonuses under the new reforms were now changed according to how much they reduced costs. If savings are as high as 200,000 rubles, the bonuses could be as high as 30%. If the savings were more than 50 million rubles, the bonus could not exceed 5 percent.

The new criteria for the innovations rewards was about the reduction in costs. It was very cost-driven as opposed to output-driven.

The new system also did not pay the bonuses based on the overfulfillment of the production plans but more so on whether new products were created. “The amount of the bonus will now depend on the percentage of total ruble output that consists of products newly produced in the enterprise, in contrast to the old method, under which bonuses were paid for plan fulfillment and overfulfillment regardless of whether or not the products were new” (32).

The enterprises got the right to decide the increases in their work norms according to the decree “Concerning a Change in the Method of Review of Work Norms” as pointed out here:

“The decree, effective 1 January 1957, gives enterprise directors the right to determine the amounts by which work norms are to be increased each year, as well as the time or times when such adjustments are to be made. These decisions must be made in agreement with the appropriate trade union representatives in the plant. The decree also stipulates that norms may be raised only on those jobs that have been affected by changes in technology or work methods” (p. 32).

Note: In other words, managers decide how much to increase, and managers do not have to increase their norms if there has not been technological improvement. More decentralization under Khrushchev!

Citation

Central Intelligence Agency (CIA). (n.d.). THE CURRENT WAGE REFORM IN THE USSR. Retrieved from https://www.cia.gov/library/readingroom/docs/CIA-RDP79R01141A000800110002-8.pdf

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Average Annual Money Earnings of Wage-Workers in Soviet Industry

Some statistics and charts/tables provided by the CIA:

Citation

Central Intelligence Agency (CIA). (n.d.). AVERAGE ANNUAL MONEY EARNINGS OF WAGEWORKERS IN SOVIET INDUSTRY. Retrieved from https://www.cia.gov/library/readingroom/docs/DOC_0000232463.pdf

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An Evaluation of the Program for Reducing the Workweek in the USSR

Originally Published: March 1961

In 1917, the Council of People’s Commissars established the eight-hour workday. In 1927, some of the industrial production sectors got seven-hour work day for the workers.

After World War II, there was a Soviet baby boom and so there was growing unemployment.

Most workers were regularly over-fulfilling their norms by a wide margin and were gaining massive bonuses because of their increase in skill over the years. Therefore, there was a need to ‘rationalize’ the bonuses.

In 1956, the workweek of the USSR reduced from 48 hours to 46 hours. It was further reduced to 41 hours in 1960. The reduction of the workweek was lowered without lowering average weekly earnings, without under-fulfilment of production plans and with substantial increased in output per man per man-hour. The wage and bonus system was “rationalized” and the progressive piece rates were de-emphasized. Shorter workweek with a higher hourly pay helped relieve the pinch of the tightening urban labour “market.”

The economic ministries were abolished in mid-1957 and were replaced by the councils of national economy, known in Russian as the Sovnarkhozy.

Note: When Khrushchev was trying to decentralize the USSR and get rid of the ‘Stalinist bureaucracy’, the Sovnarkhozy, or regional councils were to replace the ministries. The Sovnarkzhoy brought much of chaos to the economy and was therefore replaced under the Kosigyn Reforms of 1965 - one of the few ‘positive’ aspects of the Kosigyn Reforms.

Nikita Khrushchev started talking about reducing the number of hours of work to only 3 to 4 hours per day.

The workday in Saturday was to turn into six hours. 36 hour workweek was set for persons under 18 years.

Basic minimum wage was increased in many enterprises in the state sector as an “experiment.”

Citation

Central Intelligence Agency (CIA). (n.d.). AN EVALUATION OF THE PROGRAM FOR REDUCING THE WORKWEEK IN THE USSR. Retrieved from https://www.cia.gov/library/readingroom/docs/DOC_0000380591.pdf

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Organization and Management in the Soviet Economy: The Ceaseless Search for Panaceas

Originally Published: December 1977

Planning

Kosygin’s program made sure that the Five Year Plan was binding on all enterprises again. There are annual breakdown of plans set in Five Year Plans for the enterprises. Under the Kosigyn reforms, the enterprises were to also work within the framework of a 15 year plan alongside the five year and annual plans.

There was a greater use of mathematical forecasting models, input-output data, and optimizing techniques in planning.

Note: The development of planning based on optimization was due to the influence of the Soviet economist Kantarovich. “Optimization” while in itself a good idea, is often used as a code word for the drive towards maximizing profits, while minimizing costs, and for the emphasis on profits as the regulator of the economy. Therefore, “optimization” as a ‘beautiful’ term is used by modern Dengists, Khrushchevites, and Titoites to justify bourgeois deviations and lack of focus on output and need as the driving force of the economy. That is not to say that Soviet firms should not have reduced costs and increased profits; just that the ‘nice’ term is used by the revisionists to justify capitalism.

Abolition of Sovnarkhozy

Khrushchev's Sovnarkhozy - the regional councils that were to direct economic planning locally - turned out to be a disaster as it brought much of chaos in the economy. The Kosygin reform sought to restore stability and order to the organizational structure of the planning of the USSR by abolishing the Sovnarkzhoy, regional economic councils set up by Khrushchev, and instead emphasizing the ministerial branch system of economic organization. The reforms also centralized key functions in three powerful new State Committees - for prices “Gostsen,” for industrial supply “Gossnab,” and for science and technology “Gostekhnika.”

Associations of Production

Some of the republic ministries were converted to all-union ministries. Some of the enterprises were merged into associations of enterprises. “the number of directive targets set centrally for enterprises was initially cut sharply as part of the economic reform. However, all important targets were retained; in the process of implementing the reforms, new ones (labor productivity, product quality, contract fulfillment) were added through formal changes in the rules” (p. 3).

There was greater decentralization of the R&D with the number of science-production associations increasing from 1,101 in 1973 to 2,314 in January 1, 1976.

“[T]he number of independent enterprises apparently dropped by some 7,500 during 1973-76” which created the “new production associations” (p. 5).

“The reform also called for the industrial bureaucracy ultimately to operate on the principle of full khozraschet [i.e. cost accounting]. The principle means that the ministries and their subunits would finance all their activities from their own funds, including investment and staff salaries, with no grants from the state budget” (p. 5).

The Kosigyn reform also sought to bring the Khozraschyot to the upper levels of the bureaucracy. Enterprises were to be merged into “production associations” and enterprises were to be combined into “science-production association.” There were to be increased efficiency such as improved specialization, reduction in administrative employment and costs, improved incentive structures, and closer ties between research and development and production.

There was a 22% increase in employment in the state sector during 1971-1976.

Incentives

The managers’ bonuses depended during the 1965-1970 period on the fixed sales, profits, and profitability. However, in 1972 and 1976 the indicators changed again and again.

There was a tightening of controls over the size and expenditure of funds of enterprises. The five areas of focus were labour productivity, capital productivity, fulfillment of contracts, product quality, and efforts to induce enterprises to adopt more demanding plans.

There was an effort to increase the labour productivity, and the managerial bonuses. 70% of the profits could be allocated to incentive funds and bonuses.Ministries had reserve funds for rewarding outstanding and well-performing enterprises.

Quality of Products

There was increased emphasis on setting better technical standards for products and upgrading the status of the State Committee on Standards. Penalties were placed for violations of state standards and they were imposed by deducting the value of non-standard products form total sales and profits and by imposing fines for shipping such output.

Beginning from 1973, however, the ministries classified their products into three categories:

1. Highest (H) - meets best domestic and international standards and is competitive for world markets

2. First (F) - meets average domestic standards

3. Second (S) - obsolete

There was also a program for incentives for better quality products. For instance, they had the State Seal of Quality emblems. The Kosigyn Reforms set up the State Certification Commission which certified all products to each quality category.

As a result of the reforms, there were improvements in the quality of products.

Computers

Initially, introducing computers to the enterprises were rejected. However, soon computerization was introduced into the Soviet economy. During the period 1971 to 1975, annual production of general purpose computers rose form 700 to 1,600, with the total stock being 15,000.

Automated Management Systems (ASU) helped the enterprises computerize their work and planning. The computers were not distributed to enterprises, the people who worked with them were not trained, the computers were of poor quality, easily got damaged and were hard to repair. The enterprise leaders ordered too much at times and used them inefficiently. The lack of centralized planning led to the computers not being used and distributed properly.

Supply and Pricing

State Committee (Gossnab) was a committee that was set up by the Kosigyn reforms in order to better allocate the producer goods to the different sectors. The reform also established “direct ties” to increase coordination between enterprises in the industry. There was an increase in the role of the market for the supply given to each of the enterprises

The new pricing system took into account the marginal costs.

Finance

The 1965 reforms called for (1) more authority to the enterprise for its investment decisions, (2) introduction of charges on capital, (3) greater self-financing instead of budget grants (Khosraschyot), (4) more extensive use of bank credit in enterprise finance instead. In the early years, the share in decentralized investment increased from 12% in 1965 to 19.5% in 1972. However, the authorities reduced the share of decentralized investment to 16% in 1975.

Note: The above underlined basically means that the national budget was given to the enterprises in a very unplanned way, meaning that the enterprise managers would not be held directly responsible for the funds they received from the state. This indicates another profound decentralization of the economy. Furthermore, as indicated in the 'Supply and Pricing' section, there were more market mechanisms introduced for the enterprises, hence more revisionism!

Much of the investment was to be done by the “production development” funds which came largely from the profits of the enterprise itself. The idea was that the enterprises would be encouraged to rationalize and introduce better technology from their “own” funds so to promote economic accountability. This has been a matter of controversy however. Nevertheless, the fund was pretty small, accounting for only 12% of industrial investment in 1976.

The goal of the greater bank credit was to reduce the role of the state budget and encourage more responsibility

The bank’s share of the enterprise profits was to increase.

Research and Development (R&D)

Part of the goals of the Kosigyn reforms was to form science-production associations and committees to more closely relate the R&D to the production. The goal was to also create a unified fund from the enterprises for their operations.

There were efforts to calculate the the economic return on individual R&D projects and set prices and gear the system of rewards to scientists to this expected return.

All of these measures on R&D were yet to be implemented however. Not all of them were implemented.

The ministries were to have unified funds in order to finance their Research and Development (R&D) projects.

Impact of Managerial Reforms

“The 1965 economic reforms seemed to entail some measure of decentralization and greater scope for spontaneous and independent action by producers in response to price and profit signals.” (p. 17)

Note: As the following quotes indicate, there was economic decline and chaos caused by Khrushchev's decentralization reforms. However, one must note that the Kosigyn reforms did not bring any viable improvement either because they further entrenched capitalism and market "socialism" in the revisionist USSR.

“The restoration of the economic ministries and the centralization of responsibility for some key functions in newly created state committees had a positive impact, eliminating the near-chaotic situation created by Khrushchev’ organizational innovations [sovnarkhozy]" (p. 17)

The reforms were “intended to raise growth rates of productivity of labour and capital, which had deteriorated seriously during 1961-1965" (p. 17)

“Although moderate improvement in productivity of labour and capital has been achieved in the nonagricultural sectors since 1965, growth rates for output continue to decline, and productivity growth is slow compared with Soviet performance before 1960…. Productivity growth continued to be sluggish in 1976 and 1977. In 1971-1975, growth rates for labour productivity improved somewhat over 1966-70, but the record for capital productivity worsened, and its growth rates continue to be negative...Considering the scope of the assault of the productivity problems, the gains achieved seem small" (p. 17)

“The 130 science-production associations created thus far can have had little impact as yet.”

The Kosigyn reforms of 1965 emphasized profit, sales, and profitability whereas during the 1970s, the emphasis shifted to labour productivity and profitability as well as product quality.

To Summarize: The Kosigyn reforms ended some aspects of Khrushchev's decentralization program, such as the Sovnarkhozy. However, they further entrenched the capitalist mode of production in the USSR by dramatically reducing the targets to profit and profitability. They also decentralized the economy by emphasizing the production associations rather than the central government's plans or the plans of the ministries.

Citation

Central Intelligence Agency (CIA). (n.d.). ORGANIZATION AND MANAGEMENT IN THE SOVIET ECONOMY: THE CEASELESS SEARCH FOR PANACEAS. Retrieved from https://www.cia.gov/library/readingroom/docs/DOC_0000292221.pdf

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Soviet Economic Problems and Prospects

Originally Published: July 1977

The Soviet Union faced many problems. The decentralization had brought chaos and deregulation to the economy. In the energy sector, there was a reduction in oil output as many of the Soviet oil resources were depleting and it had become costlier to extract oil from new oil resources.

“Soviet exploration and extraction policy has long favored increasing current output over developing sources of future output” (p. VI).

Furthermore, there was enough capital produced and the capital productivity was reducing; there a a need for the importation of technical equipment.

Agriculture was inefficient was well.

Policy Changes:

The leadership was considering importing oil from non-socialist countries, while cutting oil exports to East Europe.

“We conclude that a marked reduction in the rate of economic growth in the 1980s seems almost inevitable.”

“Potential Impact on Defense - the slowdown in economic growth could trigger intense debate in Moscow over the future levels and pattern of military expenditures.” (p. IX).

“The reduced growth potential means that the Soviet consumers will fare poorly during the next five to 10 years compared to recent gains” (p. X).

“On Relations with the US - Moscow’s economic problems in the 1980s will affect its relations with the West, especially the United States. Since the USSR’s ability to pay for its imports from the industrial West in the early and mid-1980s will be strained, Moscow may seek long-term credits (10-15 years), especially to develop oil and gas resources. Much of the needed technology would have to come from the US” (p. X).

“Since 1960 annual GNP growth rates have been as high as 9 percent (1964) and as low as - 0.1 percent (1963)” (p. 3).

“Growth in output per man hour slowed down by nearly one-half of the 1970s. The productivity of additions to the stock of planned and equipment also slumped” (p. 3).

Note: The above quotes indicate that the economy of the USSR was going to decline enough that the defense spedning, the capitulation to the West, and the negotiations for loans from the IMF were more or less expected a decade earlier. This indicates that Gorbachev's reforms were not simply due to Gorbachev's own opportunism but also that the reforms were decades in preparation.

The intention of the 1976-1980 Five Year Plan sought to invest in advanced machinery and equipment, renovating and re-equipping old plans, a quicker and cheaper process than building on greenfield sites, and mechanizing activities such as materials handling, still done manually in large part.

Soviets had to import more grain, oil, and technology from the West, because of their domestic supply problems and the industrial and agricultural shortages, as well as bad weather.

Citation

Central Intelligence Agency (CIA). (n.d.). Soviet Economic Problems and Prospects.

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Soviet Economic Reform Decrees - More Steps on the Treadmills

Originally Published: May 1st, 1982

In 1979, the Soviet leadership began setting new plans and goals.

The goals of the Soviet leadership were as follows:

• Improve planning by focusing more on five-year rather than annual plans. All plans were to be balanced.

• Link prices more with costs by setting new industrial wholesale prices, a new charge for water, and sharply increase social insurance taxes.

• Replace success criterion - gross value of output, which led enterprises to prefer expensive inputs - with another indicator, “normative net output” which was the average value added.

• Require all entities - enterprises to ministries - to finance their operations from their own funds and bank credits, rather than receive partial funding from the state budget.

• The authorities sought to ties managerial bonuses to greater labour productivity, and create balances for the supply and demand of labour, thus increasing planning.

• Central planning was to increase.

• “The comprehensive July 1979 Decree...outlined a program for gradual transfer of all economic activities to complete self-finance, beginning with industrial ministries” (p. 1).

There was nevertheless an attempt to renovate the old industrial equipment.

As under the Shchekino plan, enterprise managers are allowed to use wage savings to pay bonuses (up to 50 percent of regular wages) to workers who take on two jobs or similarly raise productivity. Any savings in wage funds were to go for the bonuses.

There was a “progressive” norm to be established. The progressive norm basically meant tighter labour requirements in industry and strict distribution of labour according to output.

The new khozraschyot plan for the enterprises was believed to end up in failure according to the CIA assessments. The enterprises had to take all the risk of failure and get little share of the reward for the success. The profits were to go to the state. Parts of the profits went to finance the newly centralized R&D funds of ministries.

Production cost would include geological prospecting costs.

Citation

Central Intelligence Agency (CIA). (n.d.). Soviet Economic Reform Decrees - More Steps on the Treadmills. Retrieved from

https://www.cia.gov/library/readingroom/docs/CIA-RDP83T00233R000100180002-3.pdf

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Soviet Intensive Economic Development in Perspective

During the 1970s, the labour force growth rate reduced and the Soviet leaders began thinking of new ways. The equipment in the factories was getting very old. There was not much of an incentive to replace the old technology with the newer ones either because the incentive structures were directed towards production targets.

The Soviets invested much in eliminating illiteracy and beat Europe in that. They had a much more productive labour force. Andropov was trying to reduce the number of people in higher education by emphasizing technical training more.

There was not enough emphasis on reconstruction in the Soviet system.

There was also too much focus on technology for the military sector, rather than the production.

Research and development initiatives were separate from the production process. There was not a coordination of the needs of the production sector with the R&D sector.

Citation

Central Intelligence Agency (CIA). (n.d.). SOVIET INTENSIVE ECONOMIC DEVELOPMENT IN PERSPECTIVE ( SOV86-10006). Retrieved from

https://www.cia.gov/library/readingroom/docs/DOC_0000326296.pdf

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USSR: Private Sector and Organized Crime

Originally Published: March 23, 1989

Gorbachevite USSR prosecuted several corrupt people including the corrupt officials of Uzbekistan and Brezhnev’s own son

Gorbachevite established the Law on Cooperatives, a law that allowed the establishment of large private joint-stock companies owned by few individuals; the joint-stock companies were called "cooperatives" in order to make them appear socialist. The industrial "cooperatives' paid little taxes. The mafia gangs frequently targeted the cooperatives because of their wealth. The coops had much of wealth because of low supply and the higher quality of goods sold by them at the backs of the working class in state owned industries. This caused massive income inequality in the USSR and the mafia gangs were able to gain stocks in the cooperatives.

Citation

Central Intelligence Agency (CIA). (n.d.). USSR: THE PRIVATE SECTOR AND ORGANIZED CRIME. Retrieved from

https://www.cia.gov/library/readingroom/docs/CIA-RDP92M00732R000900010007-1.pdf

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Winners and Losers: Increasing Social Stratification in the Former Soviet Union

Originally Published: November 1991

The government of Gorbachev initially invested in heavy industry much more; however, the low investments into the Southern republics given they did not have as much heavy industry caused income inequality and the growth of unemployment in the Southern republics. Soon after, the Soviet government began focusing on the consumer sector. The Gorbachev Government cut its budget, spent on consumer goods rather than producer goods, thereby not increasing production. The government had budget deficits, while not increasing production, hence creating greater inflation. That is, there was greater money supply without greater production.

The government also kept the prices of some goods low, which caused shortages. The Law on Cooperatives basically established large companies owned by few individuals - i.e. joint-stock companies disguised by a socialist-sounding name. The pseudo-cooperatives were able to use the black market for selling their goods at high prices and a few stock-owners in the "cooperatives" became millionaires. Over the years, with the expansion of the criminal activity, the black market, and "Communist" Party corruption, only 15% of what the Soviet cooperatives produced got to the public because the cooperatives had to bond themselves to the local officials in order to escape the harassment of the officials.

Greater wage differentiation was set and the managers got more freedom in terms of setting the bonuses and the wages. Enterprises used these wages to attract more labour without really economizing on the costs of labour. The fact that they did not economize due to the USSR’s strict laws on labour as well as the workers’ strikes due to inflation caused the workers’ wages to increase by 44% in just one year till 1991.

Gorbachev also had brought joint ventures where the foreign companies could own the majority of the percent share of the state companies.

Gorbachev’s liberalization program actually significantly expanded the shadow economy by providing easier markets. The unfair distribution of wealth also allowed the legally wealthy to be preys to the mafia millionaires who clung on to and stole from them.

Limchitky was a term referring to the category of workers who had to work for a certain number of years to register for affordable housing; in practice in the USSR, however, workers worked for many years but got no housing. The return of Soviet troops from Afghanistan and Eastern Europe caused greater unemployment and an increase in demand for housing. The scarcity of housing made things even worse.

People in the Soviet Union frequently used the black market for their basic necessities, since the 1960s. A third of the Soviet population lived in poverty according to the government estimates. The Caucuses and the Central Asian republics slipped much further behind the other republics which led to ethnic tensions.

USSR had a brain drain too.

Gosplan economist Vladimir Kostakov put the unemployment rate during Gorbachev at 6% and this included both the real and unreal unemployment (i.e. token jobs just to give jobs to everyone without actually getting any work done).

Workers in military factories were also complaining about the cuts in military spending.

Central Asian Republics that traditionally got subsidies no longer got them. Ethnic tensions grew: citizens of a Russian city even called for the expulsion of all Azeris from the city, out of the anger that Azeris were selling fruits at too high of prices.

By all economic indicators, Gorbachevite USSR had seen a severe decline: inflation, unemployment, housing, health and education, crime rates, and corruption.

Citation

Central Intelligence Agency (CIA). (n.d.). WINNERS AND LOSERS: INCREASING SOCIAL STRATIFICATION IN THE FORMER SOVIET UNION. Retrieved from

https://www.cia.gov/library/readingroom/docs/DOC_0000499578.pdf

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Illegal Economy Under Gorbachev: Growth and Implications

Originally Published: March 1990

During the Brezhnev years, the Soviet State began a campaign against alcohol consumption. The anti-alcohol campaign in the USSR had cost the USSR 57 billion rubles. The reduction in the supply of alcohol led to the increased prices of the commodity in the black market, and the expansion of the alcohol markets.

Gorbachev privatized industries supposedly to boost the consumer goods and services. There was a dramatic reduction in focus on the producer goods. Moscow sought to launch a 12 percent increase in the consumer goods for the long-term stabilization plan. Retail trade had gotten worse prior to the reforms. Under Gorbachev, it got even worse.

The Soviet State had also established a "Law on Cooperatives," which basically privatized many state enterprises into the hands of pseudo-cooperatives - large companies owned by few individuals. The term "cooperative" was to give a socialist name to a series of joint-stocked companies. Greater freedom for cooperatives allowed them to buy the cheap subsidized goods and export them easily from the USSR under the shadow economy.

The size of the shadow economy was exaggerated for political purposes, according to the government of the USSR which the CIA believes provided the most scholarly study of the shadow economy.

Under Gorbachev, thanks to the Law on Cooperatives, some "middleman" cooperatives were established which basically traded goods between industries. As such, these pseudo-cooperatives earned very large profits at the backs of the working class, given the price differences.

Leningrad United Workers’ Front and All-Union Central Council of Trade Unions (AUCCTU) lobbied for the ban on the “middleman” cooperatives and issued complaints on the recent neoliberal economic policies. As a result of public outcry, the Supreme Soviet banned Middleman coops. Many "cooperatives" did not pay their taxes either. The decree by the Supreme Soviet also ensured greater tax inspections to make sure that the cooperatives pay their taxes. Longer jail terms for abuses in trade and speculation were set up.

Some traditionalists wanted the introduction of a new currency to curb the power of the shadow economy.

The supply was low and the black market prices were high. Low state prices and controls of the state on the price of goods caused greater black market activity, as people would purchase cheap commodities from the state and sell them at a higher price in the black market.

Citation

Central Intelligence Agency (CIA). (n.d.). THE ILLEGAL ECONOMY UNDER GORBACHEV: GROWTH AND IMPLICATIONS (SOV 90-10020). Retrieved from

https://www.cia.gov/library/readingroom/docs/DOC_0000500702.pdf

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