Chapter

Chapter II.1 The Traditional System And Developments Through 19851

Author(s):
International Monetary Fund
Published Date:
December 1991
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1. BACKGROUND

The USSR, spanning eleven time zones and covering one-sixth of the world’s land surface, is geographically by far the largest country in the world. About one quarter of its territory falls in Europe and the remainder in Asia. The northernmost part of the country is arctic desert and tundra; south of the tundra stretch enormous forests, then the steppes and finally the deserts of Central Asia. Some 20 percent of the land is suitable for agricultural cultivation, of which about two thirds—including the famous black soil zone—is in the steppes. However, unfavorable weather conditions make full exploitation of this natural resource difficult.

Within its territories, the USSR has enormous reserves of mineral and raw material wealth. It is estimated to contain around 40 percent of the world’s reserves of natural gas and almost 6 percent of oil. In addition, it is the leading country in reserves of timber, iron ore, manganese, copper, zinc, nickel, lead and various precious metals. The distribution of unexploited reserves is uneven, and has generally shifted eastward over time: 90 percent of oil production and 75 percent of gas output are concentrated in the Russian republic (RSFSR).2

The USSR is divided into fifteen constituent republics (within which are twenty so-called autonomous republics and also some further ethnically-based territorial governments). Of the overall population of more than 288 million, some 51 percent live in the RSFSR, and a further 18 percent in the Ukraine. The population is growing most rapidly in the five predominantly Moslem republics of Central Asia (currently accounting for some 17 percent of the total). Per capita incomes,3 which averaged rub 2,210 in 1988 for the USSR as a whole, ranged from rub 993 in Tadzhikistan to rub 2,624 in the RSFSR. Overall, there are more than 170 distinct ethnic groups, and at least 18 different languages having more than 1 million speakers.4

2. THE PLANNED ECONOMY

The strategy for economic growth in the USSR was established in the first Five Year Plan of 1928, and remained fundamentally unchanged for the next 50 years. At the time of the 1917 revolution, and despite a drive for industrialization in the late 19th century, economic development in Russia had continued to lag well behind that of the major European countries and the United States. By the late 1920s, following enormous losses incurred during World War I and the subsequent civil war, and in part due to the perceptions of an increasing threat of further military conflict, the objective of catching up with the West became the dominant influence on economic policy. The relatively liberal New Economic Policy of 1921-28 had mixed results and was seen as inadequate to the task of achieving the desired “dash for growth”. The new approach, centered on accelerated industrialization, required the rapid mobilization of capital, labor and material inputs, with lesser emphasis being placed on their efficient use (so-called extensive development). This, in turn, implied the need to raise substantially the share of investment in national income, to increase labor force participation rates and to redeploy labor from agriculture to industry. The introduction of a full-scale command economy—including nationalization of almost the entire capital stock and the collectivization of agriculture—was seen as the only way to achieve these shifts in resources at the required pace.

The system that evolved was composed of a set of all-union ministries and state committees (such as Gosplan—the central planning agency—and the state committees on prices, labor and material supply) whose heads comprised the Council of Ministers, the chief executive body of the Government. The Communist Party of the Soviet Union (CPSU), however, was the dominant force, with virtually all the principal economic policymakers belonging to its Central Committee, which in turn formally elected the ruling Politburo.

With over 90 percent of production brought under direct state control, and with the coordinating role of markets almost entirely suppressed, the implementation of the broad economic objectives required detailed, centrally-determined, plans for the inputs and outputs of all branches of the economy. To facilitate the monitoring and processing of information between the central planning authorities and state enterprises, branch ministries were established, typically along sectoral lines. Annual plans, in principle consistent with the strategic Five Year Plans, generated sets of targets for the ministries, which in turn distributed these amongst the individual enterprises under their control. In general, the primary target was specified in terms of the physical volume of production, and rewards for managers and ministers were tied closely to plan fulfillment. Financial or efficiency objectives were, at best, of secondary importance and loss-making enterprises were rarely if ever shut down (the losses being absorbed by the state budget, the extension of credit, or through cross-subsidization within ministries). Direct competition between enterprises was typically suppressed, being viewed as a drain on planning resources and a sacrifice of economies of scale. Consequently, production tended to be highly concentrated, with, in many cases, only one or two producers of a particular good in the entire country.

Under the command economy, the distribution priorities of the ruling Communist Party were directly enforced. The traditional top priority was investment in heavy industry, viewed by Marxist-Leninist political economists as the key to rapid economic growth, but also by the leadership as the basis for large scale weapons production, which was seen both as an essential guarantee of national security and as a means of projecting Soviet influence abroad. The high rate of capital formation and rapid expansion of heavy industry were accompanied by relatively slow growth of consumer goods production. As the result of an unfavorable relative price structure and a general lack of incentives and inputs, agriculture also became a neglected sector of the economy.5

The planning authorities controlled most investment at the enterprise level. The bulk of enterprise profits and depreciation allowances fell under the direction of the branch ministries, which reallocated funds for investment between their enterprises according to the requirements of the plan. The residual accrued to the state budget and was used partly to finance some investment directly from the center. Basic inputs were included in the so-called material balances, which the planners formulated to balance the production, stockbuilding and usage of hundreds and even thousands of products considered critical to fulfillment of the national economic plan.

The combination of gross output targets and soft budget constraints meant that demand for labor was consistently high—even though, once employed, workers could not normally be laid off without their consent. Enterprises were entrusted with the provision of many social benefits to their employees, including health care, recreation and vacation facilities and, in some cases, accommodation. Thus, despite strict controls on wages, there was some scope for enterprises to bid for extra labor by offering improved working conditions. As forced labor and various administrative restrictions on mobility declined significantly in importance after the mid-1950s, workers were increasingly able to respond to the demands for their services, and a labor market (albeit heavily regulated) developed.6 The tying of most social benefits to employment, the lack of any system of unemployment benefits, and the inherent bias towards excess demand for labor are thought to have kept unemployment artificially low and essentially frictional in nature.

The substantial information flows connected with the planning and evaluation process took place mainly in a vertical, bureaucratic setting rather than in a market context. The potential information content of prices was largely ignored; indeed, it was deliberately suppressed as the planners were intent on maintaining the stability both of producer prices, to facilitate the planning process, and of retail prices (particularly for staple goods and services). Household goods and services were allocated mainly through (highly regulated) market means, however, since formal rationing schemes were viewed as unpopular or too cumbersome. Fixity of prices inevitably led to periodic (in some cases chronic) shortages, which were generally resolved through queuing or by resort to the black market.

With the main allocations determined administratively, and with production and distribution effectively monopolized, price formation was a major challenge. The favored method was to peg wholesale prices at average cost plus a percentage mark-up, which prevented excess profits but discouraged cost saving. The structure of relative prices, though largely arbitrary and fixed, could nevertheless affect the output mix to the extent that enterprises had some scope for changing the composition of their inputs and outputs so as to boost the overall value of their production and their profits relative to the plan.

Private economic activity was strictly circumscribed by law. Households were allowed to hold some “personal” property with income-generating potential—such as small private plots, livestock, automobiles and housing— but resale was restricted and private citizens had little recourse against state-led harassment and confiscation campaigns. Other capital was banned, as was employment of hired labor, and supplies were difficult to obtain through legal channels. The main legally-sanctioned private activity was crop production on the household plots of collective farm members, which typically contributed a disproportionate share of total agricultural output.

In its economic relations with the rest of the world, the Soviet economy became relatively autarkic; for most of the period up to the late 1940s, only a very small share of domestic output was traded internationally. Thereafter, trade volumes rose rapidly, with the majority of this trade being carried out with the East European members of the CMEA, an organization formed in 1949 as a trading bloc for the newly emergent centrally planned economies. Despite a growing role for foreign trade, the authorities attempted to limit the influence of external conditions on the economy; first, by conducting virtually all trade through a state monopoly composed of noncompeting foreign trade organizations, whose function was to export only enough to pay for the imports required under the plan; and, second, by ensuring that changes in world prices were fully offset by implicit variable taxes and subsidies (so-called “price equalization”), with domestic prices remaining fixed. Thus, both enterprises and households were largely insulated from the world economy.7

Monetary and fiscal policy had no active, independent, role to play in the planned economy. The monetary system consisted of a monolithic state bank (Gosbank) whose primary functions were to grant credit to enterprises in whatever amounts were necessary to fulfill the plan for output and investment, to take deposits from households (there was little consumer credit), and to issue currency. Interest rates were generally low, in some cases negative in real terms, and capital charges for enterprises were not introduced until the 1960s. Consequently, from the enterprise’s point of view, capital was virtually a free good. Enterprise deposits were strictly earmarked for planned expenditures and could not be converted into cash, except to make authorized payments, mainly wages. The accumulation of money by households was kept under control largely by ensuring that their incomes grew no faster than the availability of consumer goods and services. Thus, the avoidance of excess purchasing power in the economy was essentially an administrative matter.8

Similarly, fiscal policy was entirely subordinate to the plan’s specific objectives for output, prices, defense, and social spending. At an operational level, budgetary preparation and execution, as well as extrabudgetary activities, were simply a part of the planning process. Thus, the state budget and extrabudgetary centralized funds were used to achieve a significant redistribution of resources among state enterprises. Enterprise surpluses were typically transferred to the budget and the centralized funds, and reallocated—often on a discretionary case-by-case basis—for enterprise investment and other uses. Likewise, through product-specific turnover taxes and subsidies—which were, in fact, variable wedges between retail and wholesale or producer prices—the budget fulfilled a redistributive function among households. Adherence to the plan—with full control over incomes, prices and quantities—combined with ad hoc direct intervention in enterprise finances, helped ensure approximate balance in the state budget.

3. ECONOMIC PERFORMANCE THROUGH 1985

a. Economic growth

After achieving high rates of growth by world standards in the 1930s and in the years following World War II, the Soviet economy entered a period of secular decline in output growth. When this decline began is a subject of continued debate; official statistics indicate it started only in the 1970s, whereas other sources—both Soviet and non-Soviet—suggest that it was already apparent in the 1960s. It is now generally accepted that official statistics have tended to exaggerate growth by the failure, for example, to adjust adequately for so-called hidden inflation.9 There is little agreement, however, on the extent of overstatement.10 According to official statistics, the average annual rate of growth of net material product (NMP)11 fell from 7.8 percent in the second half of the 1960s to 5.6 percent in 1971-75, 4.3 percent in 1976-80, and 3.2 percent by the first half of the 1980s (Table A.1, Appendix II-1).

The slowdown in Soviet growth has been attributed to many factors. The relative contributions of these are difficult to assess, but it is useful in establishing a context for the reform efforts of the 1980s to distinguish between two sets of factors. The first relates to the choice of growth strategy. By relying on the rapid mobilization of capital, labor and raw materials to generate economic growth, the USSR was bound sooner or later to run into constraints on the availability of resources. It can be argued that, by the 1970s, these constraints were beginning to bite, and that there was little that policy could do to relax them. A second set of factors, by contrast, points to inherent deficiencies in the planning system itself, and it was on these problems that reforms were primarily to focus.

The “extensive” nature of Soviet growth—that is, its dependence on increases in the quantity rather than the productivity of inputs—has been well-documented. Rapid growth in the labor supply was achieved mainly through a progressive rise in the proportion of the population engaged in the active work force, with policies aimed, in particular, at raising the participation rate of women. Fixed capital was accumulated at a rate generally well in excess of output growth, by devoting a much greater share of national income to investment than most market economies could sustain. And full use was made of the USSR’s vast reserves of fossil fuels and other raw materials.

Clearly, the labor participation rate could not continue to rise indefinitely, and in the early 1970s it finally peaked at over 85 percent, considerably above the rates prevailing in Western Europe and the United States. Growth in the population of working age slowed, and the largest additions to the working age population were taking place in the predominantly Muslim republics of Central Asia, where the fall in participation rates in the 1980s was several times as great as in the rest of the union (Appendix Table F.1). Moreover, migration from this region to other areas of the USSR with shortages of labor was limited, partly for cultural reasons. As a result, the growth rate of employment began to decline by the early 1980s; indeed, in 1981-85, employment was growing at only one-half the rate of the late 1970s (Appendix Table A.1).

The scope for increasing investment growth was similarly bounded, as the share of income available for consumption had fallen towards the limit of what was considered politically sustainable. The decline in the growth rate of the fixed capital stock is thought to have begun in the late 1960s. By 1981-85, the fixed “productive” capital stock was still growing quite rapidly—at 6.4 percent annually—but at a rate that was only two thirds as great as that in the early 1960s (Appendix Table A.1). This picture is reinforced by the secular trends in investment over the same period. Both gross fixed investment and net fixed investment showed sharp declines in growth between 1970 and 1985, with recorded net fixed investment—in so-called comparable prices12 —actually falling on average in the early 1980s (Appendix Table C.2).

As far as natural resources were concerned, there had been a tendency to exploit the more accessible reserves first. Costs of extraction and transportation therefore rose as production (of oil and gas in particular) was forced to shift from Europe and Central Asia to harsher and more remote regions in Siberia and the Far East.

Having approached these resource constraints, the Soviet economy could have maintained its rapid expansion only through accelerating productivity growth. However, some studies have estimated that total factor productivity growth also slowed—and perhaps even turned negative—in this period, although this remains a highly controversial issue.13 It seems likely that the efficiency with which the central planners were able to balance physical inputs and outputs branch-by-branch and enterprise-by-enterprise would have declined as the economy grew and became increasingly complex.14 It is also possible that, as economic growth slowed, the traditional diversion of higher quality inputs to the defense sector would have put an increasing burden on the other, “productive”, sectors of the economy.

At the same time, the incentives for enterprise managers to innovate, increase efficiency or improve the quality of their output were inadequate or even perverse. This stemmed in large part from the overriding emphasis in the plan on gross production targets. Innovation and the search for lower-cost techniques generally involve some short-term disruption to output, as new machinery is installed, employees are retrained and different work practices are tested and developed. But the planning system, which motivated higher production primarily by imposing increasingly ambitious targets, could not afford to allow temporarily lower output from one enterprise to jeopardize the inputs to others. Moreover, the typical rewards to innovation and efficiency in a market economy—lower prices, higher market-share, increased profits—were generally of little or no interest to a Soviet enterprise for which prices were typically set on a cost-plus basis, particularly if they came at the expense of missing the annual production target (to which all bonuses were tied). Even if improved techniques were successful in raising output within the year, the payoff to the enterprise would be extremely limited, since its target for the subsequent year would simply be raised accordingly (the so-called ratchet effect).

Similarly, an enterprise faced with the objective of delivering a certain volume of output had little reason to be concerned about the quality of its products, or whether they would meet the needs of the ultimate customer. While there were provisions in the system for enterprises to raise prices on the grounds of improved quality, no mechanism existed to distinguish genuine from spurious improvements. The artificial deadlines imposed by the planning system tended to aggravate the problem, since enterprises frequently found themselves having to rush production as the end of the year approached. Soviet goods were consequently of notoriously poor quality and low reliability, and, to the extent that this was true of intermediate and capital goods, productivity of the economy as a whole is likely to have suffered.

Despite a fairly elaborate system of wage bonuses, mostly dependent on production performance at the enterprise level, the motivation and morale of the work force were also consistently poor. This was partly a function of the preeminence of investment in the growth strategy, which resulted in a correspondingly limited supply of consumer goods, and implied an almost total neglect of the consumer services sector. But it also reflected some of the frustrations imposed by the planning system: the limitations on private enterprise; the sporadic shortages and associated queuing; and the meager selection and poor quality of those consumer goods that were available.

The infrastructure and environment were further casualties of the preoccupation with growth and meeting the yearly plan objectives. The installation of new capacity was typically given precedence over expenditures on maintenance, transportation, distribution and storage facilities. The roads, the rail networks and the oil and gas pipeline systems, in particular, became increasingly overstretched and dilapidated. Similarly, risks of environmental damage were not allowed to obstruct the resource requirements of rapid industrialization, and would eventually impose enormous costs on the Soviet economy.

Whatever the role of productivity trends in this period, it would appear that the slowdown in output growth—in a generally supply-constrained system—was at least somewhat cushioned by the significant terms of trade gain accruing to the USSR as the result of successive increases in world oil prices after 1973. As the world’s largest producer and exporter of petroleum, the USSR benefitted from an overall net barter terms of trade gain in the period 1971-85 that averaged over 3 percent annually (Appendix Table G.4). This enabled it to improve its overall gross barter terms of trade (i.e., the ratio of import to export volumes), by an annual average of more than 3 percent, thereby enjoying a net inward transfer of real resources for both current production and final demand, without having to incur trade deficits.15 The terms of trade gain was reflected in the sharply rising share of NMP accounted for by foreign trade in the second half of the 1970s (Appendix Table A.3).

b. Broad sectoral developments

Although the share of investment going to industry remained constant in the 1970-85 period at around 35 percent, the proportion allocated to the oil and gas industries combined rose from about 4.5 percent in 1971-75 to almost 8 percent in 1981-85. Investment growth was kept at relatively high levels in these sectors partly to develop new gas fields but also in an attempt to maintain oil output which, by the mid-1980s, had fallen below the level of 1980 (Appendix Tables C.2-C.3 and B.3).

Agriculture continued to claim about 20 percent of total investment, although its share fell slightly below this range in the first half of the 1980s despite the launching of the so-called Food Program in 1982-83.16 The secular shift of labor from agriculture into industry—and, increasingly, into the so-called nonmaterial sphere—continued during 1970-85 (Appendix Table F.2), although at a much slower rate than in the earlier decades. By 1985, almost 20 percent of the working population was still listed as being principally employed in agriculture. About 20 percent of NMP was also still accounted for by agriculture in 1985, up from about 15 percent in 1980 (Appendix Table A.5). This increase was not the result, however, of relatively rapid growth in real terms; indeed, agricultural value added in comparable prices grew by only 1 percent annually on average in 1981-85, whereas NMP increased at an annual rate of 3.2 percent (Appendix Table A.4). The big boost in agricultural value added in current prices was due to the decision—connected with the Food Program—to raise significantly the level of agricultural procurement prices relative to the cost of agricultural inputs.

In the mid-1980s, the food and light industries combined accounted for only 21.5 percent of industrial value added (down slightly from 1980), testifying to the continued low priority placed on consumer goods.17 Personal consumption expenditure accounted for about 60-65 percent of Soviet NMP (Appendix Table A.7) and total consumption for about 55 percent of GDP. This compares with an estimated average share of consumption in world GDP of 78 percent. It is widely believed that one counterpart to this was a high, and possibly rising, share of defense expenditure in total national income. This is difficult to substantiate, however, from official figures; neither the budgetary nor the national accounts statistics permit a comprehensive assessment of defense spending.18

Foreign trade was dominated by exports of energy products and raw materials and imports of processed goods and food products. Foreign trade turnover rose from about 15 percent of GDP in 1980 to around 18 percent in 1985, largely reflecting higher world market prices for Soviet energy exports. Buoyed by these higher oil and gas prices, the share of energy products rose from 47 percent in 1980 to 53 percent of total exports in 1985 (Appendix Table G.2). At the same time, the share of manufactured products declined as the market shares of Soviet manufactures fell in industrial countries, reflecting a general decline in competitiveness. The terms of trade gains made it possible to raise the volume of imports by one third between 1980 and 1985 without incurring a major trade imbalance. The CMEA countries continued to be the most important trading partners. Because the sharp rise in world market prices of oil and gas around the beginning of the decade affected CMEA trade only with a lag, the share of CMEA countries in total trade expanded from some 49 percent in 1980 to around 55 percent in 1985 while the share of developed countries declined from 32 percent to 26 percent (Appendix Table G.7).

c. Incomes and expenditure

According to official statistics, the average annual rate of growth of private consumption in real terms fell from 4.2 percent in 1976-80 to 2.9 percent in 1981-85,19 and the share of personal consumption in domestic expenditure fell by about 3 percentage points during the latter period (Appendix Tables A.6-A.7). Stockbuilding—broadly defined—increased in relative importance by roughly the same extent.20 Equally striking, over the 15-year period ending in 1985, was the almost 30 percent decline in the share of domestic expenditure devoted to net fixed “productive” investment, reflecting the slowdown in growth (during the 1970s) and then actual decline in net fixed investment during 1981-85.

The central regulation of wages, which was intended to keep the growth of real wages in line with gains in labor productivity, performed well in the period 1970-85. The rate of growth of the average monthly real wage declined in line with the falling rate of growth of labor productivity, and even nominal wages consistently grew less rapidly than labor productivity (Appendix Table E.2). The share of primary incomes of the population21 in NMP fell, as a result, by 3 percentage points between 1970 and 1985. Thus, although the rigidity of the price structure almost certainly generated severe imbalances between the supply and demand for particular goods, there appears to have been no significant buildup of aggregate excess demand pressures.

One trend which emerged clearly in the early 1980s, and which would have a significant influence on economic developments later in the decade, was the progressive shift in income from the state budget to the industrial and agricultural sectors. Between 1980 and 1985, the share of profits in NMP rose by over 6 percentage points, less than one third of which was accounted for by a fall in the share of value added going to households (Appendix Table D.1). The remainder was at the expense of the budget and other miscellaneous categories.22 Enterprises gained, in particular, from a significant increase in wholesale prices in 1982; while state and collective farms benefitted a year later, as part of the Food Program, from increases in agricultural procurement prices. In both cases, prices at the retail level remained more or less unchanged, and the state budget consequently bore the cost of higher subsidies and lower turnover tax receipts. In total, indirect taxes net of price subsidies fell as a share of NMP by almost 8 percentage points between 1980 and 1985.23 As profits rose, remittances from enterprises to the budget increased, but by less than 2 percent of NMP. Consequently, by 1985, the state budget was showing a deficit of more than 3 percent of NMP, while enterprises’ stock of financial assets—still, at this point, firmly under the control of the branch ministries—had climbed to 27 percent of NMP, from 15½ percent five years earlier (Appendix Tables A.2 and K.5).

NOTES

An overview of economic developments and reform in the USSR is contained on pages 2-16 of The Economy of the USSR: Summary and Recommendations.

More precisely, the Russian Soviet Federated Socialist Republic (RSFSR).

On an NMP basis (see section 3.a for an explanation of NMP as opposed to GDP).

For further details on republican issues, see Appendix II-4.

Over the past quarter century, however, the authorities have attempted in various ways and with some success to step up agricultural production.

Though residence permits continued to be required for work in Moscow and some other major cities, the main factor inhibiting labor mobility in the post-Stalin period was (and still is) the difficulty of obtaining housing.

One unintended consequence of this, together with various limitations imposed by Western governments, was that it severely curtailed the scope for spontaneous transfers of technology from the rest of the world. Great efforts were made to compensate for the deficiencies in Soviet research and development by the selective imports of Western technology, but with limited success.

The authorities also encouraged the population to hold its money in the form of savings deposits rather than currency, so as to discourage its expenditure and to rein in illegal activity. A more favorable conversion ratio had been applied to savings deposits in the early postwar currency reform.

Hidden inflation refers to the practice of state enterprises of introducing supposedly new products or claiming to have increased their output of higher quality goods so as to justify price increases that would not otherwise be permitted by the authorities. This phenomenon and others are covered in some detail in Appendix II-2.

To the extent that unrecorded parallel market transactions involving more than simple retrading might have grown more rapidly than measured output, part of the official overstatement of growth may have been offset.

It should be noted at the outset that the reliability of official Soviet statistics in general is often questioned on grounds of methodology, coverage, consistency, issues of interpretation, and the incentives for enterprises, under central planning, to exaggerate their performance.

NMP differs from GDP largely due to the exclusion from the former of depreciation and of the value added of services provided by the so-called “nonmaterial” sector that do not directly contribute to material production. In recent years, Soviet official statistics have begun to include calculations of GNP (actually, GDP, inasmuch as net factor incomes from abroad are not included) and retroactively to estimate GDP for earlier years. These GDP estimates are open to several methodological objections, however (see the statistical issues appendix) and for this reason, as well as the fact that most other time series in Soviet official statistics are closely linked to production in the so-called material sphere, this chapter and Chapters II.2 and II.3 discuss Soviet aggregate economic developments largely in terms of NMP.

The Soviet concept of “comparable” prices does not strictly correspond to the usual notion of constant prices. See Appendix II-2.

Much of the controversy stems from the fact that total factor productivity growth is not directly measurable and is the residual element in econometric estimations of Soviet production functions, about which there is little consensus on functional form. Uncertainties about the data for real growth in NMP and the capital stock are also an important problem.

Efforts to keep the system manageable by concentrating production in one or a few firms may ultimately have hampered the process, by magnifying the consequences of shortfalls in one industry or enterprise on others further along the chain of production.

Nonfactor service transfers are not included here. To the extent that both exports and imports are composed of raw materials and intermediate products, an improving gross barter terms of trade may be viewed, in a supply-constrained economy, as a factor that positively influences the rate of growth of output.

The Food Program consisted of a package of measures designed to improve the efficiency of food production through unified agro-industrial management, greater investment in food storage and processing, and financial incentives for higher output and retention of young workers in agriculture.

These figures of course understate the relative importance of consumer goods production in the Soviet economy, as much of agricultural output is sold on collective farm markets and many enterprises nominally in heavy industry also produce industrial consumer products.

See Appendix II-2 and Chapter III.1. Following a reclassification of state budget expenditures in 1989, official statistics indicated defense spending in that year of around 8 percent of GDP (Appendix Table J.2). Most of this amount had previously been spread across other categories of state expenditure. Many Western estimates, however, continue to put total defense expenditure substantially higher (in some cases, by as much, as a factor of two) than the new official figures would suggest.

These estimates probably overstate real consumption growth, because actual inflation was most likely understated. A partially mitigating factor, however, would be the possibility of above-average growth of the informal economy, as noted earlier.

Unfortunately, stockbuilding or “the change in material circulating means and reserves” cannot be easily decomposed into its parts, which consist of stockbuilding—as conventionally understood—the change in unfinished construction and changes in “reserves” of the defense sector and those held by the government in connection with natural disaster relief programs.

Excluding social security contributions and other social welfare deductions out of enterprise profits, which are classified in the Soviet accounts within the category “surplus product” of economic units.

It is not possible, from the statistics, to identify the effect on the budget per se. In Appendix Table D.1, the “other” category includes some items which themselves affect the budget—for example, net price equalization taxes on foreign trade. The latter probably rose as a share of NMP in the early 1980s, reflecting continuing improvements in the terms of trade.

This fall was accentuated by the early effects, in the second half of 1985, of the anti-alcohol campaign, which reduced alcohol sales sharply (see Chapter II.2).

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