Resistance to Change in the Soviet Economic System (Routledge Revivals)

A property rights approach

Jan Winiecki

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781317831525
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1991, this book uses a property rights perspective to analyse why there is such widespread resistance to change in the Soviet Economic System. Many within the ruling stratum benefit considerably from their positions, particularly in terms of access to goods and services. In an original conclusion Jan Winiecki argues that a cost-effective way of removing the resistance of the parasitic ruling stratum would be a system of compensatory payments.

Chapter one

Apparatchiks and bureaucrats: main beneficiaries of status quo

In this chapter I answer a question that is fundamental to the whole book, namely why economic reforms (to say nothing of change) fail repeatedly, in spite of the obvious interest of rulers in the Soviet system in improving their ailing economies. Approaching the problem from the property rights perspective, I stress the wealth distribution under the existing property rights structure as crucial for understanding sources of the resistance to change. A system-specific mode of rent appropriation is emphasized in this respect; one that is possible only under the present, patently inefficient economic system.

Following the age-old cui prodest (who gains) principle, I determine in the opening section who has the strongest incentive to maintain the Soviet economic system and why. First, incentives to prevent the emergence of market-type relations in the state sector accompanied by the well-defined property rights structure are stressed and, second, incentives to prevent the expansion of the (more efficient) private sector are explained as well. The interdependence between the marketization of the state sector and the healthy growth of the private sector are strongly underlined. Next, the strategy and tactics of aborting, distorting and reversing market-oriented reform or change by those who stand to gain most from maintaining the status quo are analysed. In the last section I evaluate the prospects of some current reforms in the light of the preceding considerations.

Who gains from status quo and why

Disincentives to change in the state sector

Most analyses of the Soviet system, including those of the economic subsystem, have centred excessively upon power distribution to the detriment of wealth distribution across the ruling stratum. In this property rights-oriented study it is rather the distribution of wealth, both within the ruling stratum and between it and the rest of the population, that becomes the focus of attention. Power means privilege, especially in non-democratic systems, and privilege means wealth.

This shift is not intended to mean that power and its distribution do not matter. On the contrary, the rulers of a Soviet-type system may regard control over the working population through a system of hierarchical commands and fulfilment reports as satisfying their thirst for power. In other words, the satisfaction from exercising control over workers enters rulers’ utility function and so does the right to dispose of the investment part of aggregate product (building ‘socialist pyramids’, as show-case projects are commonly called in Eastern Europe).

But it is important to realize that wealth distribution has been much more important in determining the attitudes of the ruling stratum in the case of market-oriented change. Without the wealth component it is difficult to explain why changes – so badly needed by the rulers themselves in times of economic decline – have failed to materialize or, if they did materialize, why they failed (or at best brought about very little improvement).

Alchian’s logic of the natural selection of economic arrangements (including economic systems) referred to in the Introduction¹ suggests the following line of reasoning. Assuming that low-cost organizations tend to supersede high-cost organizations, one should first search for hidden benefits offsetting costs of an apparently inefficient system and, not finding them in this particular case, turn to the search for political constraints blocking rearrangement of a given property rights structure. Wealth increasing rearrangements may not be adopted if a new property rights structure threatens to cause distributional losses to those who control the state.²

More specifically, Douglass North’s explanatory framework for the structure and enforcement of property rights and their changes over time seems to me to be most suitable for an analysis of Soviet-type states. Applying what North (1979) calls a predatory theory of pre-representative state, two basic services of such a state may be formulated:

1 to specify the fundamental rules of the property rights structure, i.e. to specify the ownership structure in factor and product markets that maximizes the rent to the rulers and the ruling stratum (the fact that this structure is extremely muddled in the STEs is irrelevant here, since such a muddle actually facilitates the appropriation of the rent); and

2 to provide a set of public goods and services designed to lower transaction costs, i.e. to increase efficiency upon which the growth of wealth is predicated (elsewhere economic growth is a synonym of wealth but in the STEs the two are distinct, see, for example, Winiecki 1986a).

At this stage, two reservations made by North (1979) can be waived. First, North saw complications arising with the advent of a representative government. Soviet-type states clearly have a pre-representative government and, as such, can be easily analysed within the basic framework referred to above.

North (1971) also pointed out that his model – predicated upon profit-maximization – does not always hold, owing to the existence of social reformers who endeavour to devise institutional arrangements for the benefit of others. However, since we are exploring the contemporary Soviet-type states, the existence or non-existence of social reformers at the foundation of such states is irrelevant for our purpose. The ruling stratum in the Soviet-type states was rather quick in degenerating, i.e. establishing property rights in a way that maximized their rent, as described by such insiders as Trotsky (1937) and Djilas (1956). Since power tends to corrupt and absolute power corrupts absolutely, in accordance with Lord Acton’s famous dictum, this is only to be expected. Thus, another of North’s reservations can be waived as well.

Having said this, I hypothesize that: (i) in the Soviet-type states the fundamental conflict described by North (1979) – the conflict between efficient property rights, designed to lower transaction costs in order to increase wealth, and property rights designed to maximize rent to the ruling stratum – is strongly in evidence; and (ii) the rulers will avoid offending powerful segments of that stratum who benefit most from the status quo. Consequently, they agree to maintain a property rights structure favourable to those groups, regardless of the effects upon efficiency.

As indicated already, the system-specific mode of rent appropriation that evolved in Soviet-type states is inseparable from the structure of property rights in existence in these states. This makes any institutional change leading to lower transaction costs and increased wealth much more difficult.

To make these greater difficulties in rearranging property rights in STEs more transparent, differences with respect to the modes of wealth distribution must be clearly delineated. In the autocracies, either the old traditional oligarchies or new dictactorships based on the military and the police, members of the ruling stratum appropriate a larger share of created wealth than they would obtain under a representative government. They simply get higher salaries, more ‘perks’, etc., while their status symbols (articles of conspicuous consumption and/or modern professional equipment) have a priority claim upon the state budget.

The above mode of wealth distribution is not, however, the only one in the Soviet-type system. Its ruling stratum consists of four segments: Communist Party apparatchiks, economic bureaucracy, police and military (see Winiecki 1986c). All may (and do) receive a larger share of the created wealth. Their salaries may be relatively higher and their ‘perks’ are relatively more important in a shortage economy,³ but this mode of wealth distribution appears to be the same as in ‘ordinary’ states with pre-representative governments.

However, in the Soviet-type system there exists yet another mode of wealth distribution that maximizes the rent of primarily two out of four segments of the ruling stratum: party apparatchiks and economic bureaucracy. This mode – unknown in other systems – enables them to draw benefits through the protracted interference in the process of wealth creation itself. There are basically two ways in which these two pillars of the system maximize their rent. These two ways are interconnected.

The first is through the nomenklatura, i.e. the right of the Communist Party apparatus – from the central party committee down to the enterprise committee – to ‘recommend’ and ‘approve’ appointments for all managerial positions in the economic (and public) administration, and managerial positions in enterprises. These appointments have always been made primarily on the basis of loyalty (for which read obedience) rather than managerial competence, and apparatchiks have usually appointed themselves and their card-carrying cronies to those well paid jobs. This has been tantamount to protracted interference in the process of wealth creation and has adverse effects for at least two reasons: (i) it signifies the severe limitation of the pool of talents from which managers are appointed; and (ii) given the well-known negative selection process of totalitarianism, the pool of nomenklatura talents is not only drastically smaller but also of below average competence relative to any other pool in a given society (assuming similar occupational, age, sex and other characteristics).⁴

The second way of protracted interference is through various kickbacks from managers of mainly industrial enterprises. In a shortage economy these kickbacks are mostly of a non-pecuniary nature. To those who appointed them, and to other superiors and colleagues who may help them in their career, enterprise managers offer a variety of goods and services (and they themselves are also given the chance to benefit in the same way).

More often than not such offers include goods in short supply that enjoy a high black market price but which are sold to selected people at the list price or even at a reduced price using the excuse of lower quality; (lower quality goods do reach the market en masse but kickback-related ones are carefully selected!). These offers include delegating workers from auxiliary divisions to build a country house at a sharply reduced price, to renovate a city apartment on the same low-price basis, to build some custom-made furniture for the apartment of a superior, etc. A wide variety of goods and services may be sought in a shortage economy at one time or another, and they are easily obtained in this fashion.

Both ways of protracted interference in the creation of wealth are made possible by the muddled structure of property rights. Since means of production are ‘socialized’, since workers are ‘the hegemonic class’ in a socialist society and since the Communist Party is ‘the leading force of the working class’, any appointment through the procedure of nomenklatura (in fact, any decision whatsoever) can be justified in this way. Again, it does not matter whether or not property rights were originally devised in this way for the purpose of maximizing rent for the said segments of the ruling stratum under communism. What matters is that they serve the purpose very well.

Since obedience is the foremost concern, managers once appointed, continue to be evaluated on the basis of loyalty in fulfilling commands (planned targets, ad hoc commands, etc.) rather than efficiency (the bottom line effects of enterprise activity). Also the relative unimportance of efficiency allows managers to absorb, without being held accountable, all the costs of kickback activities. Leakage of wealth thus takes place not only through losses incurred and gains foregone by managers with a business competence below the average, but also by their distractions from business activities.

It is at this point that the issue of loyalty will be briefly considered (more on this important subject in Chapter 2). Loyalty to their own superiors within the ruling stratum is not perceived by subordinates as obliging them actually to fulfil commands. Falsified reports on economic performance are the rule rather than the exception. This tradition continues, perestroika or no perestroika.⁵

Does the preference for loyalty to one’s superiors over real performance signify the dominance of power considerations? Since the communists’ power has rarely been threatened in the Soviet system, and, until recently, the neglect of real performance for the sake of loyalty is a constant factor in STEs, the answer is in the negative. Bureaucrats and apparatchiks learned long ago that their wealth does not depend primarily upon the creation of wealth but upon the interference in the wealth creation process. Thus, loyalty to one’s superiors is important in struggles between various coteries within the ruling stratum positioning themselves to extract more benefits from the inefficient economic system as shown in Hillman and Schnytzer (1986). Power considerations alone, for example attempts of a group to set an ideologically different course for the party, are much rarer. Moreover, in the latter cases it should also be evidenced that setting such a different course is at least neutral from the distributional viewpoint for those attempting such change. Otherwise (as often happens in STEs – see below), ideology is simply used as a pretext for rent appropriation.

Now, as nomenklatura is an instrument of the Communist Party, personnel shifts from the apparatchiks to economic bureaucracy occur frequently. The reverse flow is also frequent since young bureaucrats perceive the road even to a bureaucratic career as being faster if it includes a spell in the party apparatus. The interaction of this sort is much less intensive in the case of the remaining two pillars of the system.

The differentiated modes of rent-maximization for the ruling stratum are of primary importance for the prospects of change in the Soviet system. For the reasons stated above, all segments of the ruling stratum prefer the status quo to an alternative of the representative government. But only two segments – party apparatchiks and economic bureaucrats – have, in addition, a strong incentive to maintain the institutional status quo in the economic sphere.

In Gary Libecap’s words, an ‘analysis of the likely winners and losers of institutional change and their interaction in the political arena in specific settings is necessary before the observed pattern of property rights can be understood’(Libecap 1986). Although in the Soviet system political interaction is generally hidden from view, his statement is as valid for STEs as for other economies.

To give an example, market-type decentralization assumes, as a first step, the substitution of parameters for commands, and since parameters such as interest rates need not be disaggregated and passed on to respective subordinates (in contrast to plan targets!), intermediate levels of economic bureaucracy become superfluous. However, a look at Figure 1.1 shows clearly that the liquidation of the intermediate levels of economic bureaucracy (the rectangular, shaded area) affects not only the bureaucrats employed there, but also reduces the pool of available well-paid jobs to which party apparatchiks may be appointed through nomenklatura. It is only to be expected that such change (in fact it is a reform, i.e. tinkering with the existing system) will be resisted by both affected segments of the ruling stratum.

Figure 1.1 Links between bureaucratic and managerial positions and various levels of the Communist Party nomenklatura

Strengthening the budget constraint by holding enterprises financially accountable for the effects of their activities will also be resisted since the costs of kickback-related distraction from business activities would begin to affect the balance sheet and rewards for managers and workers.

In fact, real financial accountability of enterprises would undermine the whole loyalty-based system. The conflict resulting from divergence between requirements of obedience to one’s superiors and those of financially sound performance is an everyday occurrence in modified STEs, especially in Poland and Hungary, where financial indicators matter to some extent. Its outcome, however, is predetermined in favour of loyalty by the operation of nomenklatura.⁶ To put it simply, an enterprise manager caught in the dilemma of whether to follow a ‘suggestion’ of his superiors or to pursue another – more financially rewarding – option, chooses the former and asks for subsidies afterwards. Otherwise he might lose his job. That is why even in these two countries, the most reformed STEs, the budget constraint continues to be ‘soft’, to us...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Preface
• Acknowledgements
• Introduction
• 1. Apparatchiks and bureaucrats: main beneficiaries of status quo
• 2. Rent dissipation at enterprise level -its impact on reforms and change
• 3. Industry as a prime rent-seeking area for apparatchiks and bureaucrats
• 4. Softening the resistance to change: the buyout proposal
• Notes
• Bibliography
• Index