The Russian Economic Planning System

The Russian Planning System

Historical experience has largely answered the question of whether a cen­trally planned economic system can work. In 50 years the Soviet Union has climbed from a relatively backward, largely agrarian economy to a position among the industrial giants of the modern world economy. The relevant questions thus become, How was this growth record achieved and how much credit can be attributed to the institutions and processes for eco­nomic planning that the Soviets have evolved? This chapter looks at the planning process through the eyes of the central planner; the next two chapters investigate the effect of planning on the operation of individual industrial and agricultural units of production. Although the details of the planning process and the names of relevant agencies have varied somewhat over time, the following account catches the essential stages of plan con­struction.

"In its most general sense, economic planning is the working out of a description of a desired state of the economy at some future date, and the use of active instrumentalities to bring about this state of the econ­omy."1 The creation of an economic plan involves a choice of comprehen­sive goals and the allocation of tasks among the various economic units. These functions are performed by substituting central direction for the relatively free movement of prices that prevails in market-oriented eco­nomic systems. The plan document includes production targets, capital-investment schedules, domestic and foreign trade planning, and programs for social and cultural advancement.

The Soviets have chosen to use strict economic planning in its central­ized form for both ideological and practical reasons. Marxist-Leninists (as Soviet ideologues refer to themselves) hold that the marketplace is a chaotic instrument for allocating resources because it reflects the financial power of the bidders instead of the needs of the state. Competition, they say, is wasteful and has no worthwhile role to play in the building of socialism.
Centralized planning, on the other hand, affords the Communist Party direct influence over the direction of the national economy. The command economy system has proved effective in achieving the structural transfor­mation away from agriculture and toward industry, and the planned em­phasis on investment at the expense of the consumer. Whether it has done this as efficiently as possible, in the sense of achieving maximum output with available resources in any given period and maximum growth over time, will be debated in later chapters. No one can dispute, however, that central planning has exerted a tremendous influence on the course of eco­nomic events in the Soviet Union.

Steps In The Planning Process

The Soviets prepare a number of social-economic plans varying, in duration and comprehensiveness. The long- and intermediate-term plans are not binding but serve as a guide in the preparation of short-term plans. We will be concerned here with the annual economic plan, which is operational because it is concrete and legally binding on economic units. The planners seek to determine the composition of physical output, the rates of growth in productive capacity, and the improvement, if any, in the standard of living.

Planning Targets and Instruments

Several instruments are at the disposal of central planners to assist in achieving these goals: the setting of output norms, the design of material incentives for managers and workers, the construction of prices, investment and financial plans, and the program of taxation.

Each enterprise receives a target for its annual output in physical terms of quantity and assortment that it is expected to fulfill. Recent re­forms have also introduced a planned rate of profitability that the manager must keep in mind when appraising his costs of production. The profitabil­ity measure attempts to overcome deficiencies of physical-output targets in securing the results the central planners intend as contrasted with what managers see as the easiest way to meet output success indicators.

The Soviet system employs a set of material and nonmaterial incen­tives to induce labor and managers to act in accordance with the plan. In fact, much of the history of the Soviet economic system can be explained with reference to adjustments and transformations in the incentive system.

At this time, labor is not allocated by command in the Soviet Union —workers are largely free to choose their occupation and place of employ­ment. In the past, labor passes were utilized to cut down on job turnover, and of course the forced labor camps of the Stalinist era represented a form of command control over a segment of the labor force. Wage differentials are designed to reward skill, education, and putting up with dangerous or unpleasant work conditions in occupations like mining. Piecework rates, bonuses, and payments in kind reflect extra effort on the part of workers. A chance for a better apartment in company-controlled housing provides considerable incentive, given the scarcity and overcrowding of residential facilities.

Managerial incentives center around bonuses, which make up a con­siderable portion of their total earnings if they fulfill plan targets. We will discuss the managerial reward system in greater detail in the next chapter —it plays a key role in the operation of the industrial sector. Benefits in the form of better housing, access to a company car, and perhaps a vaca­tion cottage away from the city add considerably to the standard of living enjoyed by top management personnel.

Prices, with the exception of some free-market trading by collective farmers and by artisans, are set by the state. Necessities, on the whole, are low priced; in fact, many such goods are in short supply at prevailing prices, as testified by the long queues in many shops and markets. Luxuries are usually priced far beyond the reach of the average consumer, although consumer durable goods such as television sets and washing machines have become more accessible in recent years. Private ownership of automobiles on any significant scale is still far in the future. Price setters must be careful not to destroy material incentives by not providing goods on which to spend extra income. Prices in the industrial sector do not serve the same rationing function as consumer prices; they serve largely as an accounting measure to set contract terms between firms and to trace financial flows through the state banking system.

Investment plans_ provide the firm with funds made available to ex­pand capacity and improve techniques of production. Capital charges have been introduced in recent years to limit managers' requests to those invest­ment projects which will prove profitable for the enterprise. (Considerable ingenuity was required to reconcile these charges to the Marxist belief that interest payments were a tool for capitalist exploitation that would disap­pear under socialism; Marx neglected the rationing function of interest rates.) Some internal funds may remain in the control of the enterprise for investment purposes, but the amount is limited by the fixed-price contracts procuring inputs and selling outputs under which the enterprise operates.

Purchasing power in the Soviet Union has consistently exceeded the supply of consumer goods, especially once the shoddy quality of many goods is taken into account. This purchasing power must be reduced to avoid the unpleasant effects of black markets and reduced incentive for productive effort. The turnover tax is aimed at this problem. By imposing differential tax rates on consumer goods at the wholesale level, the market price of commodities can be adjusted to curb excess buying power and steer purchasers toward relatively abundant items. Now that the Russian consumer has acquired the basic necessities of life, it becomes more neces­sary to permit a discernible rise in real living standards by increasing both the quantity and the quality of those goods which consumers really want to buy.

Construction of the Annual Plan

Central planners must have a statistical base from which to construct the annual plan. Data must be accumulated early in the year before the one being planned. This enormous task is undertaken by the Central Statistical Administration and involves literally millions of people. The planners must extract from this preliminary information an indication of areas in which production targets for the year are not being fulfilled.

These statistics are also the basis of production norms for the plan year. A production norm is the number of units of an input required to produce one unit of output; it thus becomes the fundamental source of estimates on requirements of raw materials and intermediate goods to achieve output goals. Working with fixed production norms requires strong assumptions about the nature of technology; economists disagree on whether the production process can be adequately described over short periods by fixed coefficients or norms. If input requirements are set too liberally, waste and excessive inventory costs result; if they are too taut, it is technologically impossible to achieve output targets with available re­sources. Since the selection of a set of norms is really a selection of a spe­cific technology, it is not surprising that alternative methods have had to be used to induce Russian factory managers to experiment with new tech­niques of production. The Soviets are aware of the disincentive effect of production norms on innovation, and this has figured in their discussion of planning reform.

Political Ratification of Plan Goals

Political leaders, once they possess some knowledge of where the economy will be at the beginning of the plan year, can set forth their preferences on the directions the economy should take during the plan year. It is they who ultimately decide the overall growth rate and appropriate output mix to be attained. Their preferences take concrete form when directives are pre­sented to the State Planning Committee, or Gosplan. The individual minis­tries then receive from Gosplan several hundred "control figures" for the planned output of major industrial products and the maximum amount of key inputs that ministries can expect to receive,

It must be emphasized that at this point the plan is in very crude form. It could not yet serve as a guide for every single enterprise or farm. These control figures embody the essential priority decisions for the econ­omy as determined by the Council of Ministers and other political bodies. Before the priority decisions can be translated into specific planning direc­tives, the control figures must be disaggregated into a workable plan of action for individual economic units.

Translating the Plan into Enterprise Norms

At this stage of plan construction, the industrial ministries subdivide the task of disaggregating control figures according to type of product. They inform subministries, organized along product and geographic lines, of the output that will be expected of them; these units, in turn, allocate produc­tion norms to the enterprises they oversee. Approximately 1500 different products are planned in this way. Once the firm knows its output target, it can apply production coefficients to request needed materials in order to produce that level of output.

We encounter here the first of a series of conflicts of interest between central planner and enterprise manager. It will be to the manager's benefit to underestimate his productive capability and to overestimate his input requirements. A manager who successfully conceals "reserves of produc­tivity" can easily overfulfill the lower target set for his factory; if he hoards raw materials, he can survive future shortages or even (illegally) barter scarce commodities with other enterprises. From past experience the manager knows that the plan will be "taut," that is, that it will err on the optimistic side and demand his full effort. The manager can assume, more­over, that the planners are aware of his tendency to understate capacity and will routinely adjust output and input coefficients to recapture maximal output. This is a dangerous and potentially wasteful game to play, as shown by the concern expressed in official Soviet publications and in periodic legal trials of offending plant managers selected to serve as examples.

The raw-material estimates of the enterprises make their way back to Gosplan. At each point in the hierarchy, the administrator will attempt to minimize the burden of requirements on himself or herself and to maxi­mize the burden shifted to others. A great deal of negotiation takes place throughout this process and, although not officially sanctioned, becomes part of the adjustment process involved in balancing the plan. At one stage of Soviet development, a specialized group of "expediters" arose in Moscow who engaged in activities that a Washington lobbyist dealing with administrative bureaucracy would instantly recognize. These sorts of activi­ties become very important to the success of a manager and are brought on by the prevailing tautness of the plan. The prudent manager, in fact, may be well advised to break, or severely bend, several laws and regula­tions in order to "lead a quiet life" free from prying investigators sent out by supervisory agencies.

Balancing the Plan

Gosplan must now check that the figures for input requirements are not larger than the projected output of those commodities; otherwise bottle­necks and shortages will result. The method of material balances sums all the requirements for a product and compares the quantity with that avail­able from all sources, including current production, imports, and inventory depletion. Uses of a product include inputs to domestic enterprises, final consumption, exports, inventory buildup, and an emergency reserve. Often it is found that requirements initially exceed planned availability, and ad­justments must be made if the plan is to be rendered internally consistent. One procedure for rectifying this situation is on the "uses" side. High-priority enterprises (military, heavy industry) still receive their full alloca­tion, but distribution to low-priority areas is cut back. Reducing the flow of goods to final consumers has the least repercussions on related produc­tion; thus, consumers often bear the brunt of the materials-balancing operation.

On the sources side of the account, imports of the goods in short sup­ply may be increased. Recent grain purchases from Western countries in years of poor Russian harvests are an example of this remedy. Imports must ultimately be paid for with exports, of course, and this measure in­volves economic or political consequences. The planners may adjust to shortages by changing input norms for enterprises in order to force them to economize on raw-materials use. If there is slack in the plan due to underreporting, this is a healthy move; if the plan is already taut, evasive tactics that give the false appearance of plan fulfillment will necessarily be resorted to.

Approving the Plan

Gosplan submits a balanced version of the annual plan to the Council of Ministers. This is not a rubber-stamp gesture; approval is not automatic. The individual ministers have a large personal stake in the accomplish­ment of the goals set forth in the plan. They too try to get output targets reduced and input allocations increased. A number of changes are often made at this late stage, since ministers possess considerable political power. When a compromise is reached, the plan is finally approved as law.

The plan is not operational, however, until the enterprises receive "funds" to purchase required inputs. This term does not mean money or credit; it is a corruption of the Russian word for requisition permits that allow contractual agreements between suppliers and purchasers to be drawn up. Firms are then prepared to carry out the dictates of the annual plan, which affects every economic unit in the Soviet Union with the excep­tion of a few consumer industries that must be responsive to rapidly changing needs and therefore operate with a shorter planning horizon.

We have followed the planning cycle from the initial phase of data collection to the moment when the final plan is implemented. Soviet plan­ning machinery has grown considerably more complex and more sophis­ticated since the early plans of the 1930s, which were often forced to make ad hoc adjustments in coefficients or in priorities in the middle of the plan period. "After 1953, when the new leaders of the USSR pledged them­selves to a gradual but steady rise in the population's living standards, con­sumer goods industries could no longer be used so conveniently as a buffer to break the impact of planning mistakes on the priority sectors of the economy."5 Even as the ability to plan was improving, the task of planning was becoming increasingly difficult as industrial production experienced an explosion in the range and degree of fabrication involved. An army of plan­ners was occupied in a losing battle to keep track of physical details of interindustry transactions; the development of computers and the reemergence of economic theories for decentralized decision making in the Soviet Union during the 1960s were no coincidence. A brief discussion of these trends is in order, because they point out possible future directions around which economic planning institutions may evolve.