Chapter

Chapter V.8 Manufacturing

Author(s):
International Monetary Fund
Published Date:
December 1991
Share
  • ShareShare
Show Summary Details

1. INTRODUCTION

This chapter presents an assessment of the performance of Soviet industry,1 its potential for improvement, and the measures which might be appropriate to effect such improvement. Section 2 concludes that in most respects Soviet industry performs poorly and that in terms of quality, Soviet manufactured goods are not competitive with those produced in industrialized market economies. As discussed in section 3, recent reform measures go only a small way towards addressing the problems of the industrial sector, while at the same time inconsistencies and various negative effects seriously compromise the benefits. Sections 4 and 5 address the fundamental question of designing and implementing plans for the sustainable improvement of Soviet industry. Finally, in section 6, the possible implications for external technical and financial assistance are discussed.

2. PERFORMANCE AND COMPETITIVENESS

a. Background to industrial development

(1) Investment

For most of the period since World War II, Soviet planners have emphasized the development of the industrial sector as “an engine of growth”. A large and rising share of investment resources was directed to industry, while at the same time obsolete plants were kept in service by prolonging life through repeated major repairs. Between 1960 and 1975, total public sector investment grew in real terms at an average rate of 7 percent annually,2 much of which was directed towards new and/or expansion projects in the manufacturing industry. However, by the mid-1970s, there was growing recognition among Soviet planners that the massive investments were not yielding the anticipated results. The Tenth Five-Year Plan (1976-80) thus reflected a judgment that even if investment rates were slowed, the growth of the economy could be sustained through more “intensive” utilization of existing resources. At the same time, more emphasis was to be placed on the modernization of existing facilities rather than on new or expansion projects.

At the start of the Eleventh Five-Year Plan (1981-85), Soviet planners initially continued to follow the intensive approach, with lower rates of capital investment in industry. By the time the plan was finalized early in 1981, total investment as well as investment in the manufacturing industries sector was to increase by only 10.4 percent over the five-year period. However, by this time, there was open debate about the desirability of this investment strategy. A number of prominent economists espoused the view that the Soviet economy required more rather than less increase in investment if development objectives were to be achieved. The views of this group apparently prevailed to some extent: at the end of the Eleventh Plan period, overall investment had increased by 17.5 percent over the previous plan period, although investments in manufacturing industries were up by only 8.5 percent. Investments in the energy sector, by contrast, had increased by 44 percent.

The onset of the Gorbachev era saw a new emphasis on investment aimed at replacing obsolete equipment and raising the technological level of Soviet industry. During the Twelfth Plan period (1986-90), total public sector investment is likely to have increased by around 21 percent over the previous plan period, although investments in the manufacturing industries probably rose only about 14 percent compared with over 30 percent in the energy sector. It is noteworthy that in the three plan periods reviewed here, the share of investment of industry and energy together has remained at a fairly constant level of around 35 percent of the total. This aggregation obscures the fact, however, that energy’s share of the combined investment has increased; investment in manufacturing industries declined as a share of total investment from 25 percent in 1976-80, to 23 percent in 1981-85 and 21 percent in 1986-90 (Table V.8.1).

Table V.8.1.USSR: Total Investment and Investment in Industry in the Tenth, Eleventh and Twelfth Five Year Plan Periods
Actual ExpendituresPercentage Increase
10th Plan11th Plan12th Plan1981-851986-90
(1976-80)(1981-85)(1986-90)1over 1976-80over 1981-85
(In billions of 1984 rubles)(In percent)
Total Investment7188431,02317.521.4
of which:
Industry1771922198.514.1
Energy7510814144.030.6
(As percent of total investment)
Industry252321
Energy101314
Sources: Leggett (1987); and PlanEcon (February 21, 1990).

Investment for the final year of the Twelfth Plan Period has been estimated at 85 percent of the investment for 1989, based on indicative estimates for the first part of the year.

Sources: Leggett (1987); and PlanEcon (February 21, 1990).

Investment for the final year of the Twelfth Plan Period has been estimated at 85 percent of the investment for 1989, based on indicative estimates for the first part of the year.

(2) Output

The Soviet manufacturing industry now contributes an estimated 36 percent of NMP, which is down considerably from the share of around 47 percent in the second half of the 1970s. In terms of GDP, the share is less, but probably roughly the same as in Eastern Europe (25-30 percent) and industrial countries (20-25 percent). The share of employment in manufacturing, however, is somewhat higher in the USSR than in some industrial countries (Table IV.6.2). By far the most important subsector in terms of output is machine building (engineering industries),3 which accounted for more than one third of all industrial output in 1989. The relative importance of other primary branches is shown in Table V.8.2. The table also shows that, while overall output from each branch has increased over the past decade, the relative importance of machine building in industrial output has increased, with offsetting modest declines in the relative importance of metallurgy, wood products and light industry.

Table V.8.2.USSR: Distribution of Industrial Output by Branch, 1980-89
Value of OutputPercent of Total
19801985198819891980198719881989
(In billions of 1988 rubles)(In percent)
Metallurgy7684929214131212
Machine Building16322026227129333535
Chemicals415361627888
Wood Products313741426655
Construction Materials263034355445
Light Industry10811712512619171716
Food Processing10311712913318171717
Others101213132222
Total Industry 1558670757774100100100100
Source: Goskomstat.

Excluding fuel and energy branches.

Source: Goskomstat.

Excluding fuel and energy branches.

Over 60 percent of Soviet industrial output is from the Russian Republic while a further 20 percent is from the Western republics (primarily the Ukraine, but also Belorussia and Moldavia (Table V.8.3)). For many products (steel, chemicals, paper), the proportion of output from these two regions is over 90 percent. This concentration follows the distribution of land area and population.

Table V.8.3.USSR: Distribution of Industrial Output by Region, 1988 1
Russian

Republic
Western

Republics
Baltic

Republics
Transcau-

cacus
Central

Asia
Economic Indicators
Population (millions)147.466.27.915.849.4
Share of (in percent)
Land area76.23.80.80.817.8
NMP59.221.93.44.710.7
Labor force57.222.53.04.812.6
Share in output of (in percent)
Electricity62.520.62.83.210.9
Coal55.124.90.219.8
Steel57.735.80.31.44.8
Chemicals61.128.91.93.53.8
Paper84.48.65.80.70.5
Cement60.220.23.93.112.6
Consumer goods54.127.05.74.98.3
Source: Narkhoz 1988 (1989) and Goskomstat.

Western republics (Ukraine, Belorussia, Moldavia); Baltic republics (Lithuania, Latvia, Estonia); Transcaucasus (Georgia, Azerbaidzhan, Armenia); and Central Asia (Uzbekistan, Kazakhstan, Kirgizia, Tadzhikistan, Turkmenia).

Source: Narkhoz 1988 (1989) and Goskomstat.

Western republics (Ukraine, Belorussia, Moldavia); Baltic republics (Lithuania, Latvia, Estonia); Transcaucasus (Georgia, Azerbaidzhan, Armenia); and Central Asia (Uzbekistan, Kazakhstan, Kirgizia, Tadzhikistan, Turkmenia).

(3) Industrial organization

There are about 46,000 industrial enterprises in the USSR, including some 600 large enterprises with a current book value of capital assets in excess of rub 200 million each; another 1,600 middle-sized enterprises with assets of rub 50-200 million each; 6,000 smaller enterprises with average assets of about rub 25 million; and finally 38,000 small factories and plants with an average asset value of rub 2-3 million. The aggregate value of assets in these enterprises in 1990 is estimated at around rub 760-780 billion. The 600 largest enterprises have 25 percent of the book value of assets, produce one third of total industrial output and employ 20 percent of industrial workers. The 46,000 industrial enterprises include about 4,600 “amalgamations” defined as “single production-economic complexes which contain productive units and have subordinate enterprises which usually do not maintain their own accounting balances”. Amalgamations account for around 55 percent of total production.

About 80 percent of all enterprises and amalgamations are under the authority of union or republican (or sometimes both) ministries, although some smaller enterprises fall under regional or city authority. Exceptions to this rule are cooperatives (owned and controlled by their members) and a few enterprises which have recently broken away from their ministries. Under another new form of production organization—leasing—members of an enterprise “rent” some or all of the facilities of the enterprise from its supervisory authority. Although these operations are allowed greater freedom in wage and investment decision-making, they are still responsible for production quotas set by their supervisory authority.

There are approximately 15 all-union ministries dealing with particular industries.4 There are also union-republic ministries that have industrial responsibilities, which have offices in individual republics as well as in Moscow. The republican offices report to the main ministry office in Moscow, and also to the local republic Council of Ministers.

Total employment in manufacturing industries is around 35 million, or somewhat over one fourth of the total labor force. Within the industrial sector, the machine building branch accounts for almost one half of all workers. In terms of the number of employees, Soviet enterprises are very large: more than 20 percent of all workers are in firms with over 10,000 employees, while almost 75 percent of workers are in firms with more than 1,000 employees.

(4) International trade

Exports of manufactured goods to socialist countries represent less than 2 percent of industrial output while those to nonsocialist countries (converted to rubles at the official exchange rate) are less than 1 percent. These figures are extraordinarily low,5 although distorted prices and exchange rates make them subject to major error. In terms of their share of total trade, however, industrial products are relatively important, especially in imports, accounting for 60 percent of imports and 24 percent of exports in trade with socialist countries in 1989, and 40 percent of imports and 12 percent of exports in trade with nonsocialist countries.

b. Measures of performance

(1) Productivity

By most measures and in most industries labor productivity is assessed to be only about 40 percent of U.S. levels,6 and the quality of the output of many industries is often cited as evidence of poor workmanship. Inadequate training and skill levels, however, are only partial contributing factors to this performance. Other factors include: (1) poor work planning and scheduling of work activities, coupled with the inadequacies of the central distribution system; (2) time spent off the job, often searching for consumer goods and waiting in line; (3) poor quality inputs and tools; (4) inadequate incentives as a result of limited scope for management to reward individual performance, or to penalize poor performance;7 and (5) overmanning, which is a consequence of the need to provide employment, long-established work practices and the absence of any incentive for management to adjust to changing markets or technologies by releasing excess labor. Overmanning is estimated to be as much as 100 percent of requirements in some operations.

The capital-output ratio of the Soviet industrial sector (book value of assets divided by total output for the year) averaged around 2.0 in 1975, but had risen to 3.5 by 1987. While distorted prices and improperly valued capital limit the usefulness of these published figures, the increasing trend across all industrial branches probably reflects the diminishing returns from the large-scale investments of the past fifteen years.

Reported figures of capacity utilization appear to be reasonably in line with Western experience, but the method of reporting provides results which are not comparable. In some process industries, for example, the capacity of the plant is adjusted to what the plant actually produces, so that operations around or in excess of 100 percent of capacity utilization are not unusual. In the engineering industries, capacity is calculated on the basis of available machine time adjusted for bottlenecks in the process. In other words, 100 percent capacity utilization would mean full use of the capacity of the machines which are bottlenecks, but underutilization of machinery elsewhere. Official figures of capacity utilization are thus likely to be overestimated.

(2) Shortages

The most discussed deficiency of the Soviet industrial sector has been its inability to deliver goods in the quantities and qualities required by industrial, commercial and individual consumers. Industries point to the difficulty in obtaining inputs as one of the most important factors which have constrained output. To compensate, enterprises and branches have tended to become increasingly vertically integrated as they attempted to solve internally what the external markets could not provide. Another manifestation of the mismatch of supply and demand within the industrial sector has been the build-up of high levels of stocks,8 and the continuing utilization of capacity in some branches and factories for the production of goods which nobody wants to buy and which are simply stored.

At the level of the individual consumer, the impact of shortages has recently been even more obvious. Most local authorities have applied restrictions on purchases by out-of-town customers. Some shortages are somewhat mysterious in that production is reported to be increasing while the shortages continue to get worse. Possible explanations include hoarding, bureaucratic mistakes, allegations of sabotage, and other problems with the distribution system. Shortages have also undoubtedly been exacerbated by disruptions in the flows of materials from one republic (or other administrative district) to another as the central planning apparatus is dismantled and as the republics, cities and oblasts begin to take a more independent stand concerning their obligations to deliver goods across borders. Nevertheless, shortages of material inputs, intermediate products and consumer goods were characteristic of the economy long before perestroika, underscoring the fundamental structural deficiencies of an economy that lacked proper incentives and in which the production and distribution system had become too complex to be administered centrally.

(3) Product quality

Gospriemka, the state organization that “accepts” products (under Gosstan-dart, the State Committee for Standards) was created in 1987 to monitor quality within the consumer goods and some producer goods enterprises. In 1988, 8 percent of the total output of the industrial enterprises subject to inspection was rejected. Rejection rates were considerably higher for a number of products such as washing machines (27 percent), television sets (19.6 percent), furniture (16 percent) and machine building (15 percent).9 While these rejects are not generally scrapped, but sent back for repairs, such figures are very high compared with Western experience where reject rates seldom exceed 5 percent of output. Furthermore, many of the products acceptable to Gospriemka do not measure up to Western standards.

There are several examples of poor quality manufactured goods by world market standards. Textiles, particularly in design and finish, are of poor quality, although some knitwear products are of acceptable quality. Footwear is of poor quality and a frequent source of consumer complaint. Trucks are based on old designs, and equipped with inefficient gasoline engines, although conversion to diesel has begun. Gear reducers, manufactured in Leningrad, also suffer from poorly manufactured parts and, sometimes, sloppy workmanship in assembling. While manual and automatic machine tools are of reasonably acceptable quality, computerized numerically controlled machine tools are not internationally competitive in terms of electronics and drives; for exports to the West these components must be imported. Even in joint production under license for the domestic market, the usual practice is to import critical components which can amount to as much as 50 percent of the value of the final product. Computers produced by the domestic computer industry (a spin-off from military activity) are of poor quality, inter alia, with major hard disk and diskette drive problems.

(4) Energy Efficiency

During 1988, manufacturing industries, excluding petroleum refineries, accounted for 40.3 percent of total energy consumption in the USSR. The share of major subsectors were: chemicals and petrochemicals, 10.3 percent; iron and steel, 9.8 percent; machine-building and metal-working, 6.2 percent; nonmetallic minerals, 4.1 percent; agro-industry, 2.8 percent; nonferrous metals 2.3 percent; wood products, 1.3 percent; and others, 3.5 percent. With four decades of emphasis on investments in heavy industries, it is not surprising that the structure of energy consumption differs substantially from OECD countries in which manufacturing industries consume only 23 percent of total energy. Detailed analysis of energy consumption per unit of output has not been carried out. However, if as an example, overall energy consumption of the Soviet steel industry (the largest steel producer in the world) is compared with the other industrialized countries, the inefficiency of energy use is demonstrated as detailed below (in gigacalories per ton of steel output): USSR, 8.9; United States, 7.0; Federal Republic of Germany, 6.7; United Kingdom, 6.2; Japan, 6.2; and France, 5.9. Reportedly, technical measures are underway to increase energy efficiency in the steel industry.

(5) Environment impact

As mentioned in Chapter V.1 above, pollution and consequent environmental degradation are serious problems in all branches of Soviet industry. The steel and chemical industries have been serious culprits, particularly as urbanization has spread to the areas where plants are located. The accident at the Chernobyl power plant in April 1986 became a focus for a rapid expansion of the population’s concerns over the adverse effects of industry on the environment. During the last few years, hundreds of polluting enterprises have been closed down by local authorities as well as by the newly created State Committee for Environmental Protection. In some cases, while these shutdowns may have been warranted, they were carried out precipitously by local authorities and have had major disruptive effects on downstream industries, particularly in the chemical sector.10 Also, in many cases the shutdowns were ordered without giving the enterprise any opportunity to correct its pollution problem and without review of the economic arguments for doing so.

The development of regulations to deal with the problems of polluting industries has started. The environmental impact of polluting industries is now taken into consideration in developing plans and in preparing new legislation such as the Law on Enterprises. Enterprises are now under pressure to reduce pollution through self-financing, although as yet the incentives to invest in waste reduction are inadequate. While there is a growing national awareness of the external environmental impact of industry, there does not yet seem to be much attention given to reducing pollution and increasing safety measures within manufacturing plants.

c. Factors adversely affecting performance

(1) The central planning system

As noted in Chapter II.2, traditional central planning pervaded every aspect of economic activity, including the whole spectrum of manufacturing industries as well as industrial research and development. Despite the reforms which have taken place since that time, the influence of central planning still appears to be dominant in many areas. Central planning has seriously constrained improvements to industrial efficiency by creating monopolies, removing key incentives for management initiative to control and improve operations, and eliminating essential linkages between producers and consumers.

Monopolization under the Soviet central planning system endeavors to rationalize manufacturing and to secure perceived advantages from scale economy and specialization. However, such a system inhibits diversification and flexibility in manufacturing and keeps manufacturers in long production runs even when the demand for their product has declined or disappeared; this problem frequently appears, for example, in the machine tool industry. Monopolies also have made Soviet industry fragile because of the disruptions which occur if the operations of a monopoly have to be curtailed for any reason. An example of this type of problem was the recent shortages of cigarettes, which at least in part derived from the shut-down of monopolistic glue and filter manufacturing facilities located in Azarbaidzhan and Armenia. There is also only one producer of television tubes in the entire country.

Monopolies also inhibit the entry of new businesses into manufacturing industries; indeed, small businesses are typically the most dynamic sector of Western economies. Signs of this dynamism are now evident in the reforming economies of Eastern Europe. In recognition of this fact, in 1987 the Soviet Government allowed the establishment of cooperatives, which resemble Western partnerships, with apparently favorable treatment. In fact, however, state trading monopolies continued to act in many cases as effective barriers to the acquisition of material inputs to cooperatives, and outright bans to entry into certain types of manufacturing activity have further diluted much of their competitive impact.

Management initiative is stifled under the centrally-planned system. Managers of enterprises have been primarily responsible for implementing a plan provided to them by the state. When extraordinary problems arose at a factory, they would normally be referred upwards to the branch ministry rather than being addressed more directly at the level of the plant. Markets and the delivery of inputs (at least in principle) were assured, and soft budget constraints meant that finance for investments or to cover operational deficits was handled by transfers from the ministry or the central budget. In short, other than meeting production targets imposed by the plan (and these could easily be adjusted in case of a serious shortfall), there was little incentive to improve operational efficiency. Under these circumstances, measures of efficiency and the tools for real efficiency improvement have not been developed. Cost accounting is merely a routine exercise rather than a critical measure of operational efficiency and a key factor in production and market planning. Profit centers within an organization are unknown.

The centrally controlled distribution system and state orders have also severed the essential trade relationship between the producer and the consumer. The former receives little feedback concerning the acceptability of its products and the latter has no recourse when the product does not meet specifications. Further, the system does not provide incentives for marketing and after sales services which are part and parcel of any successful manufacturing in the West. A major complaint of the users of exported Soviet machinery has been the lack of spare parts and timely after-sales service. This is perhaps explained by the fact that the reward system under central planning encouraged production of complete operating units rather than spare parts.

(2) Inadequate information

Adequate information about markets and competition is essential in a market economy, enabling managers to make rapid adjustments to products and prices. In the USSR, the manufacturing enterprises, having no need for market information, did not develop a system of gathering and analyzing information regarding the sources of supplies for their inputs and the markets for their products. In fact, many enterprises did not know either their suppliers or their customers. Estimates of unsupplied market demand appear to be frequently based on mere guesses, without any in-depth market analysis.

In addition to market information, the dearth of general information about business developments and financial markets puts the Soviet manager at a serious disadvantage when it comes to reacting to changes in the business environment and identifying and acting upon new business opportunities.

The problem of inadequate information is exacerbated, and the dominance of the existing distribution structure is reinforced, by the totally inadequate communications network in the country. Although some large enterprises have established direct communication lines through the national network with their subsidiaries, the vast majority of enterprises, particularly private investors and cooperatives, find the shortages of telephones, telephone books, telex and fax facilities an impediment to their operation.

(3) Autarky and vertical integration

Autarky is an inevitable outcome of the traditional isolation of the Soviet economy. While autarky has largely insulated Soviet industries from foreign competition, the absence of competition has allowed the industry to continue to operate while becoming increasingly inefficient. Further, some observers report that the desire for self-sufficiency has led Soviet industries to import foreign technology at costs which may not be economically justified. Finally, the absence of interaction between Soviet enterprise managers and foreign businessmen leaves the former at a serious disadvantage when trying to negotiate foreign contracts or develop trade relationships.

Excessive vertical integration has been (and continues to be) the enterprise and ministry response to the absence of significant subcontracting capacity and the inadequacies and supply uncertainty of the central allocation system. The disadvantage is that if most major producers produce most of their components, the potential for scale economies is compromised, as is the flexibility of manufacturers.

Ministries in the industrial sector are highly internally integrated while conversely the links between ministries are relatively poorly developed.11 The multi-plant amalgamations also have a high degree of self-sufficiency, with purchased inputs ranging between only 30-40 percent of the total. Single plant enterprises, however, tend to have a lower degree of integration with purchased inputs accounting for as much as 50-60 percent of their needs. These levels of vertical integration are not very different from those typically found in Western countries where engineering industries typically purchase around 70 percent of their inputs.

(4) Technology

A number of technological factors have been important contributors to the relatively poor performance of Soviet industry. The most important are the following.

(a) The average age of machinery. A 1984 study estimates that 30-40 percent of equipment in operation has been in use for 15-20 years or more.12 The level of technology in Soviet factories does not always accurately reflect the age of equipment. In some cases, even new equipment is based on relatively outmoded technology. Recent investments have been aimed at retiring obsolete equipment, but cannot yet have had much effect on the average age of equipment in use. Moreover, investments within plants have rarely been on the basis of a systematic renewal program but have rather tended to concentrate on the replacement of single machines on the basis of availability and financing possibilities. The average age of machinery is considerably greater than in comparable Western industries, although there is considerable variation from plant to plant and between operations in a single plant. Some industries have been almost completely neglected. The engineering industry, for example, has paid more attention to modernizing its machine building while neglecting its foundries. The foundries, equipped with old equipment, are heavy polluters, and inefficient energy users.

(b) Inadequate quality control. The poor quality of manufactured goods can be explained by deficiencies in every aspect of manufacturing, including design, production planning, work methods, the quality of inputs, manufacturing equipment, and inadequate attention to quality control. Quality control in most plants is limited to finished products; quality assurance and control during the production process is virtually absent.13 The absence of such quality management systems is an important development constraint; most enterprises do not have a grasp of the real value of quality and have no incentive to face up to the costs of securing it.14

(c) Deficiencies in technology transfer. Manufacturing enterprises, through their own efforts and with assistance from the State Committee for Science and Technology (GKNT), have become quite familiar with scientific and engineering technological advances in the West. During recent years, such technologies have been transferred to Soviet enterprises through one or more of the following forms: imports of equipment, joint ventures, and purchases of license and co-production. It appears, however, that no significant effort has been made to improve management techniques, particularly in optimization of means of production, production planning which would be responsive to demand changes, quality assurance and control, inventory and cost control, financial management, and marketing. Without these additional elements, the potential benefits from technology transfer have been greatly reduced.

(d) Organization of research and development. Until 1988, all research and development (R&D) organizations were subject to central planning by Gosplan with the GKNT in charge of managing and supervising the plans’ implementation. The system had a number of shortcomings, including a lack of flexibility; an inability to respond in a timely manner to the needs of enterprises, a lack of capacity to promote inventors and innovators, and ineffectiveness in the process of commercialization of new technologies. Some of these shortcomings were addressed in September 1987, when the Council of Ministers passed its decree on “Transfer of Science and Technology Organizations to Self-supporting/Financing Organizations.” Since then, the responsibility of the GKNT has changed gradually from the administrator of the plan to the developer of policies for science and technology, and the facilitator of programs in R&D.

(5) Infrastructure

Problems with the physical infrastructure, particularly in the transport sector, have contributed to distortions in the industrial structure, including excessive levels of vertical integration and the development of transport fleets by some of the larger enterprises. The deficiencies of the communications network, meanwhile, contribute to the problem of inadequate flows of information.

Perhaps even more important than the physical infrastructure constraint is the almost complete absence of a service infrastructure, one of the most distinctive features of a market economy. Among the most important services lacking in the Soviet system are financial services such as public accountants, auditors, brokers and other financial advisory services which are nonexistent; and consultant services.15 There is no tradition of utilization of independent consulting services in investment and production planning, technical assistance, management assistance and marketing. To the extent that these activities are undertaken, they are provided in-house or with assistance from the relevant ministries and research institutes. This system lacks an impartial view untainted with the biases which are inherent in the supply of in-house advice.

d. Competitiveness of Soviet industry

In most cases, manufactured goods are not internationally competitive. While ministries and managers cite barriers to access to Western technology, and inadequate capital for investment, this is clearly not the whole story. The automotive industry, for example, has been equipping itself with Western technology and equipment for the past ten years but is still incapable of producing vehicles which are of a quality or reliability comparable to western counterparts.

The USSR exports industrial equipment to nonsocialist countries with a value of around US$5 billion annually, much of it to developing countries. The quality of such equipment, in terms of its international competitiveness, varies. In steel manufacturing complexes, for example, many of which have been established in developing countries with Soviet assistance, the machinery and equipment for raw material handling, coke oven and blast furnace installations are of technically acceptable quality, while the equipment for steel casting and rolling are of outmoded technology and poor quality. Machine tools are acceptable by international standards, except for CNC machines. Overall, in comparison with the other economies, the level of technology observed in the USSR is in most respect similar to that found in other reforming economies of Eastern Europe, which is to say 10-15 years behind the West.

Given the distorted prices of material inputs, energy, labor and capital in the Soviet economy and in view of the grossly overvalued ruble, it is extremely difficult, if not impossible, to measure the competitiveness of the Soviet products in financial and economic terms. Profit has not been necessarily the motivation for exports.

3. THE REFORM PROCESS AND THE IMPACT OF RECENT REFORMS

a. The approach to reform

There is little ambivalence about the overall intended direction of reform of the Soviet economy: an acceptance that in a large and complex economy, central planning is incapable of delivering the required goods and services effectively, and a recognition that market forces will be more effective in determining production, investment and purchasing decisions. However, to effect the necessary changes to the environment which will induce an effective supply response is far from simple. A review of the reforms which have taken place until now, and their impact on performance in manufacturing, is enlightening and helps to identify an agenda for additional reforms which will be necessary in order to achieve the desired results.

b. Reforms through 1989

(1) Enterprise autonomy

The 1987 Law on State Enterprises foresaw the dismantling of the central planning system and the devolution of control of day-to-day decisions to enterprise management. Under this law, enterprise managers were nominated (and could be removed) by work collectives, which would certainly be a constraint on management freedom. Also, for many enterprises, central control was merely replaced by the system of state orders. State orders dictate what percentage of the output should be delivered to the state and, at the same time, provide guarantees for the delivery of corresponding inputs, both at state controlled prices. In 1988, state orders accounted for around 90 percent of manufacturing production and the Government’s announced intention was to bring this rate down to 35 percent in 1989. The reduction did not materialize and, in 1990, state orders in manufacturing ranged between 40-100 percent, depending on the product group. As products not subject to state orders can be sold freely at fixed prices or bartered, many enterprises with low state orders tend to demand higher rates in order to survive, and those with a large share of output produced under state orders frequently argue for lower rates in order to benefit from the advantages involved in direct disposal of their surplus production. In some cases, enterprises clamor for state orders to try to improve their prospects of obtaining inputs, particularly as the initial steps taken towards liberalizing the economy have disrupted established supply channels and exacerbated previous difficulties. It should be noted that inputs for surplus production are not provided by the state and are to be procured by the enterprise at its own cost, another reason for barter trade. Most output which is not covered by state orders is still sold through a system of negotiated contracts at state-controlled prices, usually to the same distribution monopolies as before the reform.

Although inputs, outputs and pricing are still largely controlled by the central authorities, enterprise autonomy has increased in other areas. For example, until a few years ago, all imports and exports of enterprises in each ministry were handled by the ministry’s foreign trade organization and the enterprises were not allowed to contact foreign suppliers directly. With these restrictions removed and subject to compliance with foreign exchange regulations, larger enterprises have established contacts and are doing business with foreign counterparts ranging from normal trade to import of technology to joint production and joint ventures. With the loss of captive clients, the foreign trade organizations are changing their strategy and, some of them have become more aggressive in attracting clients by offering better services.

Leasing has become another symbol of recent enterprise autonomy. Although a recently enacted Lease Law specifies detailed procedures for leasing, many lease agreements are not in conformity with the law. The general practice has been the leasing of some of an enterprise’s workshops or services to internal or outside cooperatives. Entire enterprise leasing to the collective in that enterprise or outside cooperatives is the authority of the relevant ministry and has been exercised in those cases in which the enterprise is in danger of closure.

Domestic barter trade is growing and has become quite prevalent. It is the response of enterprises to the shortages resulting from the allocation system of materials and goods on the one hand and the attempt to secure consumer goods for their employees on the other. Examples include the exchange of construction steel for buses, steel products for consumer goods, management training for furniture and components and tires for automobiles. A further development is the emergence of private intermediaries for barter trade.

(2) Pricing

With the move towards greater enterprise autonomy and so called “self-financing,” fixed state prices as such have been substantially eliminated. In practice, however, the state continues to control essentially all prices administratively with the following few exceptions: (1) “new” products can be sold at negotiated prices for two years before they become subject to state control; (2) a small portion (generally about 1 percent) of products made from left-over inputs can be sold freely; and (3) barter agreements, reflecting the real value of relative prices, can be negotiated freely between the contracting parties. For most products, industrial enterprises determine costs of production, add an allowed profit margin to calculate the final price, and submit their proposed price to the center for approval and determination of final price. Losses incurred by inadequate margins between inputs and outputs are covered by direct subsidies in the form of budget transfers (about rub 15 billion annually during 1986-1990).

With cost-plus pricing, most industrial enterprises are “profitable,” but prices still bear little relation to market prices which would adjust to accommodate imbalances in supply and demand. The result has been severe distortions in absolute and relative prices and thus an inability of manufacturers to receive the appropriate market signals in order to improve their operations. Moreover, cost-plus pricing is a disincentive to efficiency improvement.

The pricing system for industrial goods has not only resulted in prices irrelevant to the market but also in skewed relative prices in relation to the world market; it would appear that the price system is biased in favor of consumption of capital goods and against durable consumer goods (Table V.8.5). This distortion is caused partly by differential rates of turnover tax, but also by the fact that only some prices have been raised in recent years.

Table V.8.4.USSR: Capital-Output Ratios by Main Industrial Branch, 1975-1987
1975198019851987
Metallurgy2.693.464.334.44
Machine building1.331.802.312.41
Chemicals2.613.504.054.02
Wood products1.401.992.342.34
Construction materials1.872.382.802.78
Light industry1.291.561.911.89
Food processing1.982.432.863.18
Source: Narkhoz 1988 (1989).Note: Output is measured in 1982 prices and the capital stock in 1973 prices.
Source: Narkhoz 1988 (1989).Note: Output is measured in 1982 prices and the capital stock in 1973 prices.
Table V.8.5.USSR: Domestic and International Prices of Manufactured Goods
Domestic

Price
International

Price
Implied

Exchange Rate
(rubles)(US$)(rubles/US$)
Refrigerator850400*2.13
Color television600300*2.00
Automatic lathe5,00015,0000.33
CNC M-center50,000175,0000.29
Six-ton truck6,50014,000*0.46
Sources: Data provided by the Soviet authorities and estimates.Note: Domestic prices are ex-factory state prices. International prices marked with (*) are estimates; international prices for machine tools are actual export prices.
Sources: Data provided by the Soviet authorities and estimates.Note: Domestic prices are ex-factory state prices. International prices marked with (*) are estimates; international prices for machine tools are actual export prices.

(3) The changing role of government

With the dismantling of the central planning system, the ministries which administered and managed manufacturing enterprises have become largely redundant and are shrinking. The Ministry of Machine Tools, for example, has reduced its staff from 1,450 to 500.

In the area of industrial research and development, the role of the GKNT has changed dramatically from the administrator of research to the formulator of research policies and, possibly, a channel for directing government’s funds in support of priority research. At the enterprise and research institute level, 80 percent of research costs must be self-financed and the balance is provided by the center (GKNT or ministry). This development is not generally welcomed by research institutes which fear loss of jobs and brain drain and which have to adapt to their new enterprise clients.

(4) Foreign exchange retention and allocation

As described in detail in Chapters III.4 and IV.3, the system of foreign exchange retention and allocation is highly distortionary, and exports bear no relationship to comparative advantage.

(5) Conversion of military production capacity

A detailed examination of the conversion program was beyond the scope of this study. Transfer of technology from the military industrial complex to the civilian industry started about five years ago with assistance in establishing computer manufacturing facilities. Although the military has also produced a range of consumer goods for many years, larger-scale conversion of some military production facilities to the manufacture of consumer goods started about three years ago and now covers a rather wide range of products. For this purpose, at the enterprise level, either a new line has been added or a part of the manufacturing facilities has been converted to manufacture often incongruous mixes of products such as airplanes and washing machines, armaments and refrigerators, and ships and skateboards. Another contribution of the military industry has been the manufacture of capital goods for light industry which, reportedly, has helped in its rapid expansion. But overall, so far, neither a genuine transfer of technology nor widespread conversion of military production has taken place.

Some manufacturers of high-technology equipment in the civilian sector believe that military industrial products have a high technological content and a high degree of effectiveness, but are produced in a costly and inefficient manner. Reportedly, the military is becoming more open and is selling its technology to civilian enterprises. The GKNT and its departments are aware of the non-confidential technologies available to the military and have started assisting it to promote innovation and the conversion of its manufacturing facilities to meet civilian demands.

c. Impact of recent reforms

(1) Laws on enterprises

Two laws and a temporary decree could (provided there is adequate reform of the system as a whole) have a significant impact on the ways in which enterprises are allowed to operate, and hence on their potential for improving performance. These are the Law on Enterprises in the USSR, signed by President Gorbachev on June 4, 1990, the Small Business Law which was agreed to in principle by the Council of Ministers on August 9, 1990, and the decree entitled Temporary Regulations Governing Joint Stock Companies and Limited Liability Companies and Societies approved in July 1990.

The Law on Enterprises replaces the Law on State Enterprises of 1987 and offers several important advances in terms of the way in which enterprises are to be managed and the ways in which enterprise property can be utilized. Among other things, this law repeals the provision in the 1987 law whereby managers were nominated by workers’ collectives. The law appears to be comprehensive in encompassing all types of economic activities but is vague on a number of important issues:

First, Article 18 states that “The council (board) of the enterprise consists of an equal number of representatives appointed by the owner of the property of the enterprise and elected by its labor collective unless otherwise stipulated by the charter of the enterprise.” The exclusion apparently applies to the joint stock and limited liability companies which are governed by their own law. Given the extensive powers of the enterprise council, which include determination of the general direction of the economic and social development of the enterprise as well as decisions on the procedures for distribution of net profits, equal representation of owners and workers on the council will not provide a mechanism for resolving inevitable conflicting issues between the two interested parties. In countries such as Germany in which there is equal representation of owners and labor on the supervisory boards, a neutral position is created to avoid deadlocks on the board.

Second, while the law allows participation of enterprises in forming new joint stock companies by transferring their assets, it is silent on transformation of a state-owned enterprise in its entirety into a joint stock company or other form of ownership.

Third, the law allows mergers and formation of associations as a corporate body and, in doing so, requires compliance with existing but rather ineffective anti-monopoly requirements established by the corresponding legislative acts of the USSR and union republics. As the anti-monopoly law and a system for its enforcement has not yet been enacted, enterprises may increase their already strong monopolistic powers through mergers and associations.

Fourth, under the law “certain kinds of activity, a list of which is determined by legislative acts of the USSR and the union and autonomous republics, may be engaged in by an enterprise only on the basis of special permission (license).” Issuing a negative list is the prerogative of any government, but such a list should be announced at the time of enactment of the law. Leaving it to the future creates uncertainties in investment decisions and erodes confidence, as has been the experience with cooperatives in productive industries.

The Small Business Law appears to offer excellent conditions for the establishment of an efficient small-scale16 industrial sector, provided the upper limit of the number of employees in the services are increased. According to a description of the proposed legislation, small enterprises will be completely independent to choose their own form of ownership, economic activity and payment to employees. Private ownership is not mentioned specifically in this context, but would appear to be the goal of the new legislation. It is hoped that the experience of the cooperatives (same objectives at the start, but heavily constrained raw material supplies in practice and subsequent restriction of activities) will not be repeated. Under this law, some enterprises have already started to create their own “small businesses” to supply them with goods and services. Some of these may involve “spontaneous privatization” of state assets as experienced in Hungary and Poland.

The Joint Stock Company Decree also appears to be a step in the right direction and follows practices in the West. A three-tier structure, comprising the shareholders’ general assembly, the council (supervisory board) and the executive board is foreseen for joint stock companies. The limited liability companies will have a simpler structure consisting of the participants’ assembly and an executive body which could be one person. Contrary to the Law on Enterprises, labor participation in the management of joint stock companies is limited to the executive board “in the number and pursuant to the procedure stipulated by the charter.”

(2) Breakup of the CMEA

With the dismantling of the CMEA, intricate relationships between Soviet and Eastern European manufacturers for joint production of many goods are being disrupted, with serious implications for investment in Eastern European and Soviet exports to that region. In the machine tool industry, for example, the Soviets have assisted several Eastern European countries over the past decades to establish manufacturing facilities and assembly shops which use substantial amounts of Soviet manufactured parts and components. As trade among the CMEA countries is in principle based on convertible currencies beginning January 1, 1991, and in view of the shortage of convertible currency and the general slowdown in economic activity in the Eastern European countries, the Soviet machine tool industry is projecting a huge drop in production during 1991. This may represent a hardship for machine tools and other engineering industries, but it will also have the beneficial effect of forcing the Soviet industry to compete in the international market both in quality and price.

(3) Financial systems

Under the full centrally planned economy, banking was also highly centralized and acted as a control mechanism as well as a clearing house for financial transactions. With the decentralization and increased enterprise autonomy which began in 1988, together with more liberal banking laws, enterprises, associations of enterprises and even ministries began to open banks and offer banking services to finance their own activities (see Chapter IV.5). From the point of view of the health of the manufacturing industries sector, this development could create problems. Industrial enterprises need an enlightened and effective banking system which supports their trading and investment activities rather than controls them. However, the system must be fully independent from the enterprises themselves, and be able to make independent judgements on a commercial basis.

(4) Other reform proposals

Other reform measures being considered include (1) decentralization through regionalization, followed by privatization; (2) reduction of investments in heavy and basic industries; and (3) a rapid increase in the conversion of the military industrial complex to serve civilian needs. While on the surface these may appear to be reasonable objectives, they contain many elements of past centrally-administered reform programs. Thus, regionalization has certain attractive features but there is a danger that control will just be centralized at a different level of government. Changes in investment policy may also be warranted but it is not clear that the stated main objective of redistributing resources in order to assure growth in the production of consumer goods and upgrading in technology is very different from the central investment strategy of the past several years. Military conversion aims at decreasing state expenditures through the reduction of military programs and closure of redundant capacities; transfer of technology to the civilian sector and export promotion of products with advanced technological contents; and redistribution of material and labor resources from the military to civilian sector. Once again a great deal of government intervention is implied.

(5) The managers and future challenges

Political instability and economic uncertainties are among the main problems which industrial managers are facing at present. Despite these problems, many managers are apparently making an effort to meet the present and future challenges through a variety of initiatives. Examples abound, including (1) the manager who had shown entrepreneurial talent in obtaining finance for a large state enterprise and who had established the enterprise with distinct profit centers; (2) the manager who had taken advantage of the changing circumstances and was establishing an incentive system for the employees; (3) the manager who foresaw the necessity to disintegrate the larger amalgamation and had already started work in that direction by converting one of the enterprise’s major shops into an independent cooperative; and (4) the manager who saw the advantage in subcontracting and contracted with a cooperative for transport services. Not all managers are so resourceful, however, and many appear to be responding by hoping that the present uncertainties will pass and the former status quo return.

4. A MARKET ECONOMY FOR IMPROVED INDUSTRIAL PERFORMANCE

a. Elements of a successful market economy

The presidential guidelines represent a commitment of the Government to transform the Soviet economy into a market economy. It is unclear, however, whether there is a common understanding in the USSR of what exactly constitutes a market economy. At least insofar as the industrial sector is concerned, the principal element of a market economy is the allocation of resources on the basis of market signals. More specifically, the allocation system requires: (1) prices as the primary market signal; (2) profits as a guide to identifying the most effective activities and enterprises and thus to aid capital allocation; and (3) enterprise autonomy which allows adjustments to be made in response to market signals. A second key element is freedom for competition which will allow new entries into profitable activities, and conversely, mechanisms to facilitate the exit of producers who are not competitive. Finally, a market system will not function properly without a wide range of supporting infrastructure and services such as transportation and communications, but also including the free flow of information, a supportive financial system, readily available technical assistance and a coherent legal framework. Such a market system can only function if a majority of investment and ownership is in the private sector.

By the same token, however, few, if any, of the Western industrialized countries operate completely free market economies. In many cases, certain commodities or activities are promoted or protected. The loss of efficiency and attendant higher costs are justified on the basis of political expediency or other noneconomic grounds. What is important is to ensure that such exceptions are minimized and that resulting distortions are contained rather than allowed to distort other sectors of the economy.

b. The process of transformation

While Soviet industry is performing poorly, there is considerable potential for improvement. There is an abundance of most basic raw materials, a skilled and educated workforce, highly trained technicians and engineers, a considerable stock of capital equipment, and a large, undersupplied market. To realize this potential requires: (1) the dismantling of the inefficient central allocation system; (2) the removal of controls which have so effectively constrained individual initiative while continuing to support inefficient operations; and (3) the provision of all of the basic services—information, transportation, communications, financial services, management skills—which are essential in a smoothly-working market economy. There is plenty of evidence from other reforming socialist economies, and more recently from within the USSR itself, that attempting to accomplish reform with just a few of these measures will give results which are disappointing: all of the elements will have to be addressed in a comprehensive package of reform which includes a realistic assessment of feasibility and timing.

c. Lessons learned from other transformations

The process of designing a workable reform program will not be easy. The experience of reform programs in the USSR to date and elsewhere can be valuable in identifying some of the less and more successful approaches. While the existing Soviet system of production and distribution is inadequate and inefficient, it should not be dismantled without giving time for more efficient systems to evolve and replace it. Although there is a clear recognition in Western market economies, and now in the USSR as well, that private sector autonomous enterprises perform better than public sector centrally-controlled enterprises, there is no evidence that either (1) giving the control of enterprises over to committees of managers and workers; or (2) trying to obtain the benefits of private ownership by giving shares to a wide cross-section of the public are likely to do much to increase the efficiency of enterprises. These approaches might merely replace inefficient, centrally controlled enterprises with inefficient autonomous enterprises.

Managers whose life-long work experience is in a centrally planned economy usually lack the skills and the analytical tools necessary to redirect their enterprises in a competitive environment, unless they undergo appropriate training. Investments in new technology and equipment aimed at improving the efficiency of an enterprise will have little or no effect if all of the other factors which inhibit efficiency improvement are left untouched. As long as prices are wrong—including the prices of labor, capital and foreign exchange—enterprises will continue to make wrong (and inefficient) production decisions.

Experience also shows what does work in the industrial sector. The principal finding is that reform will begin to have the desired effect once effective competition is introduced. More specifically, in both mature industrial economies and reforming centrally-planned economies, small business is the most dynamic and competitive sector. Active encouragement of the small business sector can yield rapid results. Profits are also an essential element of a competitive situation in a market economy. During a transition period, “excessive” profits are equally essential: they will attract additional investment and other resources from non-profitable activities to increase supply; and they will spur noncompetitive enterprises to take whatever steps are necessary to become competitive. Eventually, competition will reduce profit margins to ordinary, acceptable levels. Moreover, foreign trade liberalization can stimulate improved competitive performance through both imports and exports. Adequate protection for domestic industries may be appropriate for an interim period to allow restructuring, but should not be built into the system to allow the continued operation or expansion of inefficient activities. Foreign direct investment can also be a way to accelerate the acquisition of competitive industries. As well as finance, this type of investment usually brings with it technology and management skills which can provide spillover benefits to other enterprises and business activities.

Where an enterprise is not competitive, and cannot be made competitive, there is nothing to be gained and much to be lost by keeping it in operation. Mechanisms which allow the closure of noncompetitive enterprises, the selling of nonproductive assets and the retraining and redeployment of workers, are essential components of a program to improve overall industrial efficiency. At the same time, eliminating the role of the state from central planning and the day-to-day operation of industrial enterprises does not detract from the responsibilities of the state to develop a strong and supportive industrial policy which will stimulate competition.

The USSR will have an efficiently performing industrial sector when all of the foregoing measures have been taken and sufficient time has elapsed to allow their impacts to work their way through the entire system. The next section describes an overall program which would lead to long-term sustainable improvements in the whole manufacturing sector. Political realities argue for some early positive results. The program thus includes some measures which could give a rapid and measurable supply response in one of the critical areas of the economy.

5. POLICIES FOR SUSTAINABLE IMPROVEMENT

a. Introduction

This section presents a broad set of recommendations aimed at improving the efficiency across the entire sector through the development of a free market system combined with private sector development and privatization of the majority of state enterprises. Implementation of these recommendations will require considerable efforts to strengthen the environment in which industry works as well as to develop mechanisms for dealing with the difficult short-term effects which will inevitably accompany this process of transformation.

In particular, to support the development of an efficient and competitive industrial sector, this section: (1) identifies the key elements of an enabling macroeconomic and regulatory framework; (2) develops a proposal for a strong and supportive industrial policy; (3) outlines a transition program to effect the process of transformation and deal with the inevitable dislocation effects; and (4) indicates some immediate measures which might be adopted to give a fast improvement in the supply of consumer goods.

b. Enabling macroeconomic and regulatory framework

The enabling economic and regulatory environment for industrial efficiency generally coincides with the environment for overall economic efficiency. The elements of such an environment have been developed elsewhere in this study and are briefly discussed here only in terms of their direct impact on the pace at which industrial efficiency gain can be achieved. In most respects, insofar as the industrial sector is concerned, there is little to be gained by delaying the implementation of economic and regulatory reforms. The sooner enterprises are faced with real costs and prices in a competitive environment, the sooner they will begin to make the necessary moves towards adjustment and restructuring. It is better to deal with the disruptive effects by isolating specific critical and potentially viable cases, than by continuing to live with economy-wide soft budget constraints and industrial inefficiency. In particular, all prices of inputs and outputs, with the exception of certain prices (such as energy) which may have to be adjusted in stages, should be liberalized immediately. State enterprises should be quickly formed into joint stock companies and commercialized to facilitate subsequent reorganization, restructuring and privatization (see Chapter IV.2). The regulations controlling new entrants (including foreign entrants) into industrial manufacturing activities should be liberalized. Similarly, entry into distribution activities without any impediment should be allowed immediately. Direct budgetary support to industrial enterprises should also be ended. Imports and exports should be liberalized. Protective tariffs on imports should be permitted only for an interim period to give some time for adjustment, with an agreed timetable for gradual reduction.

A proper structure for independent commercial banking should be developed which supports efficient industrial activity with the provision of credits for working capital and viable investments on the basis of normal banking principles. The current practice of establishing banks owned by the enterprises or branch ministries is fraught with problems and should cease. The establishment of capital markets which would provide equity for industrial development should be actively encouraged. Finally, a coherent income tax policy should be adopted which has as its fundamental basis a policy of uniform taxation for all types of manufacturing industry.

These measures will create the right environment for industry to thrive. However, as discussed in the following sections, additional support will be needed to guide industry through the necessary transition.

c. Industrial policy and the role of ministries of industry

The traditional central planning system required a large number of branch ministries to handle the complex process of production planning at the enterprise level and to facilitate the flow of material inputs and outputs. The reforms towards decentralization and enterprise autonomy have already considerably reduced these responsibilities, although in some cases branch ministries appear to be resisting this trend. Further adjustment is needed in order to provide a ministerial structure which will support and regulate industrial activity while being totally separated from day-to-day production activities. The most appropriate structure for the development and administration of industrial policy would appear to be one Ministry of Industry at the union level, and single ministries of industry in each of the republics. During a transition period of several years, the most important role of these ministries is likely to be to support and guide industries through a process of restructuring, as they adjust to the reforming economy. In the longer term, however, important functions of the ministries at both levels would be to: (1) formulate and administer industrial policy in the context of overall union/republic economic policies; (2) monitor and review long-term trends in industrial development and its contribution to the Soviet economy in the context of evolving international developments; (3) provide guidance to the industrial sector through the identification of priorities and the dissemination of information; (4) act as a primary source of technical and market information;17 (5) facilitate promotion of Soviet industrial products abroad, and assist in the promotion of the USSR as a location for the establishment of foreign and/or foreign joint venture industrial enterprises; (6) develop and update product standards in conjunction with appropriate standards bureaus, and provide industrial enterprises with information on evolving standards; (7) develop and monitor conformance with environmental and safety standards in industrial enterprises; and assist regulatory agencies in the development and monitoring of controls on monopolies and other anti-competitive practices.

d. A transition program of industrial restructuring

The ministries of industry will have an important additional role during the period of transition. Specialized agencies will have to be established to assist with the design, implementation and monitoring of programs of industrial restructuring which would encompass: (1) the reorganization of state enterprises; (2) privatization and private sector development; (3) support and technical assistance for enterprises which require substantial adjustment programs, or enterprises which must be liquidated; and (4) the retraining of enterprise managers. In addition, in view of probable unemployment as a consequence of industrial restructuring, the ministries will have a role in working with the appropriate authorities in developing schemes for retraining and providing assistance for displaced workers.

(1) Reorganization of enterprises

The restructuring of all state enterprises into joint stock companies will not by itself improve industrial efficiency. However, enterprises organized in this way will have an independent management and a clearly identified capital structure which will facilitate subsequent organizational adjustment.

Most of the amalgamations should be broken down into independent enterprises. This should be mandatory and immediate where different parts of an enterprise are engaged in unrelated productive activities or activities in which the technological linkages are minimal. The objective of such separation is to increase competition and to allow a clear identification of unprofitable activities to facilitate subsequent remedial action. Similarly, enterprises in a monopoly position should be broken up to the extent necessary to create a number of independent and competing enterprises. In the case of enterprises producing a single range of products but which are highly vertically integrated at a single site, a long-term view of efficiency would see a similar spin-off but this could be delayed pending the preparation of a longer term strategic plan for the enterprise.

This separation should also extend to nonproductive activities such as housing, and medical, educational, social and sporting facilities. Under most circumstances it is anticipated that housing together with medical and educational facilities would be transferred at no charge to the local authority, who would then assume full responsibility for their future operation. Social and sporting facilities could also be transferred to a local authority or to a legally constituted body representing the employees of a plant such as a union or workers’ council.

(2) Privatization and private sector developments

It is important to define a clear and coherent strategy for privatization with well-defined objectives, powers and responsibilities and methods to be used. In view of the wide scope of intended privatization and differences among enterprises, recourse to numerous methods (as against any single method) would probably increase the flexibility and pace of the privatization effort.

The privatization process has already begun, but given the very large number of industrial enterprises and their geographical dispersion, the process could be accelerated by categorizing candidate enterprises for privatization according to type. For example, natural monopolies are likely to remain in the public sector for the foreseeable future and need not be considered in the context of privatization. Small industries and enterprises in the services sector could be privatized immediately. Medium- and large-scale industries can be further categorized according to their likely viability in a market economy. Those which are viable could be privatized as quickly as possible. Those which are potentially viable may need to be restructured before or in the course of the privatization process. Those which are not likely ever to be viable should be liquidated.

In parallel with privatization much greater emphasis should be placed on private sector development, the entry and growth of small and medium enterprises and systematic demonopolization to foster competition, deepen the industrial structure and provide additional impetus for increasing the role of the private sector in the economy. An essential precondition for any private sector investment in any but the most transitory activity is an absolute confidence in the business environment, such as to enable private investors to predict and analyze the risks and benefits of their investments. Such evaluations can only be possible in an environment where economic policies and the regulatory framework have been stabilized, and Government’s intentions with regard to any further reform measures are clear. Private sector enterprises should also be treated on exactly the same basis as their public sector counterparts to ensure a truly competitive environment.

Even in a stable environment, there are many positive steps which may be taken to promote and assist small businesses. These include a review of the procedures for the licensing of small businesses in order first, to simplify them to the maximum intent possible, and second, to publish guides to the procedures which would be made available to new entrants. There are many other types of information which are typically made available to small business owners in Western market economies. In addition to technical material which may be of interest to specialized businesses, these include more general guides to such activities as accounting, marketing, taxation, and the preparation of contracts and other legal documents. Low-cost training courses in these areas can be developed. Finally, small businesses can be assisted through the establishment of business centers which may offer services ranging from just the use of office facilities (telex, fax, photocopiers, etc) to much more active assistance in the establishment and initial operation of a small business.

(3) Enterprise restructuring

As the Soviet economy adjusts, those segments of industry with flexible technological characteristics, which allow rapid adjustment to new market and economic conditions, and aggressive management to make such adjustment, will adapt quickly to the new situation. Overall, however, it is inevitable that there will be a short- to medium-term drop in the output of Soviet industry, due to the need for significant restructuring. Enterprises are likely to fall into one of three categories: (1) those which by themselves can adjust effectively to the new situation; (2) those which will require restructuring to become competitive under the new conditions; and (3) those which will never be competitive and should be liquidated.

Given the present distortions in prices and markets, it is not practical at this stage to try to assign enterprises into these categories. Enterprises which may now be in difficult financial circumstances may thrive in the new environment. Conversely, financially healthy industries may go quickly bankrupt when faced with realistic competition and prices. What should be done at this stage is to establish a “trigger” mechanism which would provide the necessary signal that an enterprise is in need of assistance to design and implement a restructuring and/or liquidation program. Two types of enterprise-specific signals could be envisaged: financial performance indicators such as return on assets or liquidity; and a request for assistance from enterprise management, on the basis of actual or impending problems. A third process of identifying enterprises in need of restructuring may derive from a knowledge of developments in critical industries (including energy-intensive industries, and those in which the pattern of demand is likely to undergo a drastic change as the result of reform, such as steel, petrochemicals and machine building) where the need for restructuring the whole subsector may already be evident.

Restructuring agencies will be necessary to act as focal points for identifying and delivering technical assistance for restructuring where it is required. For critical industries, there is an immediate need for technical assistance to review the potential for the subsectors as a whole and to develop policies and priorities within which the scope for restructuring of individual enterprises in that industry can be assessed. The agencies would have the primary role of assisting enterprises to obtain the right kind of technical assistance to achieve the above objectives. This would normally be achieved by putting a team of experts to work in day-to-day cooperation with enterprise management over a period of several months. The outcome of the technical assistance would be recommendations for an enterprise-specific restructuring program which may, in a number of cases, include recommendations for the closure of some or all enterprise operations. The decision to implement the program would be made by the enterprise owners or their proxies. The design of the restructuring agencies would have to take into account the essentially temporary nature of their mission and should ensure that they do not become a permanent part of the public administration.

At existing prices, consumer durables are in critically short supply in the USSR. They also, however, represent a product group where a relatively fast supply response might be achieved and where the difficulties of adjusting to the market might be somewhat less than in subsectors of heavy industry in which substantial downsizing would be required, or in sectors producing essential goods. This product group is also relatively separable, in terms of input and output relationships. The first step in accelerating a supply response in this area would be to encourage the reorganization of existing producers of consumer durables so that they are separated legally, financially and, if possible, physically from parent enterprises which are often in an unrelated business, and to convert them into autonomous, independent and self-financing enterprises, preferably in the form of joint stock companies. In all cases, the objective should be privatization of the production facilities as quickly as possible. Competition could be enhanced by facilitating the entry of new producers, and by freeing-up the distribution system and liberalizing imports (with a reasonable level of duty protection).

At the same time, prices and wages in these industries should be liberalized, in line with the general recommendations of Chapters IV. 1 and IV.6. Market signals would rapidly enable enterprises to see which products sell at what price and which product lines should be discontinued because of a lack of demand. High profits in the short run would encourage new entrants, and the resulting competition would shave margins to acceptable levels. Efficient producers and distributors would remain in business; inefficient enterprises would either improve or drop out and competition would ensure efficiency gains and improved product quality.

(4) Retraining of enterprise managers

Most managers of industrial enterprises in the USSR are very well educated technically, but know little or nothing about conducting business in a competitive environment. Enterprise managers charged with the responsibility of managing their enterprises in the transition to a market economy need generalized training in the changes in focus and activity appropriate for effective management and marketing in the competitive environment in which they will find themselves, but also they will need follow-up courses in specific business topics. For large enterprises, training could be arranged abroad and/or specific enterprise-oriented training programs could be developed for on-site execution. However, for the bulk of enterprises, the magnitude of the task is tremendous: if the training of five management personnel from each of the 46,000 industrial enterprises is assumed, then the total training envisaged would be some 6-8 weeks of instruction for 230,000 managers. Despite these dimensions, the task is critical and urgent. A crash program along the following lines could be envisaged.

A basic training module could be prepared which was specifically designed to introduce Soviet managers to the principles of management in a market economy. Particular attention would be paid in such a course to introducing the concept of business planning and the necessity for flexibility as a reaction to market signals. The course would ensure relevance by making specific use of Soviet case material. To the extent possible, the course would minimize the use of direct lectures and maximize the use of pre-prepared materials such as books, self-study guides and videotapes.

This could be followed by courses in more specific areas of management such as production planning at the plant level, distribution, financial management, personnel administrations and contract negotiations. Again, the courses should be based as much as possible on relevant Soviet case material. Further, a number (perhaps 50) of training centers could be established throughout the country, equipped with adequate classroom and other facilities to deliver the training courses to batches of perhaps 30-40 students at a time. This would involve, of course, training professional teaching and administrative staff for each center.

The anticipated benefits of such a scheme are so great in terms of improving management capacity to react to the changing economic environment that state financing would be envisaged; this may also be an appropriate area for Western assistance.

(5) Investment policies

Given the strategy of converting the economy away from the state and towards the private sector, there is no justification for major state-financed investments for new or expanded projects in industries destined for privatization. Nevertheless, during the transition to a market economy, certain state-financed investments may be necessary in two areas: first, the state has a responsibility to keep productive capacity in good working order, and to make whatever investments are necessary to perform this role; second, investments may be required to make enterprises profitable in the new economic environment prior to privatization. To the maximum extent possible, funding of such investments should be found by the enterprises themselves, either from their own resources or from commercial bank loans.18 To the extent that additional investment funds are available in the central budget, they should be allocated to improving infrastructure, in particular in the fields of communications and transport.

(6) Wage and social assistance policies

An unavoidable result of industrial restructuring is likely to be the temporary unemployment of large numbers of workers because of both labor rationalization and plant closures. Programs for retraining, facilitating creation of new employment opportunities and unemployment compensation and other social safety net schemes are essential to facilitate labor redeployment and reduce the negative impact on the population. Current capacities and programs in these areas should be assessed against the higher demands likely to be placed upon them as a result of the restructuring process. Actions to strengthen such capacities should be launched urgently.

6. ROLE FOR EXTERNAL ASSISTANCE

There is a large need for material and technical assistance for the upgrading of the industrial sector. At this stage, priority must be given to measures which will support the process of reform and restructuring, in preference to investments in new machinery and equipment. In particular assistance could be directed to (a) management training to assist with the design and implementation of the training program proposed above; (b) private sector development through assistance with the development of information networks and the establishment of centers to foster new private enterprises; (c) industrial restructuring, with institutional support for setting up an industrial restructuring agency, developing the mechanisms for a coherent policy of restructuring, undertaking studies of some critical industrial subsectors (notably steel, chemicals and machine-building), and channeling technical assistance to key enterprises with major restructuring potential and needs; (d) reorganization support for the Ministry of Industry to help it to redefine a role for the establishment and implementation of industrial policy; and (e) environmental support to assist industries to address critical pollution problems while at the same time developing the institutional capacity to design and implement an environmental protection policy.

Table V.8.6.Estimated International Value of Selected Consumer Durables
ItemAnnual Soviet Production

(thousand units)
Estimated Value at

International Prices

(US$ millions)
Refrigerators4,000600
Washing machines5,900590
Vacuum cleaners4,300215
Electric irons13,800195
Sewing machines1,60080
Television sets10,5001,260
Radio receivers6,800100
Total3,040
Source: Quantities derived from “On Commodity Stocks in State and Cooperative Trade,” Vestnik Statistiki No. 4, April 1989; values based on estimated international prices.
Source: Quantities derived from “On Commodity Stocks in State and Cooperative Trade,” Vestnik Statistiki No. 4, April 1989; values based on estimated international prices.
NOTES

The Soviet definition of “industry” includes the energy sector (oil, gas, coal and electric power). In this paper, the more usual convention of separating out the energy sector has been followed and references in this paper to “the manufacturing industry sector” (or more generally, “the industrial sector”) exclude energy.

Investment growth rates quoted in this section are official Soviet statistics based on comparable real prices. There is widespread belief, however, that these growth rates may be biased upwards by the failure to allow for so-called hidden inflation (see Appendix II-2).

Including electrotechnical products, machine tools, instruments, transport equipment and agricultural machinery.

At the beginning of 1989, there were 23 all-union ministries overseeing industry but there has been some elimination and amalgamation since then.

Poland, for example, exports about 8 percent of its manufacturing output to socialist countries and another 8 percent to nonsocialist countries.

For example, the Soviet machine building sector is reported to use 1.7 times more labor than the United States to produce only two thirds of the US output (Voyekov, (1989)).

One countervailing factor is the relatively widespread use of piece rates in Soviet industry. Piece rates apparently fail to compensate for negative incentives, however, including the low risk of job loss, the limited attractiveness of promotion and the absence of goods to buy even if income is increased.

In some machine tool plants, for example, the average level of stocks is equivalent to six months’ or more requirements, compared with one month or less in similar operations in market economies.

Some of the recent shortages, in pharmaceutical and cosmetics, for example, can be attributed to shutdowns of this nature.

This trend is continuing. For example, the Ministry of Machine Tool Industries was not satisfied with the quality of computerized numerical control systems produced under another ministry and is completing the construction of two new plants to produce its own units.

Quality in certain activities (the military, aerospace) is significantly better, suggesting that sufficient priority and resources can deliver quality output.

Some Western corporations in high technology industries estimate their expenditure on quality assurance is as high as 30 percent of total costs.

The banking system has provided only limited financial services. For example, simply to authorize the payment of wages, state banks require that sales proceeds be in their hands, and documents confirming performance by each employee have to be submitted together with a report showing the percentage of taxable benefits to be paid to each employee.

A “small” enterprise is defined as one with up to 200 employees if engaged in industry and construction, 100 in science, 50 in other productive sectors, 25 outside the productive sphere and 15 in trade.

In this respect it is envisaged that union and republic ministries would follow the practice of ministries in many Western countries which typically conduct surveys of industrial operations, collect statistics on markets and prices, review world-wide trends in important and strategic industries, carry out comparative studies on competitiveness of domestic and foreign producers, and publish and distribute this and other information to assist enterprises to constantly review their own operations while developing strategies for survival and improvement.

In 1988, 56 percent was financed by the enterprises’ own means; 39 percent from the state budget and 5 percent from bank credits. With proposed reductions in total enterprise financial transfers to the state, it would appear that shifting the bulk of the financing responsibility to enterprises would not unreasonably constrain investment in the manufacturing sector.

    Other Resources Citing This Publication