Russian Industrial Planning

Russian Industrial Planning

Soviet industry is organized vertically into a number of ministries, each concerned with a specific set of related industrial enterprises; they include the Ministry of Machine Building and Metal Working, the Ministry of Petroleum Refining, the Ministry of Ferrous Metallurgy, and so forth. For some industries the ministry is at the all-Union level; that is, there is one ministry for the entire Soviet Union. For others, the enterprises are part of the ministry of the republic in which they are located. Each ministry is rep­resented by a member of the Council of Ministers of the USSR or the republic with which it is concerned. The number and responsibilities of the ministries have been subject to frequent change.

The ministries are further subdivided into main administrations, which supervise enterprises grouped by product type and geographic con­siderations. The managers of enterprises are responsible directly to their ministries, and ministers are responsible to the political leadership for the performance of their enterprises.

The bureaucratic apparatus of the Soviet industrial sector resembles the hierarchy of one of the West's giant corporations. Like a capitalist cor­poration, moreover, the Soviets do not expect the bureaucracy to supply each individual in the system with all the instructions and supervision nec­essary to carry on all the various facets of production. The system there­fore employs material incentives to make the goals of the individual coin­cident with those of the leaders. As we will see, the design of these material incentives is vital to the smooth operation of the system and must be care­fully constructed to avoid undesirable responses.

Operation Of The Industrial Enterprise

Motivating Management

The manager of a successful Soviet industrial enterprise is a remarkable person and is well rewarded for his efforts. Because of the nature of Soviet planning—tight plans and optimistic targets—a manager's job is compli­cated. He must be certain that the enterprise will have the inputs it requires to meet its targets. He may get a call from his ministry (the telephone is a crucial instrument in Soviet industrial administration) informing him that his targets have been increased but that no extra inputs will be forthcom­ing. He may be informed that a shipment of parts the enterprise has just received does not fit his machinery. If he refuses to accept the parts, how­ever, he may never get replacements. He could organize a workshop to adapt the parts for his use, but there are no workers to be spared from the assembly line.

What does he do? He uses his connections and ingenuity. He phones his (unofficial) representative at the ministry in Moscow, calls the secretary of the local cell of the Communist Party, or sends his expediter to make a deal for more inputs, new parts, or the use of a workshop. As reformers realize, he may also adjust the assortment or quality of his output in order to fulfill the targets with less strain on his limited resources. If the quality of output suffers, this is the price paid for taut planning and for material incentives that are not adequate to ensure that quality standards can be met along with output targets.

What does the manager receive for his resourcefulness? The rewards are both monetary and nonmonetary. The nonmonetary awards include social status, consumer amenities—a chauffeur-driven car, a nice apart­ment—and the possibility of further advancement. The monetary reward is very significant; the manager's bonus may be as much as 50 percent of his base salary.

When the manager decides to put one order into production ahead of another, or to substitute one material for another, it is not his salary he is thinking about. It is usually the size of the month's bonus that will depend on the decision taken. It is in this sense that the bonus is the principal incentive in the operational decisions of the Soviet enterprise.

The bonus, therefore, must cause the manager to make decisions con­sistent with the preferences of the political leaders if central economic planning is to be successful. Under the system instituted by Kosygin in 1965, managers' bonuses depend on the rate of profitability of the enter­prise. The rate of profitability will rise if the output is increased or costs are reduced, given the amount of fixed capital owned by the enterprise. These two responses are desirable in the eyes of the political leaders. The rate of profitability was proposed by Yevsey Liberman as an answer to abuses arising from use of physical output targets as the base for bonuses. It was adopted by the political leaders in 1965. Output targets are still constructed and are still binding, but there is also a planned rate of profit­ability that gains the manager a larger bonus if he exceeds it.

The Soviet industrial manager is usually an engineer by education. Soviet business education is usually limited to learning to use standardized forms. If the manager is a good engineer, he can increase his output or reduce his costs and thus increase his bonus. As we have discussed, he must also know how to circumvent bureaucracy! It is in this capacity that adverse responses to material incentives appear.

Motivating the Worker

The wages of the Soviet worker depend on his productivity. Time-work rates, comparable to straight hourly rates in American industry, are related to the demands of the job in terms of skill and effort. Time rates are used only when quantity or quality of output is difficult to assess by standards of performance, and no more than one-quarter of the production workers in industrial plants are paid simple time rates. The majority of workers receive wages based on some piece rate or bonus scale. Piece rates and bonuses may reflect individual, workshop, and enterprise achievement. A fund is set aside from the profits of the enterprise to be used for bonuses. These rewards are calculated, as are the managers', on the bases of planned norms and thus serve as an incentive to overfulfill those targets.

Workers also receive nonmonetary rewards. The enterprise budget includes a fund for social and cultural projects for workers. Soviet enter­prises often make housing available to their workers. They may even have resort facilities where industrial workers can spend their annual two week paid vacation. A productive year may bring the workers a new lunch­room or expanded recreational facilities. Specific awards are often made for outstanding individual achievement; these are both material and hon­orary, such as the Order of the Red Banner of Labor.

Trade unions in the Soviet Union do not act as collective bargaining agents for labor. They serve more as fraternal benevolent associations and also help management obtain the degree of labor performance necessary to enable the enterprise to fulfill its plan. They are expected to ensure that the Uniform Labor Code is enforced. Material reward for the Soviet worker is a direct result of his own effort and that of his fellow workers; his in­structions from the political hierarchy are clear-cut in a way those for managers are not.

Managerial Success Indicators as Operational Communications

It is a fairly simple matter to provide instructions for a factory producing a single homogeneous product and using a single inflexible production pro­cess. Most modern factories, however, are capable of producing a broad range of commodities displaying subtle variations in performance charac­teristics, style, size, and durability. Central planners would have to spend an inordinate amount of time and effort to supervise the infinite detail of completely specified production orders. They naturally resort to "success indicators" that incorporate some, but not all, of the dimensions of product variations; managers facing the task of conforming to these success indica­tors just as naturally seek the easiest way to measure up by slighting aspects, such as quality or variety of assortment, that have not been spelled out in detail by the central authorities.

Managerial incentives have changed in form because of the previous failure to provide adequate communication of the intentions of political leaders to managers of enterprises. The aspect under most severe attack is that of rewards for fulfilling output targets in physical units that adversely affect the quality, assortment, and innovativeness of Soviet industrial pro­duction.

It is very difficult to find a physical unit of output that will suffice to include all of the desired qualities of that output. Consider the case of chandeliers, once mentioned in an official Soviet speech as an offending industry. The original physical production description chosen was weight. The Soviets could soon boast the heaviest chandeliers in the world, but the real output target was not satisfactorily fulfilled. An alternate choice might be a measurement of the amount of light produced, or candle power, since this is the purpose of chandeliers. It is doubtful that every room could use chandeliers with as much candle power as might be produced.

A factory manufacturing parts for tractors, for example, was rewarded for over-fulfilling its output plan by 60 per cent. This feat was achieved by lowering the quality and reducing the useful life of the parts produced to 40-50 per cent of what it had been. Not only are in­centives for quality improvement lacking. The planned goals often set up actually penalise it. When the personnel of the Moscow ZIL plant managed to reduce the weight of the automobiles they produce by 100 kilograms, they received a commendation but suffered a reduction in earnings: the factory's output goals are set in tons.8
Nicolas Spulber cites two examples of the distortions in communication caused by physical targets in two other industries:
An official textbook indicates that in 1954 the ministry of the coal indus­try delivered coal with an ash content exceeding by 2 per cent the standard set in 1940. Owing to this, coal consumers received 6 million tons of waste rock, the transportation of which required no fewer than 6,000 railroad trains. Nikita Khrushchev threw some additional light on these questions by citing the example of a machine tool plant in Saratov: "Why should that plant cease to produce obsolete machine tools," remarked the Soviet Premier ironically, "when this would alter the output plan, . . . and when workers have already been paid several thousands of rubles in bonuses, including 21,000 rubles to the plant director for over-fulfilling the production plan?" (Pravda, July 2, 1959)

Most Western authorities on the Soviet planning system have their own collection of anecdotes about success indicators that fail to achieve their original goals: Unusable bricks are delivered because the norm does not penalize breakage during dumping; trucking enterprises chalk up ton-miles by needlessly shuttling goods from terminal to terminal; a shoe fac­tory produces only small sizes in order to save on leather and avoid the bother of adjusting machinery for larger sizes; unwanted ladies' dresses pile up in warehouses because there is no incentive to pay attention to the style preferences of potential consumers. Efforts to set output targets in terms of "roubles worth" meet with a different set of obstacles: Price credits are often out of line with resources absorbed, resulting in easy-to-produce but unwanted assortments of output; unnecessarily expensive raw materials are used to boost the value of each unit produced; spare parts are usually undervalued and hence underproduced.

Through all of the efforts to adjust the incentive system there is the inexorable tendency for quality to decline and for little attention to be de­voted to consumer preferences in style, color, and size.

These difficulties with the design of material incentives have been discussed extensively in the Soviet official press. As the obvious sources of gains in economic productivity were exhausted in the industrialization of the Soviet Union, the emphasis on efficiency grew. Such abuses as we have mentioned could no longer be tolerated. The incentives discouraging innovation were particularly abhorrent to the political leaders. The Soviet Union could not expect to remain in the forefront of industrial nations if its managers had to play it safe and stick to current methods of production rather than experimenting with new techniques. The plight of the consumer could not be alleviated if concern with the fulfillment of physical output targets must supersede concern for meeting the needs of the consumer. The need for reform was evident. The action for reform began in 1957 with Nikita Khrushchev's reorganization of industry and took a new form with the 1965 reforms of Alexei Kosygin. These reforms did not change the command nature of the Soviet economy. They were an attempt to decen­tralize some of the decision making in industry. They tried to improve the means by which the communication of the political leaders' instructions might take place.

Economic Reform In Industry

The 1957 Regionalization of Administration

Under Stalin the industrial ministries had become very powerful. In an effort to control receipt of inputs, the ministries often set up facilities within their own bounds to produce as many of the inputs required as possible. A ministry would transport materials from its own factory in Vladivostok in the east to a factory near Moscow, rather than purchasing them from a Muscovite factory of another ministry, to ensure quality and delivery times. These activities were called empire-building and were greatly disparaged in official circles. There was much discussion of the inefficiency of decisions made by ministries in Moscow for enterprises spread throughout a land of many contrasting economic environments.

In 1957, to combat this centralization of decision making, Nikita Khrushchev reorganized the industry of the Soviet Union on a regional basis. Administration of enterprises was transferred to some 100 newly created Regional Economic Councils (Sovnarkhoz), each responsible for all industry in one of the Economic Administrative Areas into which the nation was divided. The regional councils were responsible to the Council of Ministers in the republic in which they were located. This regional organ­ization is similar to that of the Communist Party, and it was hoped that the Party would influence industrial efficiency.

The councils were expected to remedy the abuses of the empire-build­ing ministries as well as to make better use of local resources and ensure the reliability of input supply. This was not the case. The regional economic councils set about empire building of their own. They desired their regions to be self-sufficient and ignored potential advantages of trade across re­gional boundaries. The councils had to regulate all types of industry for which they lacked the technical knowledge of ministry officials. They could take advantage of local resources but in the process lost the advantages of specialization. It became increasingly obvious that the 1957 reform had not dealt with the fundamental problem—communication of economic instruc­tions.

The 1957 reform attracted considerable attention in the West when it was first announced. In retrospect it appears to have been based more on expediency than on any fundamental ideological commitment. Organ­izational changes are often designed to produce one-time increases in pro­ductivity simply by shaking things up and exposing areas of inefficiency. In addition, it is possible that the 1957 action was aimed partly at demoting ministry bureaucrats in Moscow who represented a potential source of political opposition. Reforms may involve not only new policies but also new people to carry them out.

Reforms of Managerial Incentives

The question of more basic reforms appeared in a 1962 Pravda article by Professor Yevsey Liberman of Kharkov. The resulting scheme, termed Libermanism by some in the West, centered on new criteria of managerial performance and greater freedom of decision making at the enterprise level.

How is it possible to entrust the enterprises with the drafting of plans if all their calculations are, as a rule, far lower than their true potentials? It can be done if the enterprises have the greatest possible moral and material interest in making full use of reserves not only in plan fulfillment but also in the very compilation of plans. To this end, planning norms of profitability must be worked out for each branch of industry and must be firmly established for an extended period.

The profitability criteria provided dual motivations to cut costs and to be frugal in asking for investment funds, since profits were to be cal­culated as a percentage of total capital. A progressive bonus rate structure was to encourage each firm to set its own production goals close to full-capacity levels because overfulfilment bonus rates were lower. Finally, an extended plan period was to be instituted to encourage innovation, since more productive firms would not face immediate upward revisions in their output targets.

The wastefulness of existing investment-allocation procedures became most obvious in the electric power industry, where huge investments of resources were tied up in giant hydroelectric sites without adequate con­sideration of the ultimate savings from alternative generating sources. The search was on for a system of capital rationing taking into account the dur­ability of investment projects.

All this discussion took on concrete form with the establishment of Khrushchev's successors. The new order was set forth in a report by Alexei Kosgin to the Central Committee of the Party in September 1965. Mea-surer were reposed as follows:
A system of measures to expand the economic independence of enter­prises and raising their role as the main economic unit; To strengthen and develop self-accountancy, to increase economic stimulation of production with the help of such means as price, profit, bonus credit;

Resolutely intensify the incentives for workers and employees in improving the general results of the work of the enterprise;
To improve the management of industry, to set up agencies built on the branch of industry pattern, i.e., industrial ministries vested with all rights and fully responsible for the development of these branches.

What were the 1965 reforms designed to accomplish? In addition to signaling the end of the 1957 attempt at regional administration, there were significant changes at the enterprise level. The addition of profitability cri­teria as a significant element in managerial bonuses coincided with an over­all reduction in the number of restrictions on managerial discretion. For instance, for the first time the manager was free to choose between various categories of labor if he could reduce costs in doing so. Innovation was encouraged because the new incentives would guarantee bonuses for the entire planning period for any innovations that were profitable to the en­terprise.

The 1965 reforms have not proved to be as sweeping as most Western observers at first thought. They are more accurately regarded as a change in the incentive system for managers rather than a fundamental move toward a profit-directed economic system. Centrally provided output plans still exist; managers now have more freedom in the way they meet the new criteria of cost and quality. There is some measure of decentralization in budgeting and technical planning at the enterprise level. Capital charges discourage hoarding of capital and facilitate the calculation of profitability.

The effect of the reforms has been blunted to some extent by the lukewarm reception, bordering on sabotage, accorded them by ministry planners or Party officials who found their functions superseded by new regulations. Reports appeared that bureaucrats sometimes refused to pay bonuses on the new basis or were slow in releasing discretionary funds that were supposed to be controlled by individual enterprises. Although the initial reform has been extended to almost all industrial enterprises, there appears little possibility of the next stage of decentralization—some control over pricing, allocation of raw materials by supply and demand instead of through the plan, and freedom to fix wages and dispose of profits. Liber-man himself appears to have backed away from heavy reliance on profit criteria in his later writings. The dialectical process whereby change com­bines features of the old and the new is again demonstrated in these efforts to change the institutions of Soviet economic planning.

Reforms for the Consumer

Another concern of reformers is the response of industry to the needs of the consumer. Under the conditions of excess demand that formerly existed in the USSR, industry expected that whatever it produced for the consumer sector would be purchased. With the increase in output of consumer goods initiated by the post-Stalin leaders, it became clear that such an assumption was unwarranted; some undesirable goods were left on the shelves. The preferences of consumers could not be communicated by the output plans of political leaders alone. Reform in this area was first explored through experiments in the feasibility of producing what consumers wanted.

In July 1964 two textile factories engaged in manufacturing men's suits, the Bolshevichka and Mayak enterprises, were released from their output plans and instructed instead to produce to fill the orders of then-retail customers. To meet output targets, such enterprises might formerly have concentrated on manufacturing styles and sizes requiring the least manpower or material, whichever was in short supply. Now their retailers could expect shipments that customers would be eager to buy. These ex­periments met with great success, and the system was soon applied to sim­ilar enterprises. The Soviets have even become interested in Western mar­keting techniques, conducting surveys and interviewing consumers about their reactions to experimental models in retail stores. This too represents a great change from the thinking of the Stalin era, which served the Soviet Union well in an earlier period but eventually threatened to slow its eco­nomic progress.

It is evident that increased emphasis is being placed on consumer needs. The ninth five-year plan, covering the years 1971-1975, is the first to project a higher growth rate for light industry than for heavy industry. Long queues, limited selection, and poor quality are still part of the con­sumer's lot, however, and it does not appear that any major breakthrough will occur until the forces of supply and demand come to play a much larger role in determining what gets produced.

The reforms we have discussed were motivated by a need for in­creased economic efficiency once the easily attacked reserves of productiv­ity no longer existed. They were not "creeping capitalism." A great need for reform was and is obvious also in the agricultural sector, the great weak spot in the Soviet economy. We now turn our attention to Soviet agricul­tural production.