The New Russia

A Handbook of Economic and Political Developments

Ian Jeffries

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136870651
• Edition: 1
• Topic: Historia
• Subtopic: Historia rusa

The rapid changes in Russia since the collapse of the Soviet Union are often bewildering, with many frequent, highly significant changes in the different sectors of the economy and the political system. There have been frequent changes of personnel in government and economic management and many changes have been reversed - and sometimes forgotten, or at other times reinstated. What happened when? Who was responsible for what? Did such a change in one sector precede or follow a particular change elsewhere? These are points not easily remembered. This book provides full details of the many changes, and enables sense to be made of what would otherwise be a confusing situation. Developments are arranged chronologically by sector, and the book is unusual in extensively chronicling both economic and political developments and the crucial connections between them. There is a generous introduction and overview to help the reader find his or her way around. The material covers the period up to late autumn 2000, and thus offers a valuable guide to policies in the Putin era.

PART ONE

ECONOMIC DEVELOPMENTS

THE TRANSITION TO THE MARKET: INTRODUCTION

The question about how to handle the transition from plan to market (from ‘communism’ to ‘capitalism’) in Russia has led to immense controversy and problems. There are two broad approaches in theory, ‘gradualism’ and ‘big bang’/‘shock therapy’. While China chose the former course, Russia chose the fast track approach to changing its economic system (although it took three attempts to bring inflation under control and the implementation of reforms was often slow). First, a word about terms (all of which are to be found in the glossary). ‘Big bang’/‘shock therapy’ is a programme of rapid and comprehensive market transformation, comprising a package of interdependent measures. The terms ‘big bang’ and ‘shock therapy’ are often used interchangeably, while the term ‘shock therapy’ is more often than not used in a broad sense to cover both (i) severe austerity measures and (ii) a rapid and comprehensive change in the economic system. But at times the term has been used in a narrower sense, referring only to (i). This point is dealt with in the chapter on macroeconomic stabilization. Leading exponents of ‘big bang’/‘shock therapy’, such as Sachs, Åslund and Balcerowicz, advocate the following measures:

1. Liberalization. This includes the end of central planning and the freeing of prices in the context of a liberal international trade regime. Rapid current account convertibility of the currency is recommended. Chapter 1 deals with the transition from command planning to the market, Chapter 2 deals with prices, Chapter 3 with foreign trade and Chapter 4 with foreign investment.

2. Privatization. The rapid expansion of the private sector through deregulation (i.e. freedom of entry into sectors of the economy by new enterprises) and the privatization of state enterprises is recommended. It is recognized that large privatization will take longer than small privatization. In the meantime the remaining state enterprises will need to be disciplined by measures such as demonopolization, exposure to domestic and foreign competition, and the ending of ‘soft budget constraints’. Chapter 5 deals with non-agricultural privatization and Chapter 6 with agricultural privatization.

3. Stabilization. Macroeconomic stabilization is needed in order to bring inflation under control. Chapter 7 is devoted to this topic.

Proponents such as Jeffrey Sachs also recommend a ‘social safety net’ (especially an unemployment compensation scheme; dealt with in Chapter 9) and see the need for a generous international aid (and trade) policy (foreign aid and debt being dealt with in Chapter 8).

CHAPTER ONE

THE TRANSITION FROM COMMAND PLANNING TO THE MARKET

COMMAND PLANNING IN THE SOVIET ERA

Before embarking on an analysis of command planning, it is important to understand the pivotal role played by the Communist Party of the Soviet Union (CPSU). The CPSU dominated economic, political and social life in this one-party state, e.g. it formulated and implemented economic policies.

Command planning was introduced in the Soviet Union after 1928. The basic allocative decisions about what to produce and in what quantities were taken by the state (used as an instrument by the CPSU), although in reality the whole economic hierarchy had to be involved in decision-making. The enterprise manager, for example, had some decision-making autonomy with regard to input substitution and production choice within the aggregate plan target.

The State Planning Commission (Gosplan) was at the apex of the planning pyramid, branch ministries (called ‘commissariats’ before 1946) were at the intermediate level and enterprises (production units) were at its base. Between 1957 and 1965 the basic intermediate link was the ‘regional economic council’. This was not a decentralization of decision-making. Most branch ministries were dismantled for largely political reasons, many of Khrushchev’s opponents being found in them. But there were also economic problems such as ‘empire building’, caused by strong pressures for ministries to be self-sufficient in input supply. Bureaucracy and unnecessary crosshauls were also causes of concern. But regional self-sufficiency proved to be an even greater problem and unnecessary crosshauls were not eliminated with regional economic councils. Thus branch ministries regained their pre-dominance.

The State Planning Commission received instructions about basic economic magnitudes from the party, especially the Politburo, relating to growth rates of national income and of its sub-categories of consumption, investment and defence, and to vitally important goods. These instructions were relayed via the state apparatus, especially the Council of Ministers, and Gosplan combined these with the data/requests/proposals flowing upwards from the hierarchy to draw up plans of varying duration by means of ‘material balances’ (the aim being roughly to equate the major sources of supply and demand for particular commodities). The annual, quarterly and monthly plans were operational; medium (five-year) plans and perspective plans of at least fifteen years’ duration were much more highly aggregated and were operational only in relation to the investment plan. Many projects were spread over a number of years and thus longer-term plans were needed for guidance. In later reforms annual plans were meant to be drawn up within the context of the allegedly more important five-year plan, but in reality changing targets and economic conditions ensured that the annual plan remained the operational one.

It is vital to stress the distortion of information flowing up the hierarchy. For example, in trying to achieve as low an output plan as possible enterprises have an incentive to understate capacity (see below). A reliable source of information, however, is what enterprises have already achieved. This accounts for the persistence of the so-called ‘ratchet effect’ despite its severe problems (see below), planners essentially setting output targets on the basis of what had been produced in the last plan period plus a bit more.

The Soviet economy suffered endemic supply problems, the reasons including the following:

1. Balances were heavily aggregated, the number of balances being far fewer than the number of ‘commodities’. Even by 1981 the annual plan involved Gosplan drawing up material balances for only 2,044 products (though crucially important ones), Gossnab (the State Committee for Material and Technical Supply) 7,500, and ministries 25,000 (Schroeder 1982: 75). By way of contrast, Nikolai Shmelev (Novy Mir, 1987, no. 6, p. 136) put the number of items in industrial production alone at around 24 million.

2. The ‘iterative’ problem. If, for example, the output of a particular good were increased, in the early years of planning usually only the first-order iteration (repetition) was carried out (i.e. estimates made of the effects on direct inputs). Further iterations (effects on the inputs needed to produce the increased inputs and so on) were ignored. For this reason excess demand was tackled as much as possible by, for example, reducing both the use of inputs per unit of output (‘tightening of norms’) and the consumption element of final demand (i.e. using the consumer sector as a buffer), as opposed to changing supply (i.e. increasing output).

Although stockpiles of goods could arise on occasion (see below), one of the basic features of the Soviet Union was widespread shortages, i.e. it was a ‘shortage’ economy. This will be pursued later, but some of the ill effects of shortages need stressing at this stage:

1. The opportunity cost of queues to consumers and the rest of society in terms of foregone work and leisure was enormous.

2. The ‘soft budget constraint’ (see below) shielded enterprises from bankruptcy and thus encouraged inefficiency. In turn, workers were generally guaranteed a job for life. This tended to have a deleterious effect on incentives, which were further undermined by the fact that widespread shortages ensured that money income was not an automatic command over real goods and services.

3. There was a loss of the benefits of specialization as enterprises and ministries attempted to produce as many inputs as they could themselves because of the unreliability of the materials allocation system.

Material balancing was never supplanted by other techniques as the core of command planning and was improved over time (e.g. by a greater number of iterations). For instance, the first input-output table to be drawn up was for the year 1959. But input-output played only a peripheral role in planning, e.g. variant analysis and in the final stages of planning for checking consistency, consistency in the sense that supply equals demand. Linear programming (despite some practical use, for example, at level of the enterprise) also played only a marginal role in reality (Jeffries 1993: 110–12).

The allocation of most non-labour inputs was handled by the ‘materials allocation’ system – the administrative distribution of raw materials, intermediate goods and capital goods. The supplying and using enterprises were matched centrally and the all-important document was the naryad (allocation certificate), which specified the quantity of the product and the supplying organization.

Command planning was well-named in the sense that the production unit (the enterprise) eventually received plan targets in the shape of a technical-industrial-financial plan (tekhpromfinplan). But since it was impossible for central planners to produce detailed, concrete plans in the abstract, the economic hierarchy had to be involved, with the emphasis in the traditional system on vertical as opposed to horizontal (i.e. enterprise to enterprise) linkage. More specifically tentative, crudely balanced output targets (‘control figures’) were passed down the planning pyramid to be increasingly disaggregated (made more detailed) by ministries and enterprises. Suggestions/requests (the zayavka being an input indent, for example) were made at each echelon and passed back up the hierarchy. While the centre’s major allocative decisions were preserved, this process of haggling and bargaining could be influential, as in suggested input substitution to meet a given output target. Annual plans were often late and were frequently changed; failure to fulfil by one enterprise had repercussions on others. (It is worth noting at this point the importance of informal linkages that oiled the wheels of the economic mechanism in reality. Examples include, as is to be seen below, shady deals and downright illegal relationships between enterprises.)

It is important to note that two areas of the economy were left, in more normal times, largely to the market mechanism, namely the distribution of consumer goods and the allocation of manpower. These were interrelated in both a micro- and a macro-economic sense. Wages and salaries paid out in the production sector constituted the main means of payment for the consumer goods and services made available in the plan (which, in turn, provided the main incentive to work), while avoidance of inflation meant matching the cash (rouble notes and coins) injected into the economy with the aggregate supply of consumer goods and services at established prices.

As regards the distribution of consumer goods there was essentially consumer choice (as opposed to sovereignty) in the command economy. This meant that consumers could choose among the consumer goods and services made available in the plan, rather than being able to determine the allocation of resources, as in a competitive market economy. As discussed in the section on pricing, queues were an endemic feature of the Soviet economy. Among the cause of queues were prices for consumer goods and services being typically below market-clearing levels and the restricted number of poorly organized distribution outlets. Queues imposed considerable economic and social costs on the Soviet consumer. Plokker (1990: 404) quoted a 1988 Soviet source, which estimated that the average family may have spent one month per year standing in queues. Shleifer and Vishny cited another Soviet estimate that 30 million man-years were spent in queues annually, some 25 per cent of the waking time of every adult (1991: 347). But it is worth noting that the opportunity cost of time spent queuing was lower for groups such as pensioners and the Soviet élite had the best of both worlds – assured access to scarce goods and services (e.g. via special shops and hospitals) at low or even zero prices! The poor quality, non-availability and erratic supply of many consumer goods and services, coupled with the frequency of queues and rationing, provided a breeding ground for activities of varying degrees of legality. Black markets were rife.

As regards the allocation of manpower, the fulfilment of plan output targets obviously required the necessary labour and non-labour inputs. But there were contrasting ways of obtaining them. While the latter were essentially administratively allocated by means of the materials allocation system, the former mainly involved the use of the market mechanism, with administrative methods and moral suasion also employed. The internal passport system, introduced in 1932, helped to control the geographical movement of people.

The command planning solution of labour direction, although used during the Second World War, was ruled out in more normal circumstances because of adverse effects on incentives (the War Communism period of 1918–21 being informative in this respect). Market forces were heeded when the planners determined basic wage differentials, while the state controlled the education system, including the number of places available for particular courses of study. The industrial worker’s pay crudely consisted of two parts: (1) a state-guaranteed basic wage, which varied according to industrial branch, skill and region; and (2) the residual. This residual was affected by bonuses, related to such factors as plan fulfilment and the nature of the job (dangerous working conditions, for example). This formal system enabled the state to encourage labour to move to desired industries and regions and to adopt the desired skills. In addition, there was de facto room to manoeuvre for the enterprise manager, even within the constraints of an enforced wage fund, by manipulating norms and skill designations, for example. In the early period piece rates, as opposed to time rates, were dominant.

The non-market elements in manpower allocation varied enormously over time. Forced labour camps were busy as a result of the collectivization of agriculture and Stalin’s purges. Although used for activities such as mining in inhospitable places, the camps served a mainly political function. (The declassification of NKVD files on the labour camp system for 1934–60 have resolved some of the long-standing disputes among Western historians. Estimates of the labour camp population at the end of the 1930s varied between 2 million and 9 million or more. It is now known that 3.3 million people were confined in prisons, camps, colonies and labour settlements. The number peaked in 1953 at 5.5 million and fell to 1 million in 1959: The Economist, 2 March 1996, p. 99. The NKVD or People’s Commissariat for Internal Affairs controlled the security apparatus and was the predecessor of the KGB.) High labour turnover during the 1930s, seen as a threat to plan fulfilment, was combated by means such as the ‘work book’. This was introduced in 1938 and held by the enterprise manager; without it a worker could not, in principle, find another job. Increasingly harsh legislation eventually made even absenteeism and lateness criminal offences. Graduates of universities and technical schools were assigned to a place of work for two or three years. Moral suasion exercised by the party could be seen in operation, for example, when students and workers helped out at harvest time.

Trade unions were an arm of the state in the traditional model. They were organized along industrial lines with the result that worker and manager belonged to the same union. There was no collective bargaining between trade unions and management about basic wage and salary differentials, although the former exercised some marginal consultative roles. Strikes were considered to be counter-revolutionary and in any case unnecessary, although they were not actually outlawed in the constitution. This reduced the role of trade unions to the transmission of party policies, ensuring favourable conditions for plan fulfilment, protecting workers’ interests (legal requirements as to health and safety, for example) and administering the social security system relating to sickness, work injury and pensions. (On 9 October 1989 the Supreme Soviet passed a law relating to labour disputes. Strikes were permitted as long as they met a number of conditions. They could not be politically inspired. They could not take place in key sectors such as transport, communications, f...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Contents
• Tables
• Acknowledgements
• Introduction and Overview
• Part I Economic Developments
• 1 The Transition From Command Planning to the Market
• 2 Prices
• 3 Foreign Trade
• 4 Direct Foreign Investment
• 5 The Private Non-Agricultural Sector
• 6 Agriculture
• 7 Macroeconomic Stabilization
• 8 Foreign Debt and Aid Before the August 1998 Financial Crisis
• 9 Economic Performance, Health and the Environment
• Part II Political Developments
• 10 The Dissolution of the Soviet Union
• 11 The Federal State and the Chechen Crisis
• 12 A Chronology of Political Developments, 1992–2000
• 13 Military and Foreign Affairs, Disarmament Agreements, Partnership for Peace, the Kosovo Crisis and Nato Expansion
• Conclusion
• Bibliography
• Index