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Soviet economic reforms : 1950-1970 ; an examination and assessment of the economic reforms undertaken… Tha, David Lawrence 1972

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SOVIET ECONOMIC REFORMS: 19 50-19 70 An Examination and Assessment of the Economic Reforms Undertaken i n the S o v i e t Union i n I n d u s t r y , A g r i c u l t u r e and Trade: 1950-1970 by DAVID LAWRENCE THA B. Comm., U n i v e r s i t y o f B r i t i s h Columbia, 1970 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION i n the F a c u l t y o f Commerce and Business A d m i n i s t r a t i o n We accept t h i s t h e s i s as conforming to the r e q u i r e d s t a n d a r d THE UNIVERSITY OF BRITISH A p r i l , 1972 COLUMBIA In presenting t h i s thesis i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y available for reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the Head of my Department or by h i s representatives. It i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. Department of Commerce and Business A d m i n i s t r a t i o n . The University of B r i t i s h Columbia Vancouver 8, Canada Date A p r i l 13th, 1972. ABSTRACT The purpose of t h i s study i s to examine the m o d i f i c a -t i o n s made i n the mechanics of a l l o c a t i o n u t i l i z e d i n the S o v i e t Union, s i n c e the death of S t a l i n , i n i n d u s t r y , a g r i c u l t u r e , and t r a d e . These s e c t o r s of the economy have been chosen because they comprise the predominant p o r t i o n of p r o d u c t i v e a c t i v i t y i n the S o v i e t Union, and because these s e c t o r s have undergone the most s i g n i f i c a n t changes of t h e i r forms o f a l l o c a t i o n . The crux of the o r i g i n a l S t a l i n i s t a l l o c a t i o n mechanics was q u a n t i t a t i v e p l a n n i n g : an i m p e r a t i v e economic p l a n formu-l a t e d by the c e n t r a l p l a n n i n g apparatus to d i r e c t the economic pro c e s s e s of the n a t i o n . The implementation of the macro-economic p l a n a t the micro l e v e l was c a r r i e d out through a com-p l e x system of c e n t r a l i z e d p h y s i c a l d i r e c t i v e s and f i n a n c i a l c o n t r o l s , and by a system of m a t e r i a l i n c e n t i v e s to encourage the f u l f i l l m e n t of the c e n t r a l l y d e f i n e d t a r g e t s or g o a l s . W i t h i n i n d u s t r y , a g r i c u l t u r e , and t r a d e , the mechanics of the a l l o c a t i o n system were somewhat d i f f e r e n t i a t e d i n t h a t the com-b i n a t i o n of c e n t r a l i z e d d i r e c t i v e s , p h y s i c a l and f i n a n c i a l con-t r o l s , and the d i r e c t i v e e f f e c t s of p r i c e s and m a t e r i a l i n c e n -t i v e s were i n t e g r a t e d i n v a r i e d ways to b r i n g about the d e s i r e d end r e s u l t s . I w i l l f i r s t examine the i n t e g r a t i o n of these v a r i a b l e s i n forming a 'coherent' guidance system, and t h e i r r e l a t i v e dominance i n d e t e r m i n i n g the a l l o c a t i o n of the n a t i o n ' s resources, d u r i n g the S t a l i n i s t p e r i o d , and w i l l then c o n s i d e r the m o d i f i c a t i o n s made i n t h e i r r e l a t i v e importance up to the p r e s e n t time. The f i r s t c h a pter of t h i s study d e a l s with i n d u s t r y . I t c o n c e n t r a t e s on the three component p a r t s of the S o v i e t i n d u s -t r i a l a l l o c a t i o n system: the f o r m u l a t i o n of p r o d u c t i o n - s u p p l y p l a n s ; f i n a n c i a l p l a n n i n g and the r o l e of p r i c e s ; and micro-economic t a r g e t s , c o n t r o l s and i n c e n t i v e s . The annual p l a n n i n g procedure d e s c r i b e d r e f e r s s p e c i f i c a l l y to heavy i n d u s t r y . However, t h i s procedure i s g e n e r a l l y a p p l i c a b l e to the macro p l a n n i n g i n both a g r i c u l t u r e and the consumer goods i n d u s t r y as w e l l , and thus p r o v i d e s background i n f o r m a t i o n to the more a b b r e v i a t e d d i s c u s s i o n s o f the p l a n n i n g procedures used i n these l a t t e r two s e c t o r s of economic a c t i v i t y . S i m i l a r l y , i n the d i s c u s s i o n s of f i n a n c i a l p l a n n i n g and p r i c e s , the r e l a t i o n s h i p of these v a r i a b l e s to heavy i n d u s t r y i s i n t e n s i v e l y i n v e s t i g a t e d but the d i s c u s s i o n i s expanded to a more encompassing l e v e l i n o r d e r t o g i v e a g e n e r a l comprehension of the r o l e of c u r r e n c y and p r i c e s i n the S o v i e t economy as a whole. The chapter con-clu d e s w i t h an i n v e s t i g a t i o n of the r e l a t i v e dominance of p h y s i c a l and f i n a n c i a l d i r e c t i v e s and c o n t r o l s at the micro l e v e l , and the i n t e g r a t i o n of the m a t e r i a l i n c e n t i v e scheme i n the a l l o c a t i v e system to encourage b e h a v i o u r a l adherence to the c e n t r a l i z e d d i r e c t i v e s and c o n t r o l s . The second chapter d e a l s w i t h a g r i c u l t u r e . I t f o l l o w s a s i m i l a r i n v e s t i g a t i v e format f o r both c o l l e c t i v e and s t a t e farms, but p l a c e s emphasis on c o l l e c t i v e farm p r o d u c t i o n , and d i s t r i b u t i o n of o u t p u t s , f o r two reasons: c o l l e c t i v e farm and ' p r i v a t e ' p l o t a g r i c u l t u r a l a c t i v i t i e s p r o v i d e the bulk of the i v n u t r i t i o n a l requirements of both the r u r a l and urban populace; and the guidance system used f o r s t a t e farming i s very s i m i l a r to t h a t used i n the i n d u s t r i a l s e c t o r a l r e a d y d i s c u s s e d . The t h i r d chapter d e a l s w i t h t r a d e . I t d i s c u s s e s both domestic and f o r e i g n t r a d e . With r e g a r d to domestic t r a d e , the macro p l a n n i n g procedure i s d e s c r i b e d , the d i s t r i b u t i o n network f o r consumer goods i s d e t a i l e d , and the microeconomic t a r g e t s and c o n t r o l s formulated f o r l i g h t i n d u s t r y are d i s t i n g u i s h e d from those used i n the a l l o c a t i o n of producer goods. The d i s -c u s s i o n on f o r e i g n t r a d e d e t a i l s the r o l e s of f o r e i g n trade i n the S o v i e t economy, i t s i n t e g r a t i o n i n t o the n a t i o n a l economic p l a n , and the reforms i n the methods and means u t i l i z e d t o f i n a n c e the flows of t r a d e d commodities. The f i n a l chapter of the paper assesses the o r i g i n a l S t a l i n i s t a l l o c a t i o n mechanics i n the economic s e c t o r s analyzed, and the successes and shortcomings of the m o d i f i c a t i o n s made i n t h e i r r e s p e c t i v e guidance systems to the p r e s e n t time. Many of the m o d i f i c a t i o n s made p r i o r t o the g e n e r a l reforms undertaken i n 1965 p e r t a i n e d t o the a d m i n i s t r a t i v e - e c o n o m i c bureaucracy and thus d i d not a l t e r any fundamental c h a r a c t e r i s t i c s of the S o v i e t a l l o c a t i o n systems. The 1965 reforms i n c r e a s e d the r o l e o f s e l e c t e d f i n a n c i a l and p r i c e v a r i a b l e s , and m a t e r i a l i n c e n t i v e s , i n an attempt to i n c r e a s e e f f i c i e n c y at the microeconomic l e v e l . However, the long-run b e n e f i t s of the p o s t - S t a l i n reforms are s m a l l e r than o r i g i n a l l y a n t i c i p a t e d . E f f i c i e n t d e c i s i o n making t h a t would o p t i m i z e the e x e c u t i o n of economic processes i n such a way as to maximize the u t i l i z a t i o n of r e s o u r c e s n e c e s s i t a t e s a r a t i o n a l p r i c e system. However, the essence of the S o v i e t V a l l o c a t i o n mechanics i s s t i l l q u a n t i t a t i v e p l a n n i n g , implemented through c e n t r a l i z e d a d m i n i s t r a t i v e c o n t r o l s . v i TABLE OF CONTENTS Pag ABSTRACT i i TABLE OF CONTENTS v i LIST OF TABLES v i i i LIST OF FIGURES ' , x GLOSSARY ' x i ACKNOWLEDGEMENT x i i CHAPTER I . INDUSTRY 1 The Formulation of Annual Production-Supply Plans . 1 F i n a n c i a l Planning and the Role and Formulation of P r i c e s i n the Sov i e t Economy 14 Microeconomic Planning: Targets, I n c e n t i v e s , and Con t r o l s 37 CHAPTER I I . AGRICULTURE 60 Production-Supply Planning and Micro C o n t r o l s i n A g r i c u l t u r e 60 A g r i c u l t u r a l P r i c e s 71 Inc e n t i v e s at the Farm L e v e l 79 CHAPTER I I I . TRADE 91 R e t a i l Trade 91 Foreign Trade 106 CHAPTER IV. EVALUATION OF THE ECONOMIC REFORMS UNDERTAKEN IN INDUSTRY, AGRICULTURE AND TRADE, 19 50 -1970 119 Industry 119 A g r i c u l t u r e 14 5 Trade 16 7 Conslusion: The Problem of C e n t r a l Planning and the market 179 BIBLIOGRAPHY OF SOURCES CONSULTED 184 v i i Page APPENDIX I 196. O u t l i n e of the Schedules f o r P r e p a r i n g Annual Plans and Budgets 196. v i i i LIST OF TABLES Table Page I. D i s t r i b u t i o n of Bank Loans Outstanding, as of January 1 , 1956 20 . I I . I n t e r e s t Rates on Various Types of Bank Loans 20. I I I . O u t l i n e of the Consolidated F i n a n c i a l Plan of the U.S.S.R 23. IV. Plan f o r the Consolidated Budget of the U.S.S.R., 1968 25. V. Average P r i c e Change by Branch of Ind u s t r y , 1963 P r i c e R e v i s i o n 35. VI. Major Plan Indices Assigned to Firms 39. V I I . Premiums f o r P l a n t Management 40. V I I I . C e n t r a l l y Targeted E n t e r p r i s e I n d i c e s , Introduced Post-1965 • 44. IX. Acceptance Methods Employed 52. X. Indices of Sel e c t e d S o v i e t A g r i c u l t u r a l Procurement P r i c e s 75. XI. Indices of Sov i e t State R e t a i l P r i c e s and C o l l e c -t i v e Farm Market P r i c e s f o r S e l e c t e d Years, 1958-1964 96. X I I . Percentage Share of T o t a l R e t a i l Sales by the Three Main Trade Networks f o r S e l e c t e d Years, 1950-1965 98. X I I I . Composition of I n d u s t r i a l Wholesale P r i c e s , 1964... 133. XIV. Ratios of Average P r i c e to Average Costs of Se l e c t e d A g r i c u l t u r a l Commodities i n 1960, 1963, and 1966 157. XV. R e l a t i v e Shares of State Farms, C o l l e c t i v e Farms and P r i v a t e P l o t s i n the T o t a l A g r i c u l t u r a l Out-put of Sel e c t e d Commodities i n 1965 162. XVI. R e t a i l Sales and I n v e n t o r i e s of Sof t Goods f o r Sele c t e d Years, 1950-1966 170. i x Table Page XVII. P e r s o n a l D i s p o s a b l e Money Income and Savings Accounts, 1960-1967 172. X LIST OF FIGURES F i g u r e Page 1. Schematic D i s t r i b u t i o n of E n t e r p r i s e P r o f i t s 47. GLOSSARY Fondy Glavk Gosbank Gosplan Gosstroy Hectare IBEC Khozraschet Kolkhoz K o l k h o z n i k K r a i MTS O b l a s t Raion RSFSR Sovkhoz Sovnarkhoz S t r o i b a n k Torg T r u s t A u t h o r i z a t i o n s f o r funded commodities. A main a d m i n i s t r a t i o n o f a m i n i s t r y . S t a t e bank. S t a t e p l a n n i n g commission. S t a t e c o n s t r u c t i o n commission. A measure of area (equals approximately 2.47 a c r e s ) . I n t e r n a t i o n a l Bank f o r Economic C o o p e r a t i o n . "Economic' (or business) a c c o u n t i n g , p r o f i t - a n d -l o s s a c c o u n t i n g . C o l l e c t i v e farm. C o l l e c t i v e farm worker. A t e r r i t o r y , i n the same sense as, f o r example, the Yukon T e r r i t o r y . Motor T r a c t o r S t a t i o n . P r o v i n c e . D i s t r i c t ( s u b - u n i t of o b l a s t ) . Russian S o v i e t F e d e r a t i v e S o c i a l i s t R e p u b l i c . S t a t e farm. R e g i o n a l economic c o u n c i l . Investment bank. Wholesale t r a d i n g agency i n charge of a number of r e t a i l o u t l e t s . An a d m i n i s t r a t i v e agency i n charge o f a number of p r o d u c t i o n u n i t s . Used here to denote administra-t i v e agencies i n charge o f s t a t e farms. Zaiavka A p p l i c a t i o n form f o r an a l l o c a t i o n c e r t i f i c a t e x i i ACKNOWLEDGMENT I s h o u l d l i k e t o e x p r e s s my g r a t i t u d e t o my t h e s i s s u p e r v i s o r P r o f e s s o r Hans R o n i m o i s o f t h e D e p a r t m e n t s o f E c o n o m i c s and S l a v o n i c S t u d i e s . He n o t o n l y a r o u s e d my i n i t i a l c u r i o s i t y i n t h e S o v i e t economy s e v e r a l y e a r s ago t h r o u g h h i s s t i m u l a t i n g l e c t u r e s , b u t a l s o g r a c i o u s l y a c c e p t e d t o s u p e r v i s e my t h e s i s , e v e n t h o u g h he i s n o t c o n n e c t e d w i t h t h e F a c u l t y o f Commerce and B u s i n e s s A d m i n i s t r a t i o n . I am a l s o i n d e b t e d t o Dr. W h a t a r a n g i W i n i a t a and Dr. H a r r y P u r d y f o r s t r u g g l i n g t h r o u g h a h a n d w r i t t e n p r e l i m i -n a r y d r a f t o f t h i s t h e s i s . T h e i r c o n s t r u c t i v e c r i t i c i s m s o f s t y l e and f o r m a t were a c o n s i d e r a b l e a i d i n c o m p l e t i n g t h e f i n a l m a n u s c r i p t . 1 CHAPTER I INDUSTRY The f o l l o w i n g chapter examines the three component p a r t s of the i n d u s t r i a l a l l o c a t i o n system: the f o r m u l a t i o n of produc-t i o n - s u p p l y p l a n s ; f i n a n c i a l p l a n n i n g and the r o l e and formula-t i o n of p r i c e s ; and the microeconomic t a r g e t s , c o n t r o l s and i n -c e n t i v e s . The r e l a t i o n s h i p of these v a r i a b l e s i n p r o v i d i n g an i n t e g r a t e d system o f a l l o c a t i o n mechanics w i l l be i n v e s t i g a t e d . The d i s c u s s i o n w i l l e l u c i d a t e the a l l o c a t i v e system u t i l i z e d i n i n d u s t r y d u r i n g the e a r l y 1950's, p r i o r to S t a l i n ' s death, and t r a c e the changes t h a t have taken p l a c e i n the a l l o c a t i v e mech-a n i c s up to the p r e s e n t time. The F o r m u l a t i o n of Annual Production-Supply Plans The i n i t i a l p o i n t i n the c o n s t r u c t i o n of the n a t i o n a l p r o d u c t i o n - s u p p l y p l a n stems from a number of d i r e c t i v e s i s s u e d by the l e a d e r s of the Communist P a r t y . Basing t h e i r d e c i s i o n s on the past and p r o j e c t e d year-end performance of the economy, and t h e i r p o l i t i c a l - e c o n o m i c g o a l s , the fundamental p r i o r i t i e s of the n a t i o n a l economic p l a n are formulated. D i r e c t i v e s r e g a r d i n g the d e s i r e d growth r a t e s of i n d u s t r y and a g r i c u l t u r e , the p r i o r -i t y areas w i t h i n these s e c t o r s , and the d i s t r i b u t i o n of n a t i o n a l income between consumption and investment are sent to the State P l a n n i n g Commission (Gosplan). These d i r e c t i v e s p r o v i d e the bases f o r the c o n s t r u c t i o n of a s k e l e t a l n a t i o n a l economic p l a n . 2 The foundation of t h i s s k e l e t a l plan i s a. set of source and a l l o c a t i o n t a b l e s known as m a t e r i a l balances. M a t e r i a l balances are compiled from an a n a l y s i s of h i g h l y aggregated data on past input norms and output c a p a c i t i e s , plus a n t i c i p a t e d input-output f i g u r e s of new c a p a c i t y to be i n s t a l l e d during the planned year. With these data, m a t e r i a l balances are drawn up f o r broad groups of c r i t i c a l m a t e r i a l s and equipment. The ob-j e c t i v e i s to equate supply and demand ex ante. In the b a l a n c i n g process primary c o n s i d e r a t i o n i s given to the d e s i r e d output of p r i o r i t y s e c t o r s of the economy, then to t h e i r s u p p l i e r s , and so on. C o n t r o l f i g u r e s f o r the major a d m i n i s t r a t i v e u n i t s are then c a l c u l a t e d from the m a t e r i a l balances. They s t i p u l a t e t a r g e t s f o r t o t a l outputs, i n p u t s , cost r e d u c t i o n s , c a p i t a l investments, and labour p r o d u c t i v i t y , and must be approved by the C o u n c i l of M i n i s t e r s , U.S.S.R. Once approval has been given, the c o n t r o l f i g u r e s are disseminated among the v a r i o u s ministries.''" Previous to 1950 and up to 1957 a l l i n d u s t r i a l production was administered under a branch of i n d u s t r y p r i n c i p l e . Under t h i s arrangement one m i n i -s t r y was o s t e n s i b l y r e s p o n s i b l e f o r the a d m i n i s t r a t i o n of a l l the e n t e r p r i s e s connected w i t h i t s p a r t i c u l a r branch, f o r exam-p l e , non-ferrous metals, machine b u i l d i n g , e t c . To f a c i l i t a t e the a d m i n i s t r a t i o n of these wide-spread e n t e r p r i s e s , many m i n i -s t r i e s had intermediate a d m i n i s t r a t i v e o r g a n i z a t i o n s c a l l e d g l a v k i , which i n turn administered a group of e n t e r p r i s e s . "'"The number of m i n i s t r i e s have v a r i e d around twenty-f i v e , depending on the importance placed by government leaders on p a r t i c u l a r s e c t o r s of the economy. When the r e s p e c t i v e m i n i s t r i e s r e c e i v e d t h e i r c o n t r o l f i g u r e s the v a r i o u s t a r g e t s were d i s a g g r e g a t e d and d i s t r i b u t e d among the s p e c i f i c g l a v k i under the j u r i s d i c a t i o n o f the m i n i s t r y . Each glavk then repeated the process o f d i s a g g r e a t i o n i n a s s i g n i n g c o n t r o l f i g u r e s t o i t s s u b o r d i n a t e e n t e r p r i s e s . The e n t e r p r i s e u s u a l l y r e c e i v e d i t s c o n t r o l f i g u r e s around the b e g i n n i n g o f June and was informed at t h i s time o f i t s t e n t a t i v e output assignments and m a t e r i a l i n p u t s , as w e l l as c o s t r e d u c t i o n , l a b o u r p r o d u c t i v i t y , and wage fund t a r g e t s . On the b a s i s o f the c o n t r o l f i g u r e s , the e n t e r p r i s e would c a l -c u l a t e i t s maximum output p o t e n t i a l , s p e c i f i c q u a n t i t i e s o f m a t e r i a l s necessary t o achieve t h i s output, l a b o u r p r o d u c t i v i t y and c o s t r e d u c t i o n p o s s i b i l i t i e s . The above i n f o r m a t i o n , along with d e t a i l e d o r d e r s f o r m a t e r i a l i n p u t s ( z a i a v k i ) , i s then d e l i v e r e d t o the glavk, where the r e s p e c t i v e e n t e r p r i s e s bar-' g a i n w i t h t h e i r s u p e r i o r s r e g a r d i n g the f e a s i b i l i t y o f the con-t r o l f i g u r e s they had p r e v i o u s l y r e c e i v e d . I t i s common p r a c t i c e f o r fi r m s to d e f l a t e t h e i r output p o t e n t i a l s and i n f l a t e t h e i r i n p u t requirements i n o r d e r to ob-t a i n p r o d u c t i o n and f i n a n c i a l t a r g e t s t h a t they can f u l f i l l . Past e x p e r i e n c e s o f be i n g a s s i g n e d a b s u r d l y h i g h output t a r g e t s and low i n p u t norms,"'" as w e l l as r e c u r r i n g d i f f i c u l t i e s i n ob-t a i n i n g t i m e l y d e l i v e r i e s o f m a t e r i a l s o r d ered, have r e s u l t e d i n t h i s p r a c t i c e o f u n d e r s t a t i n g t h e i r r e a l p o t e n t i a l and stock ^Absurd c o n t r o l f i g u r e s r e s u l t from o v e r - o p t i m i s t i c e x p e c t a t i o n s and l e a d to the c r e a t i o n o f t a u t p l a n s . When the c o n t r o l f i g u r e s are d i s t r i b u t e d , both m i n i s t r i e s and g l a v k i i n -f l a t e t h e i r r e a l assignments i n o r d e r t o o b t a i n a margin o f s a f e t y i n f u l f i l l i n g t h e i r c o n t r o l f i g u r e s . p i l i n g i n v e n t o r i e s . T h i s p r a c t i c e i s r e c o g n i z e d by the g l a v k i a d m i n i s t r a t i o n s , and when the z a i a v k i are pres e n t e d to them by t h e i r r e s p e c t i v e e n t e r p r i s e s , t h e r e ensues a process of c o l l e c -t i v e b a r g a i n i n g . The e n t e r p r i s e attempts to j u s t i f y a r e d u c t i o n i n i t s output t a r g e t and/or an i n c r e a s e i n i t s m a t e r i a l i n p u t s , wage fund, and c o s t r e d u c t i o n t a r g e t s , w h i l e the glavk t r i e s to remove the p r o t e c t i o n t h a t the f i r m has attempted to o b t a i n . In t h i s b a r g a i n i n g the glavk, as the s u p e r i o r organ, has f i n a l a u t h o r i t y , w h i l e the f i r m has the r i g h t to appeal u n r e s o l v e d i s s u e s a t the m i n i s t e r i a l l e v e l . At the glavk l e v e l the above p r e l i m i n a r y data are ag-gregated f o r the su b o r d i n a t e e n t e r p r i s e s and d e l i v e r e d to t h e i r m i n i s t r i e s where the b a r g a i n i n g process i s repeated w i t h r e g a r d t o glavk assignments. Once these i s s u e s have been r e s o l v e d , the v a r i o u s m i n i s t r i e s c a l c u l a t e t h e i r t o t a l o u t p u t s , m a t e r i a l requirements, wage fund, c o s t / r u b l e of market ou t p u t s , r e s e a r c h c o s t s , and o t h e r r e l e v a n t economic v a r i a b l e s , and d e l i v e r the aggregated p l a n f o r the m i n i s t r y to Gosplan, U.S.S.R. Another round of b a r g a i n i n g ensues between Gosplan and the v a r i o u s m i n i s t r i e s over d i s c r e p a n c i e s between the t e n t a t i v e aggregate p l a n f o r the m i n i s t r y and the i n i t i a l c o n t r o l f i g u r e s a s s i g n e d . U n r e s o l v e d i s s u e s at t h i s l e v e l of b a r g a i n i n g are r e f e r r e d to the C o u n c i l o f M i n i s t e r s , U.S.S.R., f o r f i n a l d e c i s i o n . Gosplan then begins the complex process of r e v i s i n g i t s e s t i m a t e d m a t e r i a l balances f o r funded commodities."'' In Up to 1959 commodities and m a t e r i a l s were c l a s s i f i e d i n t o f o u r c a t e g o r i e s . 1) Funded commodities i n c l u d e d a l l im-p o r t a n t producer goods, f u e l s , and the major i n p u t s of l i g h t i n d u s t r y . A l l funded m a t e r i a l s are i n c l u d e d i n the n a t i o n a l 5 1957, Gosplan had to s i m u l t a n e o u s l y c l o s e some 1,050 i n d i v i d u a l m a t e r i a l balances."'" The i n d i v i d u a l balances are h i g h l y i n t e r -r e l a t e d and changes i n one balance cause v a r i o u s changes i n numerous o t h e r b a l a n c e s . The methods used i n c l o s i n g the b a l -ances vary from r e d u c i n g the i n p u t norms of d e f i c i t m a t e r i a l s , or encouraging the s u b s t i t u t i o n o f l e s s s c a r c e m a t e r i a l s , to i n c r e a s i n g p r o d u c t i o n of the d e f i c i t good; the l a t t e r a l t e r -2 n a t i v e i s used i f the former ones f a i l . When ' c o n s i s t e n t ' b alances have been o b t a i n e d , a d r a f t of the n a t i o n a l economic p l a n i s drawn up and forwarded to the C o u n c i l of M i n i s t e r s , U.S.S.R., and i n t u r n to the S o v i e t l e g i s l a t u r e f o r a p p r o v a l . Once the p l a n has been approved by the government, Gosplan d i s t r i b u t e s the v a r i o u s output t a r g e t s , i n p u t norms, and a u t h o r i z a t i o n s f o r funded commodities (fondy) to the economic p l a n and are a l l o c a t e d by Gosplan. 2) C e n t r a l l y planned commodities, i n c l u d e d l e s s c r i t i c a l goods and products used by a narrow group of consumers and were balanced and a l l o c a t e d by p r o d u c i n g m i n i s t r i e s . In 1957 the number of such goods reached 5,000. 3) D e c e n t r a l l y planned commodities, i n -c l u d e d goods and m a t e r i a l s o f l e s s e r importance and were planned by producing m i n i s t r i e s o r l o c a l government organs. 4) S e l f - p r o c u r e d goods and m a t e r i a l s , i n c l u d e d more abundant m a t e r i a l s , f o r example, sand, rocks and some types of lumber; f o r these m a t e r i a l s the f i r m i s r e s p o n s i b l e f o r i t s own pro-curement . "'"Eugene Z a l e s k i , P l a n n i n g Reforms i n the S o v i e t Union: 1962-1966, p.104. 2 I t i s b e l i e v e d t h a t i n c r e a s i n g the p r o d u c t i o n of de-f i c i t m a t e r i a l s i s used as a l a s t r e s o r t because of the e f f e c t t h i s w i l l have on the balances of the i n p u t s of the d e f i c i t commodity and on the i n p u t s o f the s u p p l i e r s of the i n p u t s of the producers of the d e f i c i t commodity, and so on. A p p a r e n t l y when an i n c r e a s e i n the p r o d u c t i o n of the d e f i c i t commodity i s u navoidable, o n l y conspicuous changes i n the a f f e c t e d balances are accounted f o r . (Herbert L e v i n e , " C e n t r a l i z e d P l a n n i n g of Supply i n S o v i e t I n d u s t r y " , i n The S o v i e t Economy: A Book of  Readings, ed. by M o r r i s B o r n s t e i n and D a n i e l F u s f e l d , pp.57-58.) 6 various m i n i s t r i e s i n accordance w i t h the approved plan. The m i n i s t r i e s then disaggregate and d i s t r i b u t e the above t a r g e t s among t h e i r v a r i o u s g l a v k i , along w i t h gross a l l o c a t i o n s of fondy f o r c e n t r a l l y planned m a t e r i a l s . The g l a v k i i n t u r n d i s -aggregate and d i s t r i b u t e d e t a i l e d input and output t a r g e t s along w i t h the necessary m a t e r i a l a u t h o r i z a t i o n s , i n gross terms, to t h e i r r e s p e c t i v e e n t e r p r i s e s . When the e n t e r p r i s e r e c e i v e s i t s output and input t a r -gets and m a t e r i a l a u t h o r i z a t i o n s , i t s p e c i f i e s the exact require-ments of the m a t e r i a l s d e s i r e d and sends these s p e c i f i c a t i o n s back to the glavk. The g l a v k i combine the various l i s t s of ma-t e r i a l s p e c i f i c a t i o n s of t h e i r e n t e r p r i s e s and forward these combined orders to the main a d m i n i s t r a t i o n of supply attached to t h e i r r e s p e c t i v e m i n i s t r i e s . The supply a d m i n i s t r a t i o n s i n t u r n send s p e c i f i e d orders to the s a l e s a d m i n i s t r a t i o n s of the appro-p r i a t e producing m i n i s t r y , who i n t u r n a s s i g n s p e c i f i c orders to t h e i r r e s p e c t i v e e n t e r p r i s e s . At t h i s stage formal c o n t r a c t s are signed between each f i r m and i t s s u p p l i e r s , and d e l i v e r y dates, methods of payment, and other r e l e v a n t c o n s i d e r a t i o n s are s p e c i f i e d . The c o n t r a c t u a l arrangements complete the process of production and supply planning; a f t e r the c o n t r a c t u a l arrange-ments are completed, each e n t e r p r i s e formulates o p e r a t i o n a l pro-d u c t i o n plans w i t h monthly breakdowns f o r the f i r s t q u arter or one-half of the planned year. Reforms i n a d m i n i s t r a t i o n and p r o d u c t i o n - supply planning i n i n d u s t r y : 1950-1970 A l l of the s i g n i f i c a n t reforms that occurred during t h i s p e r i o d i n the planning of production-supply and a d m i n i s t r a t i o n 7 i n i n d u s t r y took place a f t e r 1956. In May 1957 the m i n i s t e r i a l o r g a n i z a t i o n of i n d u s t r y was d i s s o l v e d and replaced by 104 r e -g i o n a l economic c o u n c i l s (sovnarkhozy).^ Henceforth, the ad-m i n i s t r a t i o n of a l l l a r g e - s c a l e i n d u s t r y , which i n c l u d e d a l l heavy i n d u s t r y , was to f o l l o w h o r i z o n t a l geographic l i n e s 2 r a t h e r than the previous v e r t i c a l branch l i n e s . The sovnark-hozy were subordinated to the C o u n c i l of M i n i s t e r s of the r e p u b l i c i n which they were s i t u a t e d . Several m i n i s t r i e s f o r c r i t i c a l areas of the economy, f o r example, defence and chemi-c a l s , were r e t a i n e d , w h i l e some other l e s s c r i t i c a l but s t i l l important m i n i s t r i e s were transformed i n t o s t a t e committees. The a d m i n i s t r a t i o n of s m a l l - s c a l e i n d u s t r y was t r a n s f e r r e d to 3 the v a r i o u s o b l a s t and l o c a l government organs. The r a t i o n a l e behind t h i s massive r e o r g a n i z a t i o n i n i n d u s t r i a l a d m i n i s t r a t i o n was to c o r r e c t the gross d e f i c i e n c i e s which had become apparent i n the branch system of a d m i n i s t r a -t i o n . Excessive branch d i f f e r e n t i a t i o n i n t o more than t h i r t y U.S. Bureau of the Census, The S o v i e t F i n a n c i a l System: S t r u c t u r e , Operation and S t a t i s t i c s , by Daniel G a l l i k , Cestmir J e s i n a and Stephen Rapawy. I n t e r n a t i o n a l Population S t a t i s t i c s Reports, S e r i e s P-90, No.23, p.14. 2 The c r i t e r i o n used was t h a t the sovnarkhozy would ad-m i n i s t e r a l l e n t e r p r i s e s w i t h over 200-250 employees. ( P h i l l i p e Bernard, Planning i n the S o v i e t Union, p.114.) 3 . . . To ease a d m i n i s t r a t i o n , s m a l l s c a l e i n d u s t r i a l firms i n the same area, producing s i m i l a r goods, were encouraged to amalgamate i n t o 'firms' or 'producer unions'. The c o n s o l i d a -t i o n s were supposed to b r i n g about the f o l l o w i n g b e n e f i t s : 1) e a s i e r c e n t r a l i z e d a l l o c a t i o n of m a t e r i a l s and equipment; 2) g r e a t e r manoeuvrability of managerial and m a t e r i a l resources; 3) l a r g e r s c a l e production and g r e a t e r s t a n d a r d i z a t i o n of out-put. The movement toward the amalgamation of s m a l l - s c a l e e n t e r -p r i s e s continued a f t e r they were t r a n s f e r r e d to the sovnarkhozy a d m i n i s t r a t i o n s , and were f u r t h e r i n t e n s i f i e d a f t e r November, 1962. ( Z a l e s k i , Planning Reforms, pp.157-158.) 8 m i n i s t r i e s had lead to fragmentation of the c e n t r a l command s t r u c t u r e , thereby i n c r e a s i n g the d i f f i c u l t y of t r a n s m i t t i n g c e n t r a l d i r e c t i v e s p e r t a i n i n g to s p e c i f i c types of i n d u s t r y down through the a d m i n i s t r a t i v e h i e r a r c h y . Over the years i n -d i v i d u a l m i n i s t r i e s had attempted to gain s e l f - s u f f i c i e n c y through v e r t i c a l i n t e g r a t i o n of t h e i r production processes, the r e s u l t of which l e a d to a d i l u t i o n of the branch p r i n c i p l e and the a d m i n i s t r a t i v e scrambling of industries.''" In a d d i t i o n to the above problems m i n i s t e r i a l c o n t r o l over the s p a t i a l arrange-ment of new e n t e r p r i s e s had le a d to l o c a t i o n a l a b s u r d i t i e s , v i s - a - v i s s u p p l i e r s and customers, r e s u l t i n g i n excessive t r a n s -p o r t a t i o n c o s t s . The replacement of the m i n i s t e r i a l system by r e g i o n a l economic c o u n c i l s was an attempt to remedy the above-noted de f e c t s i n i n d u s t r i a l a d m i n i s t r a t i o n . This t o t a l t r a n s f o r m a t i o n of the a d m i n i s t r a t i v e s t r u c -ture i n i n d u s t r y had few major e f f e c t s on the planning of pro-du c t i o n and supply of goods i n the n a t i o n a l economy. The planning h i e r a r c h y was now the C o u n c i l of M i n i s t e r s , U.S.S.R., Gosplan, U.S.S.R., the r e p u b l i c a n g o s p l a n i , sovarkhozy, and the e n t e r p r i s e s . Gosplan, U.S.S.R., acquired the research de-partments and the main a d m i n i s t r a t i o n s of s a l e s of the former "'"An example of t h i s a d m i n i s t r a t i v e scrambling was the M i n i s t r y of Machine Tool Production. During 1956 i t c o n t r o l l e d only f i f t y - f i v e e n t e r p r i s e s out of a t o t a l of 171 firms whose primary task was the production of such t o o l s . The remaining 116 e n t e r p r i s e s were s c a t t e r e d among nineteen d i f f e r e n t m i n i -s t r i e s . The e f f e c t of t h i s on conveying i n f o r m a t i o n and con-t r o l l i n g the execution of d i r e c t i v e s p e r t a i n i n g to t h i s indus-t r y i s obvious. (Oleg Hoeffding, "The Soviet I n d u s t r i a l Reorganization of 1957", papers and proceedings of the 71st annual meeting of the American Economic A s s o c i a t i o n , American Economic Review, Vol.XLIX (May, 1959), p.72.) 9 m i n i s t r i e s , and was thus responsible for c e n t r a l i z e d production research and the planning of a l l i n t e r - r e p u b l i c d e l i v e r i e s of goods and materials. At the republican Gosplan l e v e l , combined main administrations for supply and sales were formed, with each broad category of product having i t s own main administra-t i o n . Similar main administrations were formed at the sov-narkhoz l e v e l . The e f f e c t of the above changes on the planning of production and supply was that the previous functions des-cribed for the old hierarchy were administered by the newly formed organs, while the functions performed, with c e r t a i n q u a l i f i c a t i o n s , remained e s s e n t i a l l y the same. One of the major benefits proclaimed for the reorgani-zation was that the use of control figures would be abolished and the planning process would be i n i t i a t e d at the enterprise l e v e l . Each enterprise would formulate i t s own preliminary targets, based on the major indicators given to each enterprise i n i t s long-term perspective plan.*'' Due to the frequent and recurring changes that were made i n the long-term plans, the in d i c a t o r s used by the enterprise were often not appropriate; 2 thus the new planning scheme was never r e a l i z e d . New target figures had to be established every year and control figures s t i l l remained the basis for c a l c u l a t i n g the preliminary enter-pr i s e plans. The seven-year plan for the development of the economy was disseminated down through the hierarchy u n t i l each firm had i t s own seven-year plan. Once the perspective plan for the firm was approved, i t was to use t h i s as a basis for e s t a b l i s h i n g i t s own preliminary targets. pp.50-51 2 U.S. Bureau of the Census, The Soviet F i n a n c i a l System, 10 Changes i n the p l a n n i n g o f the output assortment of consumer goods i n d u s t r i e s o c c u r r e d d u r i n g and a f t e r 19 57; pre-v i o u s to t h i s time the output mixes of these i n d u s t r i e s were t a r g e t e d by the c e n t r a l a u t h o r i t i e s . From i t s i n i t i a l a p p l i -c a t i o n i n 1957, and i n c r e a s i n g l y i n the years f o l l o w i n g , the assortment t a r g e t s o f l i g h t i n d u s t r i e s were f i n a l i z e d on the b a s i s o f n e g o t i a t i o n s h e l d between the producing f i r m , t r a d e o r g a n i z a t i o n s , and r e t a i l o u t l e t s . Each year separate t r a d e f a i r s were h e l d i n most r e p u b l i c s f o r each branch of the con-sumer goods i n d u s t r y . The n e g o t i a t i o n s t h a t f o l l o w e d these f a i r s between the producer and the d i s t r i b u t o r s were used t o f i n a l i z e the assortment mixes of the v a r i o u s producing f i r m s . S e v e r a l o t h e r reforms were undertaken i n 1957 t h a t gave the sovnarkhozy g r e a t e r c o n t r o l over d e c e n t r a l i z e d i n -vestments, r e l a t i v e t o the freedom t h a t had been allowed t o the p r e v i o u s m i n i s t r i e s i n t h i s area. In a d d i t i o n , the sov-narkhozy were p e r m i t t e d to r e a l l o c a t e t h e i r gross a l l o c a t i o n s of fondy among t h e i r s u b o r d i n a t e e n t e r p r i s e s as they saw f i t . T h i s d e l e g a t i o n o f a u t h o r i t y to the sovnarkhoz l e v e l was s h o r t l i v e d . In 1959 a d i r e c t i v e by the c e n t r a l government r u l e d t h a t the sovnarkhozy would h e n c e f o r t h r e q u i r e h i g h e r a p p r o v a l f o r t h e i r d i s t r i b u t i o n s o f fondy among t h e i r s u bordinate e n t e r -prises."'" A s i m i l a r retrenchment of c e n t r a l i z e d c o n t r o l o c c u r r e d i n 1961 when the sovnarkhozy 1s c o n t r o l over d e c e n t r a l i z e d i n v e s t -2 ments was s e v e r e l y l i m i t e d . "'"Alec Nove, "The I n d u s t r i a l P l a n n i n g System: Reform i n Pr o s p e c t " , S o v i e t S t u d i e s , Vol.XIV, ( J u l y , 1962), p.2. 2 I b i d . During 1960 and f o r s e v e r a l years f o l l o w i n g , the admin-i s t r a t i v e s t r u c t u r e of i n d u s t r y was c o n t i n u a l l y m o d i f i e d i n an attempt to f i n d an a c c e p t a b l e form of i n d u s t r i a l o r g a n i z a t i o n . In 1960 a l a r g e p a r t of l i g h t i n d u s t r y , p r e v i o u s l y s u b o r d i n a t e d to v a r i o u s o b l a s t and l o c a l government a u t h o r i t i e s was t r a n s -f e r r e d t o the j u r i s d i c t i o n of the sovnarkhozy.""" During the l a t t e r p a r t of the same year t h r e e of the l a r g e s t r e p u b l i c s i n the S o v i e t Union c r e a t e d r e p u b l i c a n sovnarkhozy, r e s p o n s i b l e to t h e i r r e p u b l i c a n g o s p l a n i , f o r the o p e r a t i o n a l c o n t r o l and m a t e r i a l supply c o o r d i n a t i o n of the sovnarkhozy w i t h i n t h e i r 2 r e s p e c t i v e r e p u b l i c s . T h i s movement toward g r e a t e r c o o r d i n a -t i o n among the sovnarkhozy was f u r t h e r i n t e n s i f i e d i n 1961 when the U.S.S.R. was d i v i d e d i n t o seventeen l a r g e economic r e g i o n s and a d m i n i s t r a t i v e bodies were s e t up to c o o r d i n a t e the econom-i c a c t i v i t i e s of the sovnarkhozy w i t h i n each r e g i o n . In Novem-ber 1962 the number of sovnarkhozy was reduced from 104 to f o r t y - s e v e n and a new agency c a l l e d Sovnarkhoz U.S.S.R. was c r e a t e d and made r e s p o n s i b l e f o r the implementation of plans 3 i n the f o r t y - s e v e n sovnarkhozy. The above r e o r g a n i z a t i o n s proved to be u n s a t i s f a c t o r y , and i n March 1963 the Supreme Economic C o u n c i l was c r e a t e d to c o o r d i n a t e the t h r e e major 4 organs of economic a d m i n i s t r a t i o n . The above arrangement ''"Ibid. p . l . 2 Republican economic c o u n c i l s were s e t up i n the RSFSR, Ukraine, and Kazakhstan. 3 Bernard, P l a n n i n g i n the S o v i e t Union, p.147. 4 Gosplan, U.S.S.R.; Sovnarkhoz, U.S.S.R.; and Gosstroy, the a d m i n i s t r a t i v e body i n charge of c o n s t r u c t i o n . (U.S. Bureau of the Census, The S o v i e t F i n a n c i a l System, p.18.) 12 p e r s i s t e d up to the massive economic reforms t h a t were under-taken i n November, 1965. At t h i s time the r e g i o n a l economic system of a d m i n i s t r a t i o n was d i s s o l v e d and the o l d m i n i s t e r i a l branch system, s i m i l a r to t h a t which e x i s t e d p r e v i o u s to 1957, was r e - e s t a b l i s h e d . The r e - e s t a b l i s h m e n t o f the m i n i s t e r i a l system of ad-m i n i s t r a t i o n was among the f i r s t major changes t h a t took p l a c e i n the S o v i e t economy a f t e r the f a l l of Khrushchev. The new l e a d e r s were d i s s a t i s f i e d w i t h the performance of the economy i n r e c e n t years and b e l i e v e d the r e g i o n a l system of i n d u s t r i a l a d m i n i s t r a t i o n was p a r t i a l l y r e s p o n s i b l e f o r the r e c e n t d e c l i n e i n the growth r a t e of the economy. S p e c i f i c a l l y , the c r i t i c i s m s v o i c e d a g a i n s t the sovnarkhozy system was t h a t the wide d i s p e r -s i o n o f a d m i n i s t r a t i v e power had l e a d t o a d i l u t i o n o f c e n t r a l -i z e d c o n t r o l and monumental problems of c o o r d i n a t i o n ; i n a d d i t i o n ; the system had e x h i b i t e d a d i s t i n c t tendency toward r e g i o n a l autarky. The g r e a t e r degree of v e r t i c a l i n t e g r a t i o n of i n d u s t r i e s t h a t was i n h e r e n t i n the r e g i o n a l a d m i n i s t r a t i v e system, had c o r r e s p o n d i n g l y i n c r e a s e d the tendency toward s e l f -s u f f i c i e n c y i n i n t r a - r e g i o n a l p r o d u c t i o n and supply a c t i v i t i e s . I t was f o r these reasons t h a t the sovnarkhozy system was r e p l a c e d i n September, 1965 by some twenty-three newly c r e a t e d m i n i -s t r i e s . The r e s t o r a t i o n of the m i n i s t e r i a l a d m i n i s t r a t i v e system r e t u r n e d the p r o d u c t i o n - s u p p l y p l a n n i n g system to i t s pre-1957 form. S i n c e the 1965 reforms, the major changes t h a t have been "'"Gertrude Schroeder, " S o v i e t Economic Reforms: A Study i n C o n t r a d i c t i o n s " , S o v i e t S t u d i e s , Vol.XX, (January,1968), p.4, undertaken i n the p r o d u c t i o n - s u p p l y system have been a r e d u c t i o n i n the number of c e n t r a l l y planned goods and the i n t r o d u c t i o n of i n p u t - o u t p u t b a l a n c i n g t e c h n i q u e s . A f t e r the c r e a t i o n of the sovnarkhozy system, the d i v i s i o n between funded commodities and c e n t r a l l y planned goods l o s t i t s p r e v i o u s significance,"'" the m a j o r i t y of c e n t r a l l y planned goods b e i n g balanced and a l l o c a t e d by Gosplan, U.S.S.R. By J u l y 1966 the number of c e n t r a l l y 2 planned and a l l o c a t e d commodities had exceeded 20,000. At t h i s time, due to the e x c e s s i v e burden of p l a n n i n g f o r such a v a s t number of goods, 6,000 goods were to be d i s t r i b u t e d i n a de-c e n t r a l i z e d manner by r e g i o n a l material-equipment supply 3 a g e n c i e s . Input-output techniques have been i n c r e a s i n g l y used i n the r e c e n t p a s t as a supplement and a l t e r n a t i v e t o m a t e r i a l b a l -a n cing t e c h n i q u e s . The crude system of m a t e r i a l b a l a n c i n g does not f a c i l i t a t e f e a s i b l e a c c o u n t i n g procedures f o r f o l l o w i n g the i n d i r e c t e f f e c t s c r e a t e d i n r e l a t e d m a t e r i a l balances of changes i n any one m a t e r i a l b a l a n c e . The i n a b i l i t y of m a t e r i a l b a l a n c -i n g procedures to a d j u s t f o r the c y c l i c a l r a m i f i c a t i o n s t h a t a change i n one m a t e r i a l balance c r e a t e s i n o t h e r r e l a t e d balances has been the primary source or reason f o r the r e c u r r i n g i n c o n -s i s t a n t annual plans t h a t have plagued the S o v i e t economy. In-put-output techniques l e n d themselves to computer c a l c u l a t i o n s and can t h e o r e t i c a l l y account f o r the d i r e c t and i n d i r e c t e f f e c t s of a l t e r e d f a c t o r i n p u t s and o u t p u t s . 1 2 See n . l , pp.4-5. Z a l e s k i , P l a n n i n g Reforms, p. 105. 3 I b i d . Input-output techniques were f i r s t i n t r o d u c e d i n 1962 to check the c o n s i s t e n c y of the annual p l a n a f t e r i t had a l r e a d y been approved. S i m i l a r work was done on the 1963 p l a n and the two-year p l a n f o r 1964-1965. Since t h i s time i n p u t - o u t p u t techniques have been used i n c o n c e r t w i t h the m a t e r i a l b a l a n c i n g methods i n the c o n s t r u c t i o n of annual p l a n s , but the l a t t e r method s t i l l remains the dominant technique used to achieve an ex ante balance i n the supply and demand of c e n t r a l l y a l l o c a t e d m a t e r i a l s and equipment. F i n a n c i a l P l a n n i n g and the Role and Formation  of P r i c e s i n the S o v i e t Economy F i n a n c i a l p l a n n i n g F i n a n c i a l P l a n n i n g i s used to supplement the system of p h y s i c a l c o n t r o l s i n the management of the economy. Although p h y s i c a l c o n t r o l s p l a y the predominant r o l e i n S o v i e t a l l o c a t i o n mechanics, f i n a n c i a l p l a n n i n g i s necessary f o r the f o r m u l a t i o n o f monetary and f i s c a l p o l i c y . In a d d i t i o n , f i n a n c i a l p lans p r o v i d e the major means f o r p o l i c i n g the e x e c u t i o n of non-f i n a n c i a l plans as w e l l as checking on the v a l i d i t y of these p h y s i c a l p l a n s . I t i s the p h y s i c a l p l a n s and the i m p l i c a t i o n s of these plans on the economy t h a t p r o v i d e the b a s i s f o r the c o n s t r u c t i o n of the primary f i n a n c i a l p l a n s , v i z . , the cash p l a n , the c r e d i t p l a n , and the s t a t e budget.''" Cash p l a n n i n g l a r g e l y c o n s i s t of b a l a n c i n g the volume "*"Other f i n a n c i a l plans are i n c o r p o r a t e d i n t o the budget, f o r example, 'estimates' of budget f i n a n c e d e n t e r p r i s e s and i n s t i t u t i o n s . 15 o f monetary income r e c e i v e d by the p o p u l a t i o n w i t h the volume and s t r u c t u r e of monetary ex p e n d i t u r e s made by the p o p u l a t i o n . The dynamics o f i n t e r - e n t e r p r i s e monetary t r a n s a c t i o n s do not e n t e r the cash p l a n , as the s e t t l e m e n t s t h a t take p l a c e between f i r m s i n the s o c i a l i z e d s e c t o r i n the buying and s e l l i n g of goods are not done by exchanges of currency but by t r a n s f e r s of book accounts through Gosbank. The c u r r e n c y a v a i l a b l e to any e n t e r -p r i s e i s r i g i d l y c o n t r o l l e d , and e n t e r p r i s e s are p r o h i b i t e d by law from paying cash f o r any purchases exceeding 1,000 rubles."'" The cash p l a n of Gosbank i s an aggregated and s i m p l i f i e d form of the cash p l a n of each o f the d i s t r i c t s and r e g i o n s of Gosbank's l o c a l d i s t r i c t o f f i c e s . At each of these o f f i c e s an 'enlarged' p l a n of the balance of monetary incomes and expendi-t u r e s i s drawn up i n terms of s p e c i a l i z e d groups, e.g., f a c t o r y workers, o f f i c e workers, peasants, p r o f e s s i o n a l s , and o t h e r work c a t e g o r i e s . T h i s e n l a r g e d p l a n shows the money flows between the s o c i a l i z e d s e c t o r and the p o p u l a t i o n v i s - a - v i s these groups, and the r e t u r n flow back ( i n a d d i t i o n to the money tur n o v e r be-tween s o c i a l groups s e l l i n g products or s e r v i c e s to one another through market t r a n s a c t i o n s ) . The b a l a n c i n g o f the incomes and e x p e n d i t u r e s of the p o p u l a t i o n f o r each i n d i v i d u a l r e g i o n , not o n l y f a c i l i t a t e s the e s t i m a t i o n o f aggregate demand f o r consumer goods i n the r e g i o n , but a l s o lends i t s e l f to p l a n n i n g the d i f -f e r e n t i a t i o n of r e a l wages between r e g i o n s . "'"Joseph B e r l i n e r , "Monetary P l a n n i n g i n the U.S.S.R.", American S l a v i c and East European Review, Vol.XXIX, (December, 1950), p.240. The problem of c o n t r o l l i n g e n t e r p r i s e t r a n s a c -t i o n s t h a t take p l a c e by the t r a n s f e r r i n g of a c c o u n t i n g balances i s a separate problem and w i l l be d i s c u s s e d i n the s e c t i o n on microeconomic c o n t r o l s i n i n d u s t r y . 16 An abbreviated v e r s i o n of the above plan t h a t does not c o n t a i n the i n f o r m a t i o n on s o c i a l groups i s forwarded by a l l of the d i s t r i c t o f f i c e s of Gosbank to Gosbank headquarters. A l l of the v a r i o u s d i s t r i c t plans are then compiled i n t o an o v e r a l l cash plan f o r the economy. A s i m p l i f i e d scheme of Gosbank's cash plan i s shown below: (I) (E) Payments Received i n Cash Payments Made i n Cash 1. Trade ( s t a t e as w e l l as 1. Remuneration of labour cooperative t r a d e ) , and and other sources of per-e a t i n g houses. (Accounts sonal income, i n c l u d i n g f o r approximately 75 wages, s a l a r i e s i n i n -percent of payments.) dustry and commerce, s t i -pends, s u b s i d i e s , o l d age pensions, money wages of kolkhoz farmers, e t c . (Accounts f o r a p p r o x i -mately 90 percent of cash payments.) 2. Transport ( r a i l , a i r , l o c a l ) . M u n i c i p a l revenues. P u b l i c e n t e r -tainments. M o b i l i z a t i o n of the monetary means of the p o p u l a t i o n ( s t a t e l o a n s ) . Accounts of kolkhozes w i t h Gosbank. E t c e t e r a . 2. A g r i c u l t u r a l purchases p a i d f o r i n cash. Small o p e r a t i v e expenses of e n t e r p r i s e s and o f f i c e s p a i d f o r i n cash. Auth-o r i z e d t r a v e l l i n g expenses. Accounts of the kolkhozes, (money wages i n c l u d e d under E 1). E t c e t e r a . 3. Deposits of the savings banks w i t h Gosbank ( i f p o s i t i v e ) . Post O f f i c e , t e l e g r a p h , e t c . ( f i n a l expected balances, i f p o s i t i v e ) . 3. Deposits of the savings banks w i t h Gosbank ( i f n e g a t i v e ) . Post O f f i c e , t e l e g r a p h , e t c . ( f i n a l expected balances from o p e r a t i o n s , i f n e g a t i v e ) . Hans Ronimois, "An S o v i e t Monetary Planning and on Some Problems Related to the Monetary C i r c u l a t i o n i n the U.S.S.R.", (paper presented at U n i v e r s i t y of Stockholm, 1945), p.5. A l a t e r r e f e r e n c e , (G. Dundukov, " F i n a n c i a l Balances", Report of  the United Nations Seminar on Planning Techniques, p.136,) gives an example of a cash plan which c l o s e l y f o l l o w s the more compre-hensive scheme shown above. 17 4. The balance o f cash at the b e g i n n i n g o f the planned p e r i o d . 4. The balance of cash at the end of the planned p e r i o d . 5. Planned i n c r e a s e o f cash, i . e . , planned t r a n s f e r s of notes from the i s s u e funds o f the d i s t r i c t o f f i c e s concerned. 5. Planned decrease of cash, i . e . , planned t r a n s f e r s of notes to the i s s u e funds o f the d i s t r i c t o f f i c e s concerned. The data used i n the c o m p i l a t i o n of the cash plans o f the d i s t r i c t o f f i c e s and Gosbank are l a r g e l y p r o v i d e d by the n a t i o n a l economic p l a n and the s t a t e budget f o r the p r e v i o u s period,"'" which are then a d j u s t e d a c c o r d i n g l y . The t o t a l amount of net p e r s o n a l income i s d e r i v e d from the f i g u r e s o f the t o t a l wage funds i n the n a t i o n a l economic p l a n p l u s the budgetary f i g u r e s on government t r a n s f e r payments. The planned i n c r e a s e (decrease) of cash i n c i r c u l a t i o n i s d e r i v e d from the c r e d i t p l a n and i s based on the volume of output o f consumer goods and the planned v e l o c i t y o f r e t a i l t r a d e t u r n o v e r , i n c l u d i n g e s t i -mates of consumer c r e d i t granted by r e t a i l o u t l e t s . The primary o b j e c t i v e i n c o n s t r u c t i n g the cash p l a n i s to p r o v i d e f o r the s t a b i l i t y of the curren c y . The cash p l a n c o n s o l i d a t e s v a r i o u s p o r t i o n s of oth e r plans and balances t h a t a f f e c t the amount of money i n the hands of the p o p u l a t i o n and the u t i l i z a t i o n of these monies by the populace. By b a l a n c i n g i n f l o w s and outflows o f cash t o and from the p o p u l a t i o n , the government can p l a n f o r the s t a b i l i t y o f the cu r r e n c y . Since the cash p l a n i s l a r g e l y a ' s y n t h e t i c ' p l a n t h a t i n c o r p o r a t e s many o t h e r p l a n s , the ex post s t a b i l i t y of the curre n c y i s 1G. Dundukov, " F i n a n c i a l B alances", Report o f the Un i t e d  Nations Seminar on P l a n n i n g Techniques, p.136. 18 dependent upon the f u l f i l l m e n t of the t o t a l i t y of o t h e r plans which are i n c o r p o r a t e d i n t o the cash p l a n . Thus the cash p l a n a l s o p r o v i d e s a measure of c o n t r o l over the f u l f i l l m e n t of the o t h e r plans which are i n c o r p o r a t e d i n t o i t , as d e v i a t i o n s i n these plans w i l l r e s u l t i n d e v i a t i o n s i n the cash p l a n . The c r e d i t p l a n i s of c r i t i c a l importance to the f i n a n -c i a l e q u i l i b r i u m of the economic system i n t h a t i t i n f l u e n c e s the amount of money at the d i s p o s a l of s t a t e i n s t i t u t i o n s and i n the hands of the g e n e r a l p u b l i c . The f u n c t i o n o f the c r e d i t p l a n i s to ' m o b i l i z e the i d l e r e s o u r c e s of the economy' and to p r o v i d e a comprehensive c o n t r o l mechanism over the economic ( f i n a n c i a l ) a c t i v i t i e s of s t a t e e n t e r p r i s e s . The .objective of Gosbank i n i t s c o m p i l a t i o n of the c r e d i t p l a n i s to balance the supply o f c r e d i t r e s o u r c e s w i t h the demand f o r these r e s o u r c e s . The supply of c r e d i t i s d e t e r -mined by: the e x t e n t of the bank's r e s e r v e s ; the c u r r e n t budget s u r p l u s ; p a s t budget s u r p l u s e s h e l d on d e p o s i t by the bank; and the amount of o t h e r n o n - a c t i v e d e p o s i t s . Non-active d e p o s i t s are based on the minimum balance on hand at the end of an opera-t i v e p l a n n i n g p e r i o d . P l a n n i n g the d i s t r i b u t i o n of c r e d i t a v a i l a b l e i n v o l v e s both the a g g r e g a t i o n of q u a n t i f i a b l e or planned c r e d i t needs (used p r i m a r i l y to f i n a n c e i n v e n t o r y r e q u i r e m e n t s ) , and e s t i -mates on n o n - s p e c i f i c but r e c u r r i n g c r e d i t requirements. The a g g r e g a t i o n of planned c r e d i t s t o f i r m s i s e f f e c t e d i n the f o l -lowing manner: each e n t e r p r i s e has a l r e a d y been a l l o c a t e d a ^"Nicolas Spulber, The S o v i e t Economy: S t r u c t u r e , P r i n -c i p l e s , Problems, p.175 c h a r t e r fund of f i x e d and working c a p i t a l to use i n meeting i t s a s s i g n e d t a r g e t s : the customary p r a c t i c e f o l l o w e d i s t h a t the working c a p i t a l funds granted to the e n t e r p r i s e under i t s char-t e r fund tends to approach the minimum balance r e q u i r e d f o r any s i n g l e p e r i o d d u r i n g the planned year.""" Throughout the planned year the f i r m ' s working c a p i t a l requirements w i l l f l u c t u a t e above, (and o c c a s i o n a l l y below), the l e v e l of t h e i r own f i n a n -c i a l r e s o u r c e s a c c o r d i n g to t h e i r p r o d u c t i o n requirements. The f u n c t i o n of bank c r e d i t i s to p r o v i d e the d i f f e r e n c e between the maximum working c a p i t a l requirements and the e n t e r p r i s e ' s own funds, based on each e n t e r p r i s e ' s planned r e c e i p t s and expendi-t u r e s . The c r e d i t demands of each e n t e r p r i s e i s c a l c u l a t e d i n the above manner and are sent up the a d m i n i s t r a t i v e h i e r a r c h y where they are checked at each l e v e l of a g g r e g a t i o n and f i n a l l y forwarded to the M i n i s t r y of F i n a n c e . Other types of c r e d i t s a l l o t t e d to f irms cannot be planned i n d e t a i l e d form, f o r example, loans f o r goods i n t r a n s -i t are planned o n l y as a g e n e r a l sum, based on i n d i c e s of the n a t i o n a l economic p l a n . The f o l l o w i n g t a b l e shows the major types of bank loans o u t s t a n d i n g on January 1, 1956, as a per-centage of t o t a l bank lo a n s . The i n t e r e s t r a t e s charged f o r the above loans are d i f -f e r e n t i a t e d s l i g h t l y , depending on i t s c a t e g o r y . In g e n e r a l , the i n t e r e s t r a t e s are meant to cover a d m i n i s t r a t i v e c o s t s , and What the c e n t r a l a u t h o r i t i e s attempt to achieve i s to r e s t r i c t the l e v e l of funds a v a i l a b l e to the e n t e r p r i s e d u r i n g any p e r i o d of the planned year, a f t e r g i v i n g due c o n s i d e r a t i o n to the c o s t s of a d m i n i s t r a t i n g c r e d i t requirements. 20 do not r e f l e c t s c a r c i t y or r i s k f a c t o r s , TABLE I DISTRIBUTION OF BANK LOANS OUTSTANDING, AS OF JANUARY 1, 19 56* Use of C r e d i t Percentage of T o t a l Bank Loans Raw m a t e r i a l s , s u p p l i e s , f i n i s h e d goods 64.9 Wages, u n f i n i s h e d p r o d u c t i o n , t e c h n i c a l 1.8 improvements Goods i n t r a n s i t 25.5 Other ( i n c l u d i n g past due loans) 7.8 T o t a l 100.0 Source: Donald Hodgman, "Soviet Monetary Cont r o l s through the Banking System", i n Comparative Economic Systems, ed. by M a r s h a l l Goldman, p.374. TABLE I I INTEREST RATES ON VARIOUS TYPES OF BANK LOANS* ** Category of Loan I n t e r e s t Rate Charged Loans f o r goods i n t r a n s i t 1% A l l other short-term loans 2% Overdue loans 3% - 5% Source: Spulber, The Sov i e t Economy, p.170. I n t e r e s t r a t e s were those i n e f f e c t during the e a r l y 1960 * s. A f t e r the c r e d i t plan i s approved by the C o u n c i l of M i n i s t e r s , U.S.S.R., the 'planned c r e d i t s ' are disaggregated i n t o ' c r e d i t l i m i t s ' f o r the var i o u s m i n i s t r i e s (sovnarkhozy) and e v e n t u a l l y i n t o c r e d i t l i m i t s f o r each i n d i v i d u a l e n t e r p r i s e v i a the appropriate branch banks. Non-planned c r e d i t s are assigned to the va r i o u s o f f i c e s and branches of Gosbank, based 21 on assessments of t h e i r requirements."" Up u n t i l 1959, the long-term c r e d i t s d i s t r i b u t e d by Gosbank and the numerous ' s p e c i a l purpose 1 banks t h a t e x i s t e d up to t h a t time were i n c l u d e d i n an all-encompassing c r e d i t p l a n . Beginning i n 1959, when Gosbank absorbed the f u n c t i o n s of most of the s p e c i a l purpose banks, the long-term c r e d i t p l a n has been drawn up as a separate document. Since the implementa-t i o n of the 1965 reforms, which r e p l a c e d the bulk o f c a p i t a l investment grants w i t h repayable long-term c r e d i t s , the l o n g -term c r e d i t p l a n has assumed a f a r g r e a t e r importance and at pr e s e n t r e q u i r e s the s p e c i f i c a p p r o v a l o f the C o u n c i l o f Min-i s t e r s , U.S.S.R. The s t a t e budget i s the p i v o t a l p o i n t of the S o v i e t f i n a n c i a l system. The budgetary p l a n n i n g process c l o s e l y f o l -lows the procedures used i n c o m p i l i n g the n a t i o n a l economic 2 p l a n . The M i n i s t r y o f Finance, U.S.S.R., compiles a d r a f t balance sheet o f revenues and exp e n d i t u r e s based on d i r e c t i v e s r e c e i v e d from the government and the d r a f t t a r g e t s of the annual economic p l a n . The government d i r e c t i v e s i n d i c a t e the breadth of coverage d e s i r e d by each budgetary l e v e l ; the main d i r e c t i o n s of e x p e n d i t u r e s ; norms f o r items o f expe n d i t u r e , i . e . , c a p i t a l investment, s o c i a l and c u l t u r a l measures, c o s t s o f a d m i n i s t r a -t i o n , defence, e t c . ; and the changes i n and methods of c a l c u -l a t i n g budgetary revenues. On the b a s i s of the above-mentioned d i r e c t i v e s and p r e l i m i n a r y b a l a n c e s , the M i n i s t r y of Finance, 1R.W. Davies, "Short Term C r e d i t i n the U.S.S.R.", S o v i e t S t u d i e s , Vol.XIV ( J u l y , 1962), p.30. 2 See Appendix I. U.S.S.R., i s s u e s a p p r o p r i a t e p r e l i m i n a r y t a r g e t s and i n s t r u c -t i o n s to the A i l - U n i o n m i n i s t r i e s and agencies f i n a n c e d from the n a t i o n a l budget and to the r e p u b l i c a n m i n i s t r i e s o f f i n a n c e . The r e p u b l i c a n m i n i s t r i e s of f i n a n c e i n t u r n i s s u e s i m i l a r i n -s t r u c t i o n s to t h e i r r e s p e c t i v e r e g i o n a l and t e r r i t o r i a l f i n a n c e a g e n c i e s , the l a t t e r bodies then f o r m u l a t i n g a p p r o p r i a t e guide-l i n e s f o r a l l l o w e r - l e v e l f i n a n c i a l bodies w i t h i n t h e i r r e s p e c -t i v e j u r i s d i c t i o n s . S i m u l t a n e o u s l y the r e p u b l i c a n m i n i s t r i e s of f i n a n c e c a l c u l a t e d r a f t r e p u b l i c a n budgets on the b a s i s of aggregate f i n a n c i a l plans and esti m a t e s c a l c u l a t e d by t h e i r r e s p e c t i v e m i n i s t r i e s and agencies , and forward t h e i r c o n s o l i -dated d r a f t budgets to the A i l - U n i o n f i n a n c e m i n i s t r y . The M i n i s t r y o f Fi n a n c e , U.S.S.R., by t h i s time has a l s o r e c e i v e d the summary f i n a n c i a l plans and es t i m a t e s o f the A l l - U n i o n m i n i s t r i e s and agen c i e s . A f t e r having checked the co n f o r m i t y o f these plans and es t i m a t e s w i t h the p r e l i m i n a r y economic p l a n s , the f i n a n c e m i n i s t r y compiles a d r a f t of the Union budget. Once the p r e l i m i n a r y d r a f t s o f the c o n s o l i d a t e d r e p u b l i c a n bud-gets have been accepted, the M i n i s t r y of Finance then combines the budgets o f the Union R e p u b l i c s , and the d r a f t budget f o r s o c i a l i n s u r a n c e i n t o a d r a f t o f the c o n s o l i d a t e d budget of the U.S.S.R. The p r e l i m i n a r y c o n s o l i d a t e d budget i s then d e l i v e r e d to Gosplan and to the C o u n c i l o f M i n i s t e r s , U.S.S.R. The r e -s p o n s i b i l i t y of Gosplan i s to check the con f o r m i t y o f the budget to t h e i r d r a f t o f the n a t i o n a l economic p l a n , which they have completed by t h i s time. The con f o r m i t y and d e v i a t i o n s o f the budget t o the n a t i o n a l economic p l a n i s a s c e r t a i n e d by c o m p i l i n g 23 a c o n s o l i d a t e d f i n a n c i a l p l a n f o r the e n t i r e economy. The scheme of the c o n s o l i d a t e d f i n a n c i a l p l a n i s shown below. TABLE I I I OUTLINE OF THE CONSOLIDATED FINANCIAL PLAN OF THE U.S.S.R.* F i n a n c i a l Resources 1. Monetary accumulation made by s o c i a l i s t e n t e r p r i s e . a) P r o f i t (Net p r o f i t i n terms of economic branches). b) Turnover tax (based on p r e d i c t e d s a l e s of products and average tax r a t e s on these p r o d u c t s ) . 2. R e c e i p t s from e n t e r p r i s e s and i n s t i t u t i o n s under the s o c i a l i n s u r a n c e scheme. 3. D e p r e c i a t i o n o u t l a y s ( i s determined by e s t i m a t i n g the average annual volume of o p e r a t i n g f i x e d a s s e t s and m u l t i p l y i n g by an average r a t e of d e p r e c i a t i o n ) . 4. F o r e i g n trade g a i n s . 5. Other r e c e i p t s from the s o c i a l i s t economy ( f o r e s t r y income, amusement taxes, e t c . ) . 6. Monetary r e c e i p t s from the p o p u l a t i o n . a) Compulsory payments ( i n c l u d e s income and a g r i c u l t u r a l t a x e s ) . b) V o l u n t a r y payments ( i n c l u d e s d e p o s i t s made by the popu-l a t i o n i n savings banks and the quasi-compulsory pur-chase of bonds, which were d i s c o n t i n u e d i n 1957). 7. Other revenues ( i n c l u d e s f o r e i g n l o a n s , e t c . ) . U t i l i z a t i o n o f F i n a n c i a l Resources 1. C a p i t a l investments i n the n a t i o n a l economy (based on i n v e s t -ment p l a n and e s t i m a t e d c o s t s of c o n s t r u c t i o n ) . 2. D e c e n t r a l i z e d c a p i t a l investments. 3. O v e r h a u l i n g f i x e d a s s e t s (planned a c c o r d i n g to the p o r t i o n of the d e p r e c i a t i o n r e s e r v e a l l o c a t e d f o r such pu r p o s e s ) . 4. Increment to c u r r e n t a s s e t s ( i n c l u d e s investment i n produc-t i o n r e s e r v e s , e.g., raw m a t e r i a l s , i n - p r o c e s s i n v e n t o r y , f i n i s h e d goods i n s t o c k , e t c . ) . Source: Dundukov, " F i n a n c i a l Balances", p.125. 24 5. Increment to s t a t e m a t e r i a l r e s o u r c e s ( i n c l u d e s the t o t a l i n v e n t o r i e s h e l d at the v a r i o u s l e v e l s w i t h i n the a d m i n i s t r a -t i v e h i e r a r c h y to cushion the e f f e c t s of i n c o n s i s t e n t o r u n f u l f i l l e d p l a n s ) . 6. Other economic ex p e n d i t u r e s ( i n c l u d e s d r a f t i n g and d e s i g n i n g e x p e n d i t u r e s , e x p e n d i t u r e s on g e o l o g i c a l p r o s p e c t i n g , i r r i g a t i o n , e t c . ) . 7. A l l o c a t i o n s f o r e d u c a t i o n , h e a l t h , pension and allowances. 8. A l l o c a t i o n s f o r s c i e n c e ( e x c l u d i n g c a p i t a l i nvestment). 9. M i l i t a r y e x p e n d i t u r e s . 10. E x p enditures on g e n e r a l government and a d m i n i s t r a t i o n ( c a l c u l a t e d on the b a s i s of average s a l a r y , times the number of employees, p l u s a d m i n i s t r a t i v e e x p e n d i t u r e s ; c a p i t a l c o n s t r u c t i o n c o s t s are e x c l u d e d ) . 11. Other s t a t e e x p e n d i t u r e s . 12. Reserve fund. 13. Expansion o f bank f a c i l i t i e s f o r n a t i o n a l economic c r e d i t -i n g . Gosplan submits i t s recommendation r e g a r d i n g the budget and the f i n a l d r a f t o f the n a t i o n a l economic p l a n to the C o u n c i l of M i n i s t e r s , U.S.S.R., about the same time as they r e c e i v e the d r a f t o f the c o n s o l i d a t e d budget from the M i n i s t r y of Finance. The budget and the n a t i o n a l economic p l a n are then approved s i m u l t a n e o u s l y by the C o u n c i l o f M i n i s t e r s , forwarded to the l e g i s l a t u r e f o r a p p r o v a l , a f t e r which they achieve l e g a l s t a t u s . A s i m p l i f i e d scheme of the p l a n f o r the 1968 c o n s o l i -dated budget of the U.S.S.R. i s shown below. The downward d i s s e m i n a t i o n of the budget begins b e f o r e f i n a l a p p r o v a l , u s u a l l y a f t e r the M i n i s t r y of Finance, U.S.S.R., has completed i t s p r e l i m i n a r y d r a f t of the c o n s o l i d a t e d budget. The budget i s passed down and d i s a g g r e g a t e d through the f i n a n c i a l 25 a d m i n i s t r a t i v e h i e r a r c h y and necessary adjustments are made to the r e p u b l i c a n , r e g i o n a l , t e r r i t o r i a l and o t h e r lower l e v e l d r a f t budgets. M o d i f i c a t i o n s made to the p r e l i m i n a r y c o n s o l i -dated budget i n the course of i t s r a t i f i c a t i o n are subsequently passed down and a p p r o p r i a t e adjustments are made a t the v a r i o u s budgetary l e v e l s . TABLE IV PLAN FOR THE CONSOLIDATED BUDGET OF THE U.S.S.R. - 19 68* Expenditures B i l l i o n Rubles Percentage 1) F i n a n c i n g the n a t i o n a l economy a) I n d u s t r y b) A g r i c u l t u r e c) Other 2) S o c i a l - c u l t u r a l s e r v i c e s a) E d u c a t i o n b) H e a l t h c) S o c i a l Welfare 3) Defence and A d m i n i s t r a t i o n a) Defence b) A d m i n i s t r a t i o n c) Other T o t a l 50.1 45.7 28.0 123. 8 23.9 9.0 17.2 21.0 7.6 17.1 16.7 1.5 9.8 40.5 36.9 22 . 6 100 .0 19.3 7.3 13.9 17.0 6.1 13.8 13.5 1.2 7.9 Revenues 1) From e n t e r p r i s e s 112.7 91.3 a) Turnover tax 42.2 34.2 b) P r o f i t d eductions 43.8 35.5 c) Income tax on c o l l e c t i v e 26.7 21.6 farms, s o c i a l i n s u r a n c e , o t h e r 2) From the p o p u l a t i o n 10.8 8.7 a) Income tax 10.3 8.3 b) Other 0.5 0.4 T o t a l 123.5 100.0 Source: Spulber, The S o v i e t Economy, p.184. The implementation of the budget i s based on, and con-26 t r o l l e d by 'budget s c h e d u l e s ' , which are comprehensive f i n a l p l a ns o f the revenues and expendi t u r e s of the r e s p e c t i v e bud-g e t s , broken down i n t o q u a r t e r y e a r s . The schedules are com-p i l e d a f t e r f i n a l r a t i f i c a t i o n o f the c o n s o l i d a t e d budget; the necessary adjustments have been c a r r i e d out and are based on the f u l l y d e t a i l e d plans and esti m a t e s submitted to the v a r i o u s f i n a n c e organs. The disbursements of cash from the v a r i o u s budgets and the techniques used t o c o n t r o l the flow of budgetary funds d i f f e r a c c o r d i n g to the l e v e l at which budget a p p r o p r i a t i o n s are made. At the A l l - U n i o n and Union Republican l e v e l s budgetary grants are made by opening 'budgetary c r e d i t s ' i n the name of the heads of agencies r e c e i v i n g the c r e d i t s who a c t as c r e d i t administrators.''" Budgetary c r e d i t s are as s i g n e d q u a r t e r l y , any year-end s u r p l u s e s being r e t u r n e d t o the budget. The c r e d i t a d m i n i s t r a t o r may u t i l i z e the funds a l l o t t e d i n meeting the planned o b j e c t i v e s of h i s agency or may r e a s s i g n a p o r t i o n of the funds to subordinate agencies as he sees f i t . C o n t r o l o f budgetary r e c e i p t s and ex p e n d i t u r e s at the A i l - U n i o n and Union Re p u b l i c a n l e v e l s i s maintained by Gosbank by means of e x t e n s i v e r e p o r t s from i t s v a r i o u s branch o f f i c e s which m a i n t a i n accounts f o r budgetary r e c e i p t s and/or e x p e n d i t u r e s . At the l o c a l l e v e l , budget a p p r o p r i a t i o n s are made on the a u t h o r i z a t i o n of the l o c a l f i n a n c e organs. C o n t r o l of l o c a l budgetary r e c e i p t s and expendi t u r e s are maintained by a s i n g l e "'"The p r i n c i p a l c r e d i t a d m i n i s t r a t o r s f o r the A i l - U n i o n and r e p u b l i c a n budgets are the m i n i s t e r s and heads of oth e r c e n t r a l government departments and i n s t i t u t i o n s . 27 branch bank of Gosbank, where a l l the budgetary revenue and ex-pense accounts for the l o c a l i t y are centra l i z e d . Gosbank compiles monthly reports on the changes of the revenue and expenditure accounts of the various budgetary levels and submits these accounts to the Ministry of Finance, U.S.S.R. In this" way the f i n a n c i a l p o s i t i o n of a l l state enterprises and i n s t i t u t i o n s are subjected to the continual surveillance of the banking and f i s c a l a u t h o r i t i e s . The role and formation of  prices i n the Soviet economy The need for a price system i n a c e n t r a l l y planned economy where many of the goods are administratively allocated arises out of the need for a common unit of account. Even i f a l l the goods i n the economy were ph y s i c a l l y allocated, without resorting to an abstract unit to record the flow of goods, any method of accounting would prove unfeasible i n a diverse economy producing an immense vari e t y of goods. Aside from t h e i r accounting function, prices also play an important role i n the a l l o c a t i o n and d i s t r i b u t i o n of the national income; i n a very r e s t r i c t e d sense, they are also a factor i n the a l l o c a -t i o n of resources. The above-mentioned functions of prices are operative to some degree throughout the economy but t h e i r r e l a -t i v e functional importance varies depending on which area of the economy one i s examining. Generally i t may be said that the primary purpose of the Soviet price system i s that of providing for the control of economic processes. In t h i s section of the paper the discussion w i l l center primarily on the roles and formulation of prices for industry 28 and, to a l e s s e r e x t e n t , f o r consumer goods.''" In both heavy and l i g h t i n d u s t r y , p r i c e s p r o v i d e a method of c o n t r o l l i n g the ac-t i v i t y o f e n t e r p r i s e s through f i n a n c i a l a c c o u n t i n g . Although each f i r m i s faced w i t h a m u l t i t u d e of p h y s i c a l t a r g e t s , i t i s i m p o s s i b l e to c o n t r o l and e v a l u a t e these norms i n p h y s i c a l q u a n t i t i e s . P r i c e s p r o v i d e the means f o r a g g r e g a t i n g h e t e r o -geneous i n p u t s and o u t p u t s . Thus by making each e n t e r p r i s e pay f o r s e r v i c e s r e c e i v e d , the o v e r a l l performance of the e n t e r -p r i s e can be e v a l u a t e d as w e l l as s p e c i f i c performance r e g a r d -i n g i t s i n p u t s and o u t p u t s . The c o n t r o l f u n c t i o n o f p r i c e s i n i n d u s t r y has l e d to a d u a l p r i c e system i n t h i s s e c t o r of the economy. "Constant p r i c e s ' are used f o r i n t e r t e m p o r a l comparisons of outputs and c o s t s f o r i n d i v i d u a l e n t e r p r i s e s , groups of e n t e r p r i s e s or branches of i n d u s t r y . "Current p r i c e s ' are used i n r e c o r d i n g the t r a n s a c t i o n s of each e n t e r p r i s e ; they a l s o f a c i l i t a t e the e v a l u a t i o n o f e n t e r p r i s e c o s t s t r u c t u r e s , b e i n g based on c u r r e n t average c o s t s . Constant p r i c e s are r e v i s e d over time and w i l l be the same as c u r r e n t p r i c e s when the base year i s r e - e s t a b -l i s h e d ; from t h i s p o i n t the two p r i c e l i s t s w i l l d i v e r g e with the a l t e r a t i o n s of c u r r e n t p r i c e s and the i n t r o d u c t i o n of new 2 commodities, u n t i l the c o n s t a n t prxces are r e v i s e d a g a i n . The a l l o c a t i v e r o l e o f p r i c e s i n i n d u s t r y v a r i e s "'"For a more d e t a i l e d d i s c u s s i o n o f r e t a i l p r i c e s , see pp.99-103. 2 P r i c e s of new commodities are ' p r o v i s i o n a l p r i c e s ' which are expected to decrease as p r o d u c t i o n d i f f i c u l t i e s are mastered. Once p r o d u c t i o n procedures have been e s t a b l i s h e d , the c a l c u l a t e d p r i c e i s e n t e r e d i n t o the c u r r e n t p r i c e catalogue, 29 a c c o r d i n g to the a d m i n i s t r a t i v e l e v e l b e i n g c o n s i d e r e d . C a p i t a l output r a t i o s , as w e l l as 'estimate p r i c e s ' used i n p l a n n i n g f u t u r e investments, i n f l u e n c e planners i n t h e i r s e l e c t i o n of a l t e r n a t i v e investments. Design p l a n n e r s are a l s o i n f l u e n c e d by the above v a r i a b l e s i n d e c i d i n g what p r o d u c t i o n f u n c t i o n s new e n t e r p r i s e s w i l l have, and a l s o i n d e c i s i o n s as to the p o t e n t i a l b e n e f i t s of modernizing o l d p l a n t s or i n i n c o r p o r a t i n g new i n n o v a t i o n s i n t o e x i s t i n g e n t e r p r i s e s . In the m a t e r i a l b a l a n c i n g p r o c e s s , p r i c e s are used as guides i n c l o s i n g the d e f i c i t b alances where s u b s t i t u t e s e x i s t , the more expensive commodities b e i n g d i r e c t e d towards h i g h e r p r i o r i t y uses. At the e n t e r p r i s e l e v e l the manager i s f a c e d w i t h a host of p h y s i -c a l and v a l u e t a r g e t s , and the s p e c i f i c i t y of these t a r g e t s v a r y . P r i c e s do i n f l u e n c e d e c i s i o n s a t the e n t e r p r i s e l e v e l , p a r t i c u l a r l y i n the areas of i n p u t s u b s t i t u t i o n and the a s s o r t -ment o f o u t p u t s , w i t h i n the l i m i t e d freedom allowed by the somewhat aggregated t a r g e t s f a c e d by the e n t e r p r i s e . Although p r i c e s do i n f l u e n c e d e c i s i o n making at the top l e v e l s , i t i s r e c o g n i z e d by the p l a n n e r s t h a t r e l a t i v e p r i c e s do not n e c e s s a r i l y correspond to r e l a t i v e s c a r c i t y v a l u e s , with the e x c e p t i o n o f groups of products t h a t are e a s i l y s u b s t i t u t e d f o r each o t h e r . For t h i s reason f i n a n c i a l e v a l u a t i o n s w i l l l i k e l y p l a y a dominant r o l e i n the d e c i s i o n making process o n l y i f the r e l e v a n t p r i c e s have been 'adjusted' to approximate t h e i r s c a r c i t y v a l u e s . The use of non-adjusted p r i c e s mainly serve to supplement the b a s i c p h y s i c a l t o o l s and to f a c i l i t a t e a c c o u n t i n g procedures. Three major e x c e p t i o n s to the a l l o c a t i v e r o l e of p r i c e s 30 i n the economy are the use of wage p r i c e s i n the d i s t r i b u t i o n o f l a b o u r , the s e l l i n g p r i c e s s e t f o r consumer commodities s o l d by s t a t e and c o o p e r a t i v e r e t a i l o u t l e t s , and the ' f r e e ' p r i c e s found i n the kolkhoz markets. P l a n n i n g f o r the d i s t r i b u t i o n of l a b o u r i n the economy i s done by drawing up a balance of l a b o u r r e s o u r c e s and l a b o u r requirements of the economy which are based on long-term economic p l a n s . The l a b o u r requirements are then d i s a g g r e g a t e d i n t o s p e c i f i c c a t e g o r i e s by age, l e v e l of s k i l l o r e d u c a t i o n r e q u i r e d , and the r e q u i r e d s p a t i a l d i s t r i b u t i o n of the l a b o u r f o r c e . Wage l e v e l s are then s e t on the b a s i s of e d u c a t i o n a l or s k i l l requirements and a l s o on t h a t of the r e q u i -s i t e g e o g r a p h i c a l d i s t r i b u t i o n . Thus the l a b o u r f o r c e i s a l l o -c a t e d i n t o the d e s i r e d o c c u p a t i o n a l r e q u i s i t e s of the economy by p r o v i d i n g the necessary m a t e r i a l (wage) i n c e n t i v e s to ensure the d e s i r e d d i s t r i b u t i o n . " " " R e t a i l p r i c e s of consumer goods s o l d by the s t a t e are determined and f i x e d 'roughly' on the b a s i s of supply and demand. In the kolkhoz markets p r i c e s are f r e e to f l u c t u a t e on the b a s i s of supply and demand; hence i t i s seen t h a t r e l a -t i v e p r i c e l e v e l s are the d e t e r m i n i n g p r i n c i p l e i n the a l l o c a -t i v e mechanisms of both r e t a i l t r a d e and the kolkhoz markets. P r i c e s a l s o provi.de the major means f o r d i s t r i b u t i n g the n a t i o n a l income. The p r i c e s of almost a l l consumer goods and some i n d u s t r i a l goods i n c l u d e a t u r n o v e r tax, which along w i t h e n t e r p r i s e p r o f i t s , p r o v i d e the main source of accumulation "'"The l a b o u r market i n the S o v i e t Union i s i n f a c t an i m p e r f e c t market due to the inadequate d i s s e m i n a t i o n of i n f o r -mation r e g a r d i n g employment o p p o r t u n i t i e s . 31 f o r the s t a t e budget. Through the m a n i p u l a t i o n ^ o f r e t a i l p r i c e s , the S o v i e t p l a n n e r s have been able to keep the r e a l income o f the p o p u l a t i o n low, thus a c h i e v i n g a h i g h r a t e o f lab o u r p a r t i c i p a t i o n along w i t h a hig h r a t e o f accumulation. The f o r m u l a t i o n o f i n d u s t r i a l  wholesale p r i c e s I n d u s t r i a l wholesale p r i c e s apply to a l l goods t h a t are t r a n s f e r r e d w i t h i n the s t a t e s e c t o r o f the economy. A l l manu-f a c t u r e d goods, raw m a t e r i a l s , s e m i - f a b r i c a t e s , a g r i c u l t u r a l procurement p r i c e s , and the p r i c e s p a i d by the s t a t e to f o r e i g n t r a d e agencies are i n c l u d e d under t h i s g e n e r a l heading o f i n d u s t r i a l wholesale p r i c e s . I n d u s t r i a l wholesale p r i c e s are d i f f e r e n t i a t e d i n t o f i v e groups: e n t e r p r i s e wholesale p r i c e s ; i n d u s t r y wholesale p r i c e s ; s e t t l e m e n t p r i c e s ; p r i c e s o f own procurement; and l o c a l whole-s a l e p r i c e s . E n t e r p r i s e and i n d u s t r y wholesale p r i c e s as w e l l as s e t t l e m e n t p r i c e s are f i x e d by n a t i o n a l o r r e g i o n a l S t a t e P l a n n i n g Committees, w h i l e the l a t t e r two c a t e g o r i e s o f p r i c e s are f i x e d by l o c a l a u t h o r i t i e s . The e n t e r p r i s e wholesale p r i c e i s t h a t p r i c e a t which the producing e n t e r p r i s e s e l l s i t s output. Two p r i n c i p a l com-ponents make up these p r i c e s ; the planned branch average c o s t o f p r o d u c t i o n f o r the product, and a p r o f i t markup. The planned branch average c o s t o f p r o d u c t i o n f o r any commodity approximates the weighted average c o s t s o f p r o d u c t i o n of the e n t e r p r i s e s pro-d u c i n g the good, but excludes those f i r m s w i t h the h i g h e s t p r o-d u c t i o n c o s t s from the weighted average. P r o d u c t i o n c o s t s are based on la b o u r c o s t s (both d i r e c t and i n d i r e c t l a b o u r , i n c l u d i n g wages, s a l a r i e s and s o c i a l i n surance payments), depre-c i a t i o n charges, t r a n s p o r t a t i o n charges ( i f they were borne by the s e l l e r ) , i n t e r e s t charges on s h o r t term c r e d i t s t h a t are planned to supplement the working c a p i t a l of the e n t e r p r i s e , and v a r i o u s overhead charges t h a t are a l l o c a t e d to the product."'" The p r o f i t markup o f the e n t e r p r i s e i s c a l c u l a t e d on the branch average c o s t o f p r o d u c t i o n . The p r o f i t markup was c a l c u l a t e d to p r o v i d e p r o f i t s o f approximately 5 percent f o r the i n d u s t r y 2 as a whole. Consequently, a t the e n t e r p r i s e l e v e l planned p r o f i t s ranged from planned l o s s e s f o r the h i g h e r c o s t p r o-ducers t o p r o f i t s much i n excess of 5 per c e n t f o r the lowest c o s t p r o d u c e r s . The u t i l i z a t i o n o f planned and unplanned p r o f i t s w i l l be e x t e n s i v e l y examined under the s e c t i o n on the micro p l a n n i n g o f i n d u s t r y . At t h i s p o i n t i t i s s u f f i c i e n t to note t h a t e n t e r -p r i s e p r o f i t s are d i s t r i b u t e d among f o u r a l t e r n a t i v e uses: c o n t r i b u t i o n s t o the s t a t e budget by means of a p r o f i t tax; withdrawals t o s p e c i a l e n t e r p r i s e i n c e n t i v e funds; supplements to the working c a p i t a l o f the e n t e r p r i s e (to the maximum amount s t i p u l a t e d by i t s c h a r t e r fund); and c o n t r i b u t i o n s to i t s i n -vestment fund. The i n d u s t r y wholesale p r i c e i s t h a t p r i c e charged by """Overhead charges i n c l u d e f u e l and l i g h t , postage, ex-p e n d i t u r e s on workers' housing and e d u c a t i o n , and the l i k e . De-p l e t i o n allowances f o r e x t r a c t i v e i n d u s t r i e s , and ground r e n t s f o r a l l e n t e r p r i s e s are not i n c l u d e d as c o s t s o f p r o d u c t i o n . S i m i l a r l y , charges f o r i n v e s t e d c a p i t a l were a l s o excluded from c o s t c a l c u l a t i o n s p r i o r t o the 1965 reforms. 2 M o r r i s B o r n s t e i n , "The S o v i e t P r i c e System", i n The  S o v i e t Economy, ed. by M o r r i s B o r n s t e i n and D a n i e l F u s f e l d , p. 84. the i n d u s t r y s a l e s o r g a n i z a t i o n s to s t a t e buyers. The i n d u s t r y w holesale p r i c e i s d e r i v e d from the summation of the f o l l o w i n g items: the branch average e n t e r p r i s e wholesale p r i c e ; the tu r n o v e r taxes a p p l i c a b l e t o the product; the p r o f i t markup of the branch s a l e s o r g a n i z a t i o n ; and the t r a n s p o r t a t i o n c o s t s ( i f borne by the s a l e s o r g a n i z a t i o n and not the b u y e r ) . An outcome of the p r a c t i c e o f s e t t i n g e n t e r p r i s e whole-s a l e p r i c e s a t approximately the average c o s t s of the branch e n t e r p r i s e s i s t h a t w i t h i n the branch t h e r e w i l l be many e n t e r -p r i s e s w i t h planned p r o f i t s t h a t exceed the 5 p e r c e n t p r o f i t l e v e l (as w e l l as many e n t e r p r i s e s w i t h planned l o s s e s ) . The problem a r i s i n g out of the i n e q u a l i t y o f p r o f i t s i s t h a t e n t e r -p r i s e s w i t h h i g h p r o f i t s are l e s s s u b j e c t t o f i n a n c i a l d i s c i -p l i n e . To m i t i g a t e the above disadvantage of average p r i c i n g i n those i n d u s t r i e s where sharp c o s t v a r i a t i o n s o c c u r among the e n t e r p r i s e s , an a l t e r n a t i v e system of se t t l e m e n t p r i c e s i s f r e -q u e n t l y u s e d . 1 These p r i c e s are e s s e n t i a l l y a c c o u n t i n g p r i c e s s e t between the branch o f i n d u s t r y s a l e s o r g a n i z a t i o n and the i n d i v i d u a l e n t e r p r i s e s . Thus lower s e t t l e m e n t p r i c e s are p a i d to h i g h p r o f i t e n t e r p r i s e s ( v i s - a - v i s the e n t e r p r i s e wholesale p r i c e ) t o remove the e x c e s s i v e p r o f i t s t h a t would otherwise accrue to these e n t e r p r i s e s . 'Own procurement p r i c e s ' are those p r i c e s p a i d by e n t e r p r i s e s f o r scr a p and l o c a l raw m a t e r i a l s u t i l i z e d i n manufactur Settlement p r i c e s are p a r t i c u l a r l y used i n petroleum, c o a l , c o t t o n g i n n i n g and the cement i n d u s t r i e s as these i n -d u s t r i e s are s u b j e c t t o wide c o s t v a r i a t i o n . 34 i n g p rocesses or i n the c o n s t r u c t i o n of s o c i a l f a c i l i t i e s f o r the workers. L o c a l wholesale p r i c e s are those p r i c e s charged by the e n t e r p r i s e i n s e l l i n g output t h a t was produced from i t s own scraps and waste or from m a t e r i a l s procured from l o c a l s ources at 'own procurement p r i c e s ' . Reforms i n f i n a n c i a l p l a n n i n g and  p r i c i n g i n the S o v i e t Union: ~1930-19 70 A l l of the s i g n i f i c a n t reforms t h a t took p l a c e i n the S o v i e t f i n a n c i a l system d u r i n g t h i s p e r i o d o c c u r r e d d u r i n g the 1960's. The 1955 r e v i s i o n of i n d u s t r i a l wholesale p r i c e s had minor s i g n i f i c a n c e i n t h a t t h e r e was no fundamental change i n p r i c e f o r m u l a t i o n . P r i c e s were a l t e r e d to r e f l e c t the change i n the c o s t s t r u c t u r e s i n c e the time o f the l a s t r e v i s i o n i n 1949 . The r e v i s i o n of wholesale p r i c e s f o r heavy i n d u s t r y and t r a n s p o r t a t i o n t h a t was e f f e c t e d i n 1963 was c a r r i e d out to r e f l e c t the changing c o s t s t r u c t u r e and the concomitant changes i n the c a l c u l a t i o n of c o s t s , w i t h t h e i r consequent e f f e c t s on p r i c e s . In a d d i t i o n , r e l a t i v e p r i c e l e v e l s were s e t w i t h a g r e a t e r s e n s i t i v i t y to the a l l o c a t i v e r o l e of p r i c e s i n imple-menting d e s i r e d s u b s t i t u t i v e changes i n the economy. The net e f f e c t of the reform on the l e v e l of wholesale p r i c e s f o r heavy i n d u s t r y was a minor decrease of about 3 per-cent."'" The s t r u c t u r e of p r i c e s w i t h i n heavy i n d u s t r y was mark-e d l y a l t e r e d to r e f l e c t i n c r e a s i n g c o s t s i n the e x t r a c t i v e i n -d u s t r i e s and d e c r e a s i n g c o s t s i n o t h e r i n d u s t r i e s t h a t had been "'"Morris B o r n s t e i n , "The 1963 S o v i e t I n d u s t r i a l P r i c e R e v i s i o n " , S o v i e t S t u d i e s , Vol.XV ( J u l y , 1963), p.46. engendered by the l a t t e r ' s i n c r e a s e d p r o d u c t i v i t y s i n c e 1955. The f o l l o w i n g t a b l e d e t a i l s the degree o f change t h a t took p l a c e i n the p r i c e s t r u c t u r e . TABLE V AVERAGE PRICE CHANGE BY BRANCH OF INDUSTRY, 1963 PRICE REVISION* Branch o f In d u s t r y Percentage Change i n the Average Branch P r i c e L e v e l Coal + 30.0 Nonferrous ores + 15.0 Ferrous m e t a l l u r g y + 8.5 C o n s t r u c t i o n M a t e r i a l s + 2.0 O i l - 7.0 Gas - 10.0 Machine b u i l d i n g - 10.0 Chemicals - 14.5 E l e c t r i c power - 15.0 Railway f r e i g h t - 20.0 * Source: M o r r i s B o r n s t e i n , "The 1963 S o v i e t I n d u s t r i a l P r i c e R e v i s i o n " , S o v i e t S t u d i e s , Vol.XV ( J u l y , 1963), p.48. The above p r i c e changes cannot be a t t r i b u t e d s t r i c t l y t o changes i n c o s t s . The o b j e c t i v e of the reform, i n a d d i t i o n to p r o v i d i n g a 'normal l e v e l o f p r o f i t a b i l i t y ' f o r the branch as a whole was to a d j u s t the r e l a t i v e p r i c e s to r e f l e c t the s t r u c t u r a l changes t h a t had o c c u r r e d i n the economy. Increased awareness of the a l l o c a t i v e a f f e c t o f p r i c e s i n the p l a n n i n g p r ocess was p a r t l y r e s p o n s i b l e f o r the marked s h i f t i n the p r i c e s t r u c t u r e o f f u e l s , due to t h e i r h i g h i n t e r s u b s t i t u t i v e c h a r a c -t e r . R e l a t i v e p r i c e s of the v a r i o u s outputs w i t h i n each branch were a l s o a l t e r e d t o promote g r e a t e r adherence to the output mix t a r g e t s a s s i g n e d to each e n t e r p r i s e . The p r i c e changes a l s o r e f l e c t e d two a l t e r a t i o n s made i n c a l c u l a t i n g the average c o s t s of the e n t e r p r i s e . A m o r t i z a t i o n allowances were i n c r e a s e d to a more r e a l i s t i c l e v e l and were based on the r e v a l u e d l e v e l s of f i x e d a s s e t s t h a t were c a l c u -l a t e d e a r l i e r i n the same year. G e o l o g i c a l p r o s p e c t i n g ex-penses a t t a c h e d to the e x t r a c t i v e i n d u s t r i e s were now i n c l u d e d i n the c a l c u l a t i o n of c o s t s f o r the e n t e r p r i s e s . The major reforms i n the f i n a n c i a l system o c c u r r e d a f t e r the f a l l o f Khrushchev i n 1964. One of the most s i g n i f i c a n t changes, i n t r o d u c e d a f t e r the October, 1965 reforms, was the r e d u c t i o n of non-repayable budgetary grants used f o r f i n a n c i n g investments. During 1965, budgetary grants had p r o v i d e d the bulk o f investment funds, f i n a n c i n g 4 3.0 b i l l i o n r u b l e s of the gross 1965 investments of 48.3 b i l l i o n r u b l e s ; the remaining 5.3 b i l l i o n r u b l e s were f i n a n c e d from ' d e c e n t r a l i z e d funds' and bank c r e d i t s .""" A f t e r a t r a n s i t i o n a l p e r i o d necessary f o r p r i c e a d j u s t -ments, the bulk of investment i n p r o d u c t i v e f i x e d c a p i t a l was to be f i n a n c e d from the i n t e r n a l r e s o u r c e s of the e n t e r p r i s e and through long-term bank c r e d i t s . The t a r g e t f i g u r e s e t f o r 19 6 7 was t h a t 25 p e r c e n t of such investments should be f i n a n c e d by 2 the above-mentioned means. Under the new method of s e l f - f i n a n c i n g investments, the 'fund f o r development of p r o d u c t i o n ' had t h r e e sources of f i n a n -c i n g : a p o r t i o n of the e n t e r p r i s e p r o f i t s ; the p o r t i o n of the """Zaleski, P l a n n i n g Reforms, p. 144. The f i g u r e f o r the gross 1965 investments i n c l u d e p r i v a t e and c o l l e c t i v e farm investments. 2 I b i d . a m o r t i z a t i o n allowance t h a t had p r e v i o u s l y gone to the c e n t r a l -i z e d investment fund; and proceeds from the s a l e of unused equipment (which had p r e v i o u s l y been taken by the s t a t e ) . In a d d i t i o n to the above-mentioned r e d u c t i o n s i n budgetary grants to e n t e r p r i s e s f o r investment, budgetary grants were e l i m i n a t e d as a method of f i n a n c i a l r e s u s c i t a t i o n f o r f i r m s . Budgetary grants had p r e v i o u s l y been used to s u b s i d i z e e n t e r p r i s e s i n cases o f u n f u l f i l l e d p r o f i t p lans and f o r unplanned l o s s e s . A f t e r the reform, t h i s p r a c t i c e was d i s c o n t i n u e d and r e p l a c e d w i t h the g r a n t i n g o f r e p a y a b l e c r e d i t s from the s t a t e bank. 1 The most s i g n i f i c a n t change i n the S o v i e t f i n a n c i a l system t h a t arose from the 1965 reform was a c a p i t a l charge l e v i e d a g a i n s t the e n t e r p r i s e gross p r o f i t s . The c a p i t a l charges were c a l c u l a t e d as a percentage of the average value of the e n t e r p r i s e s ' f i x e d and 'own' working c a p i t a l f o r the planned 2 year. Up u n t i l t h i s time, the S o v i e t Union had been p a r t i c u -l a r l y opposed on i d e o l o g i c a l grounds to f o r m a l l y r e c o g n i z i n g the c o s t of c a p i t a l . Even at t h i s j u n c t u r e i n t h e i r h i s t o r y , the c a p i t a l charge, which i s tantamount to i n t e r e s t payments, was a d e d u c t i o n from gross p r o f i t s r a t h e r than an a d d i t i o n to c o s t s . Microeconomic P l a n n i n g :  T a r g e t s , I n c e n t i v e s and C o n t r o l s T a r g e t s and i n c e n t i v e s Microeconomic p l a n n i n g of i n d u s t r y c o n s i s t s of the "'"Planned l o s s e s are s t i l l reimbursed by budget s u b s i d i e s . 2 The above charges are d i s c u s s e d more f u l l y under the s e c t i o n on microeconomic p l a n n i n g . 38 a s s i g n i n g of t a r g e t s to each e n t e r p r i s e , i n c e n t i v e schemes to encourage the f u l f i l l m e n t of these t a r g e t s , and c o n t r o l s over the e n t e r p r i s e which are meant to ensure the proper conduct of the f i r m i n i t s p r o d u c t i v e and f i n a n c i a l a c t i v i t i e s and i n d i c a t e d e v i a t i o n s from the a s s i g n e d t a r g e t s . In the p r e c e d i n g p a r t o f the paper on the f o r m u l a t i o n o f annual p l a n s , the p l a n n i n g process f o r i n d u s t r y was d e s c r i b e d i n d e t a i l . A p r e l i m i n a r y d r a f t o f the n a t i o n a l economic p l a n i s di s a g g r e g a t e d as i t i s passed down the a d m i n i s t r a t i v e h i e r a r c h y to the e n t e r p r i s e l e v e l . At t h i s p o i n t the e n t e r p r i s e d r a f t s i t s p r e l i m i n a r y plans based on the c o n t r o l f i g u r e s a s s i g n e d , and n e g o t i a t e s any change i n i t s a s s i g n e d t a r g e t s w i t h i t s s u p e r i o r a d m i n i s t r a t i v e agency. A f t e r a p p r o v a l , the d r a f t p l a n s are passed back up the h i e r a r c h y , where they are aggregated and e v e n t u a l l y c o n s o l i d a t e d i n t o the i n t e g r a t e d n a t i o n a l p l a n f o r the economy. The p l a n then flows down the h i e r a r c h y t o the e n t e r p r i s e , f o l l o w i n g a p p r o v a l by the government and p a r t y l e a d -e r s . The e n t e r p r i s e a c c o r d i n g l y d r a f t s d e t a i l e d p r o d u c t i o n and f i n a n c i a l plans i n compliance w i t h the d i r e c t i v e s a s s i g n e d . The f o l l o w i n g t a b l e o f major p l a n i n d i c e s i n d i c a t e the numerous t a r g e t s t h a t were a s s i g n e d to e n t e r p r i s e s on the b a s i s of the d i s a g g r e g a t e d economic and f i n a n c i a l p l a n s . The v a r i o u s t a r g e t s a s s i g n e d to the e n t e r p r i s e had d i f -f e r e n t p r i o r i t i e s a t t a c h e d t o them as they v a r i e d c o n s i d e r a b l y i n importance. P r i o r i t y i n d i c e s , namely those r e g a r d i n g gross output, c o s t r e d u c t i o n s , and wage fund l i m i t s were r e i n f o r c e d by a system of s a n c t i o n s and i n c e n t i v e s to p r o v i d e a p p r o p r i a t e r e -sponses from e n t e r p r i s e managers. Since these same i n d i c e s p r o v i d e d the b a s i s f o r managerial e v a l u a t i o n and remaining i n d i c e s assumed secondary importance. rewards, 39 the TABLE VI MAJOR PLAN INDICES ASSIGNED TO FIRMS* Output - gross output - marketable output - output composition assortments new products improvement of products s u b c o n t r a c t e d output Labour p r o d u c t i v i t y Costs - p r o d u c t i o n c o s t s of marketable output - e x p e n d i t u r e s per r u b l e of marketable output - percentage c o s t r e d u c t i o n - u n i t c o s t s o f major goods Accumulation - t u r n o v e r tax - p r o f i t c o n t r i b u t i o n s to budget and s t a t e share remaining i n f i r m d i s t r i b u t i o n among v a r i o u s funds percentage of p r o f i t (to cost) D e p r e c i a t i o n and i t s apportionment * Source: George F e i w e l , E f f i c i e n c y : I s s u e s , C o n t r o v e r s i T e c h n i c a l p r o g r e s s - i n s t a l l a t i o n o f new equipment - s t a r t i n g up new p r o c e s s e s - improvement o f processes - new product d e s i g n - p r o t o t y p e b u i l d i n g C a p i t a l and c u r r e n t r e p a i r s F i x e d A s s e t s - new machinery and equipment - c o n s t r u c t i o n work Labour - wage fund ( t o t a l and ac-c o r d i n g t o c a t e g o r i e s ) - average wages M a t e r i a l s - from s p e c i f i c sources - f o r s p e c i f i c uses Working c a p i t a l - normatives - balance a t end of p l a n p e r i o d - r a t e of t u r n o v e r The S o v i e t Quest f o r Economic  s, and Reforms, p.111. The system c r e a t e d to s t i m u l a t e the f u l f i l l m e n t of p l a n t a r g e t s d i f f e r e d between managerial personnel and workers; f o r managerial p e r s o n n e l the primary c r i t e r i o n f o r the payment of bonuses was the f u l f i l l m e n t o r o v e r f u l f i l l m e n t of the gross output t a r g e t (as w e l l as f u l f i l l i n g the t a r g e t f o r c o s t 40 r e d u c t i o n ) . 1 The f o l l o w i n g t a b l e i n d i c a t e s the premiums p a i d to the v a r i o u s managerial l e v e l s as a percentage of t h e i r b a s i c s a l a r y . TABLE VII PREMIUMS FOR PLANT MANAGEMENT (percentages of b a s i c s a l a r y ) For f u l f i l l m e n t o f p r o d u c t i o n t a r g e t by Group Group Group I I I I I I For each percentage of o v e r f u l f i l l m e n t of p r o d u c t i o n t a r g e t by Group Group Group I I I I I I Machinery Automotive t r a n s p o r t Coal Mining Chemical Machinery Automotive t r a n s p o r t Machinery Automotive t r a n s p o r t * Source P l a n n i n g , p.76. S e n i o r management ( d i r e c t o r and c h i e f engineer) 37 30 22 4 3 2 25 20 4 3 2 30 100 75 10 8 Intermediate management (deputy d i r e c t o r s , shop and departmental c h i e f s ) 30 25 22 20 15 15 3 3 2 2 1.5 2 J u n i o r management (deputy shop and department c h i e f s , s e n i o r e n g i n e e r s , s e n i o r foreman) 22 15 15 2 1.5 1.5 20 15 15 3 2 2 Abram Bergson, The Economics of S o v i e t The i n c e n t i v e scheme used to encourage worker f u l f i l l m e n t Bergson has noted t h a t t h i s l a t t e r p r o v i s o was not a l -ways i m p e r a t i v e . The reason f o r t h i s i s t h a t the sovnarkhozy were e v a l u a t e d p r i m a r i l y by t h e i r degree of f u l f i l l m e n t of t h e i r gross output t a r g e t s . (Abram Bergson, The Economics of S o v i e t  P l a n n i n g , p.7 8.) of p l a n i n d i c e s was c o n s i d e r a b l y d i f f e r e n t than t h a t used to reward managerial personnel as the l a t t e r were much more i n -f l u e n t i a l i n the attainment of key t a r g e t s . A l l workers w i t h i n an i n d u s t r y are c l a s s i f i e d i n t o one of e i g h t c a t e g o r i e s , depend-i n g on the q u a l i f i c a t i o n and s k i l l s r e q u i r e d , and an a p p r o p r i a t e pay r a t e f o r each grade i s e s t a b l i s h e d by the State Committee on Labour and Wages. Among these v a r i o u s c a t e g o r i e s , the method of labour remuneration i s d i f f e r e n t i a t e d between s t r a i g h t time and piecework wages. For piece r a t e workers, d a i l y piece norms are e s t a b l i s h e d and the piece r a t e i s determined by d i v i d i n g the d a i l y pay accorded to the a p p r o p r i a t e groups by the piece norms. Thus f o r o v e r f u l f i l l i n g h i s norm the worker i s remun-erated u s u a l l y on a s t r a i g h t piece r a t e basis."'" These piece norms were r e g u l a r l y r e v i s e d to o f f s e t and encourage in c r e a s e d p r o d u c t i v i t y . I n c e n t i v e s to encourage s t r a i g h t time workers i n f u l f i l l i n g planned t a r g e t s were p r i m a r i l y provided by bonuses 2 p a i d from p r o f i t - s h a r i n g arrangements. The source of the major p r o p o r t i o n of i n c e n t i v e payments 3 up to 1966 was the e n t e r p r i s e fund. Deductions i n t o the fund were made from p r o f i t s and the r a t e s f o r these deductions v a r i e d "'"Progressive piece r a t e s f o r over-norm f u l f i l l m e n t i n p r i o r i t y s e c t o r s were used widely at one time, but have been se v e r e l y reduced s i n c e 1966. (Alec Nove, The S o v i e t Economy, p.133.) 2 In e n t e r p r i s e s t h a t i n c u r r e d planned l o s s e s , i n c e n t i v e s schemes were based on the degree of o v e r f u l f i l l m e n t of planned cos t r e d u c t i o n s . 3 Before 19 56 the e n t e r p r i s e fund was c a l l e d the d i r e c t o r s fund. Other minor sources of i n c e n t i v e payments were: the con-sumer goods fund ( f o r improvement of q u a l i t y and f o r production from waste); the s o c i a l i s t competition fund; bonuses f o r the i n t r o d u c t i o n of new techniques; and bonuses f o r export d e l i v e r i e s . 42 between planned and unplanned p r o f i t s as w e l l as between d i f f e r -ent branches of i n d u s t r y . For example, the a l l o c a t i o n of pro-f i t s to the e n t e r p r i s e fund was 6 percent of planned p r o f i t s and 60 percent of overplan p r o f i t s f o r the cement i n d u s t r y ; f o r machine b u i l d i n g and metal working the comparable f i g u r e s were 4 percent and 50 percent; i n a l l cases t o t a l deductions to the e n t e r p r i s e fund were not to exceed 5.5 percent of the wages f u n d . 1 The r u l e s a p p l y i n g to the u t i l i z a t i o n of the e n t e r p r i s e fund were the f o l l o w i n g : an amount gr e a t e r or equal to 40 per-cent of the fund had to be spent on communal housing construc-t i o n and/or r e p a i r s on communal houses; an amount l e s s than or equal t o 40 percent of the fund on bonuses, and/or f r i n g e bene-f i t s , (e.g., v a c a t i o n s , and personal loans to workers); an amount equal to or g r e a t e r than 20 percent of the i n c e n t i v e fund had to be spent on new technology, machinery modernization and 2 the improvement of production techniques. The d i s r e g a r d f o r many c e n t r a l l y planned i n d i c e s t h a t arose because the managerial i n c e n t i v e system was based on the key index of gross output l e a d to a general r e v i s i o n of the system i n 1959. Henceforth the c e n t r a l c r i t e r i o n f o r premium payments was to be based on the degree of f u l f i l l m e n t of the co s t r e d u c t i o n t a r g e t . In a d d i t i o n the amount of bonus payments were to be a f f e c t e d by the degree of f u l f i l l m e n t of gross out-put, assortment and labour p r o d u c t i v i t y i n d i c e s . The new system s e v e r e l y reduced the bonuses r e c e i v e d by managerial personnel, "''D.A. Allakhuerdyan, S o v i e t F i n a n c i a l System, p.146 2 Z a l e s k i , Planning Reforms, p.148. 43 which undoubtedly had consequent e f f e c t s on t h e i r morale."'" The reforms g e n e r a l l y had l i t t l e e f f e c t on the i n c e n t i v e system at the worker l e v e l . One m o d i f i c a t i o n to the worker bonus scheme was made at t h i s time: a l l p i e c e r a t e jobs were reviewed and those t h a t d i d not e x h i b i t obvious b e n e f i t s by b e i n g on a p i e c e r a t e scheme were switched to s t r a i g h t time. T h i s had the e f f e c t of r e d u c i n g the number of p i e c e workers i n the i n d u s t r i a l l a b o u r 2 f o r c e from 73 p e r c e n t to 61 p e r c e n t . The new i n c e n t i v e system d e s c r i b e d above on l y a l t e r e d the c h a r a c t e r o f but d i d not s o l v e the problem o f the gross i n e f f i c i e n c i e s t h a t arose out of the m a n i p u l a t i n g of the e n t e r -p r i s e s ' economic r e s o u r c e s to maximize managerial rewards. The problem o f c r e a t i n g proper i n c e n t i v e s which would maximize the u t i l i z a t i o n o f economic r e s o u r c e s and d i r e c t them toward appro-p r i a t e o b j e c t i v e s formed the b a s i s of the now famous Liberman p r o p o s a l s . These p r o p o s a l s suggested a r a d i c a l r e f o r m a t i o n i n the whole system of i n d u s t r i a l a d m i n i s t r a t i o n and were a s i g -n i f i c a n t s t i m u l u s to the wide r a n g i n g d i s c u s s i o n s on i n d u s t r i a l a d m i n i s t r a t i o n t h a t culminated i n the major economic reforms of 1965. The b a s i c t h r u s t of the reform aimed at r e d u c i n g d e f i -c i e n c i e s a t the micro l e v e l o f a d m i n i s t r a t i o n . The p r e - e x i s t i n g system o f e n t e r p r i s e c o n t r o l had been inadequate i n the e f f i -c i e n t u t i l i z a t i o n of c a p i t a l , i n f o s t e r i n g r a p i d i n c r e a s e s i n "'"The share of bonus payments to the b a s i c s a l a r i e s of e n g i n e e r s and t e c h n i c i a n f e l l from 26.4 percent i n 1959 to 19 p e r c e n t i n 1960, 13.2 p e r c e n t i n 1961 and 11.6 p e r c e n t i n 1962. ( Z a l e s k i , P l a n n i n g Reforms, p.67.) 2 Z a l e s k i , P l a n n i n g Reforms, p.58. 44 l a b o u r p r o d u c t i v i t y and i n promoting i n n o v a t i o n s at the e n t e r -p r i s e l e v e l , as w e l l as i n encouraging the i n t r o d u c t i o n of newer technology recommended by the c e n t r a l a u t h o r i t i e s . The 1965 reforms a b o l i s h e d the p r e - e x i s t i n g i n c e n t i v e system and reduced the number of c e n t r a l i n d i c e s a s s i g n e d to the e n t e r p r i s e to e i g h t t a r g e t s by i n t r o d u c i n g the p r o f i t concept as the p i v o t a l p o i n t o f a d m i n i s t r a t i v e c o n t r o l and e v a l u a t i o n . 1 The e i g h t c e n t r a l i n d i c e s a s s i g n e d to the e n t e r p r i s e are shown i n the f o l l o w i n g t a b l e . TABLE V I I I CENTRALLY TARGETED ENTERPRISE INDICES, INTRODUCED POST-1965* 1) S a l e s . 2) Assortment 'mix', i . e . , p h y s i c a l output t a r g e t s of p r i n c i p a l p r o d u c t s , i n c l u d i n g p r o d u c t i o n f o r export and output q u a l i t y . 3) P r o f i t (gross) and p r o f i t a b i l i t y . 4) Wage fund. 5) C o n t r i b u t i o n s to the c e n t r a l budget. 6) C a p i t a l investments from c e n t r a l funds, ( s p e c i f y i n g amount of c o n s t r u c t i o n , t a r g e t dates f o r i n i t i a l o p e r a t i o n s of new c a p a c i t i e s ) . 7) I n t r o d u c t i o n of new technology and a s s i m i l a t i o n of new p r o d u c t s . 8) M a t e r i a l s u p p l i e s . Source: Schroeder, " S o v i e t Economic Reforms", p.4. The s a l e s t a r g e t (or output sold) r e p l a c e d the gross The i n t r o d u c t i o n of p r o f i t a b i l i t y as one of the g u i d i n g f o r c e s i n the e x e c u t i o n of the economic plans n e c e s s i t a t e d a complete r e v i s i o n of i n d u s t r i a l wholesale p r i c e s i n o r d e r to ensure t h a t the normal o p e r a t i o n of most e n t e r p r i s e s would pro-v i d e an adequate p r o f i t . Consequently, as a p r i c e reform was a n e c e s s a r y p r e r e q u i s i t e to i n t r o d u c i n g the new micro c o n t r o l s , the i n t e n t i o n to r e v i s e p r i c e s was a l s o announced at the same time as the reform p r o p o s a l s . The p r i c e reform began immedi-a t e l y a f t e r the d e c i s i o n to adopt the new guidance system was taken and the f i r s t e n t e r p r i s e s were put under the new c o n t r o l s i n l a t e 1966 and e a r l y 1967. value of output index as the p r i n c i p a l q u a n t i t a t i v e t a r g e t of p l a n f u l f i l l m e n t . Corresponding changes were made i n the new i n c e n t i v e system; bonuses f o r both managerial personnel and workers were dependent on the i n c r e a s e s i n s a l e s and p r o f i t -a b i l i t y shown by the e n t e r p r i s e . The p r o f i t based bonus scheme allowed f o r the e l i m i n a -t i o n of most t a r g e t s p r e v i o u s l y a s s i g n e d t h a t r e l a t e d to e n t e r p r i s e e f f i c i e n c y , with the e x c e p t i o n o f the t o t a l wage fund l i m i t s , which remained to ensure the o v e r a l l balance of income and e x p e n d i t u r e of the p o p u l a t i o n . The p h y s i c a l s p e c i -f i c a t i o n of output mix remained to d i s c o u r a g e c o n c e n t r a t i o n of p r o d u c t i o n f a c i l i t i e s on h i g h p r o f i t items, which would have otherwise a r i s e n i n the attempt to maximize p r o f i t . In a d d i t i o n to the above changes, the major a l t e r a t i o n s i n the micro guidance system o c c u r r e d w i t h the i n t r o d u c t i o n of a c a p i t a l charge and the s u b s t i t u t i o n of long-term repayable c r e d i t s to f i n a n c e the bulk of new investment. The c a p i t a l charge was based on the average value of f i x e d and 'own' work-i n g c a p i t a l of the e n t e r p r i s e f o r the planned year. The c a p i t a l l e v y v a r i e d c o n s i d e r a b l y between branches of i n d u s t r y but averaged 6 percent f o r i n d u s t r y as a whole.''" The o b j e c t i v e of the c a p i t a l charge was to induce e f f i c i e n c y i n the u t i l i z a t i o n o f c a p i t a l , p a r t i c u l a r l y f i x e d c a p i t a l . S h i f t i n g the source of f i n a n c i n g investments from budgetary grants to long-term c r e d i t s was meant to d i s c o u r a g e the abundant demand f o r investment r e -sources t h a t had o c c u r r e d at the e n t e r p r i s e l e v e l when investment "'"Alec Nove, The S o v i e t Economy, p. 200. 46 funds had been p r o v i d e d by non-repayable g r a n t s . Under the new system, investment c r e d i t s were to be r e p a i d out of e n t e r p r i s e p r o f i t s and the i n t e r e s t a t t a c h e d to these c r e d i t s was deducted from gross p r o f i t s b e f o r e any payments were made to any of the i n c e n t i v e funds. New investments f i n a n c e d by long-term c r e d i t s o r by the i n t e r n a l r e s o u r c e s of the f i r m were exempted from the c a p i t a l charge f o r a p e r i o d of time. In the former case c a p i t a l charges were i n i t i a t e d a f t e r the repayment of the c r e d i t s asso-c i a t e d with the investment had been completed, w h i l e the l a t t e r group of investments were not to be i n c l u d e d i n the c a p i t a l l e v y base f o r a p e r i o d of two years a f t e r t h e i r c o m p l e t i o n . 1 Tempor-ary exemptions from c a p i t a l charges were given t o i n t e r n a l l y f i n a n c e d investments so t h a t p r o g r e s s i v e e n t e r p r i s e s c o u l d ob-t a i n the f u l l p r o f i t b e n e f i t s a c c r u i n g from t h e i r i n n o v a t i o n s f o r s e v e r a l y e a r s . Thus the temporary exemption encouraged s e l f - f i n a n c e d investments over those f i n a n c e d by long-term c r e d i t s , as the l a t t e r type of investments c a r r i e d i n t e r e s t charges and t h e r e f o r e reduced the p r o f i t a v a i l a b l e f o r the i n -c e n t i v e funds. . The f o l l o w i n g f i g u r e shows the schematic d i s -t r i b u t i o n of e n t e r p r i s e p r o f i t s . The f o l l o w i n g d i v i s i o n o f p r o f i t s r e f e r s o n l y to planned p r o f i t s . For the d i s t r i b u t i o n o f p r o f i t s t h a t exceed the planned l e v e l of p r o f i t the f o l l o w i n g o r d e r of p r i o r i t i e s e x i s t : c a p i t a l charge payments and bank i n t e r e s t exceeding the planned; payments to the m a t e r i a l - i n c e n t i v e , s o c i a l - c u l t u r a l - h o u s i n g , and d e c e n t r a l i z e d investment funds; payments f o r s o c i a l i s t competi-t i o n bonuses; repayment of working c a p i t a l c r e d i t s ; repayment of 1 F e i w e l , S o v i e t Quest, p.294. 4 7 long-term c r e d i t s ; a l l o c a t i o n s f o r i n c r e a s i n g the output of con-sumer goods; a l l o c a t i o n s f o r i n t r o d u c i n g new product l i n e s ; payments f o r the improvement of product q u a l i t y ; other charges; remainder to budget. FIGURE I SCHEMATIC DISTRIBUTION OF ENTERPRISE PROFITS' Gross P r o f i t P r o f i t Tax C a p i t a l Charge-- P r o f i t Disbursements I -Interest on C r e d i t s M a t e r i a l I n c e n t i v e Repay nlent of Long-Fund S o c i a l , C u l t u r a l and Housing Fund I D e c e n t r a l i z e d I n -vestment Fund Reserve f o r F i n a n c i a l A i d to E n t e r p r i s e s Term C r e d i t F i n a n c i n g C e n t r a l i z e d Payment of other Investments Planned Expenses Increases of Working Free Remainder of C a p i t a l P r o f i t ( t r a n s f e r r e d to budget) Source: F e i w e l , S o v i e t Quest, p.29 3. N.B., order of p r i o r i t y i s l e f t to r i g h t . To encourage the f u l f i l l m e n t ( o v e r f u l f i l l m e n t ) of the new t a r g e t i n d i c e s assigned to the f i r m a new i n c e n t i v e system was created to provide the necessary m a t e r i a l reinforcement. The pre-reform i n c e n t i v e scheme was ab o l i s h e d and replaced by three funds: the m a t e r i a l i n c e n t i v e fund; the s o c i a l , c u l t u r a l and housing fund; and the development fund ( d e c e n t r a l i z e d i n -vestment fund) . 48 The m a t e r i a l i n c e n t i v e fund i s the primary source of bonuses f o r both managerial and production personnel as w e l l as workers. Payments i n t o t h i s fund are de r i v e d from three sources: a percentage of the t o t a l wage b i l l ( g e n e r a l l y f o r worker bonuses); a given percentage of the wage fund f o r increases i n p r o f i t s (or sa l e s where i t i s the c h i e f i n d e x ) ; and a given percentage of the wage fund f o r increases i n p r o f i t a b i l i t y (net p r o f i t as a percentage of the annual average stock of c a p i t a l employed). The a c t u a l percentage r a t e s of the 'norms' that are used vary between groups of e n t e r p r i s e s and/or i n d i v i d u a l e n t e r -p r i s e s because under the e x i s t i n g p r i c e system e n t e r p r i s e s have widely d i f f e r i n g p r o f i t a b i l i t i e s . I n d i v i d u a l l y c a l c u l a t e d norms allow the planners to give g r e a t e r emphasis t o , f o r example, s a l e s r a t h e r than p r o f i t a b i l i t y . 1 The fund f o r s o c i a l , c u l t u r a l measures and housing con-s t r u c t i o n i s financed from the same sources as the m a t e r i a l i n c e n t i v e fund but d i f f e r e n t norms are used i n c a l c u l a t i n g the deductions from p r o f i t s . This fund i s e s s e n t i a l l y a bonus i n k i n d f o r the workers and i s expended on such things as k i n d e r -gartens and sports f a c i l i t i e s , as w e l l as f o r the b u i l d i n g and r e p a i r i n g of houses. ''"An example c i t e d by Z a l e s k i w i l l e l u c i d a t e the method used: " f o r each percentage p o i n t of increase i n p r o f i t s , pro-f i t s amounting to 0.5 percent of the planned wage fund may be t r a n s f e r r e d to the i n c e n t i v e fund; f o r each percentage p o i n t of incr e a s e i n p r o f i t a b i l i t y , p r o f i t s amounting to 0.25 percent may be t r a n s f e r r e d . I f planned and a c t u a l p r o f i t s increase by 8 percent and p r o f i t a b i l i t y by 20 percent, (0.5 x 8) + (0.25 x 20), or 9 percent of the planned wage fund f o r production personnel i s to be deducted from p r o f i t s and placed i n the fund f o r m a t e r i a l i n c e n t i v e s " . ( Z a l e s k i , Planning Reforms, p.151). 49 The development fund of the f i r m i s used to finance i n -vestments and the i n t r o d u c t i o n of new techniques. Resources f o r the development fund o r i g i n a t e from the f o l l o w i n g sources: a set of norms a p p l i e d to planned incre a s e s i n p r o f i t s and p r o f i t -a b i l i t y (these norms are a p p l i e d against the planned value of b a s i c c a p i t a l , i . e . , e n t e r p r i s e f i x e d c a p i t a l and i t s 'own' working c a p i t a l ) ; a p o r t i o n of the firm ' s a m o r t i z a t i o n a l l o w -ance; and revenue from the s a l e of f i x e d a s s e t s . In the case of the three above-mentioned funds, over-f u l f i l l m e n t and u n d e r f u l f i l l m e n t of the plan t a r g e t s f o r s a l e s , p r o f i t s - a n d p r o f i t a b i l i t y are p e n a l i z e d by a r e d u c t i o n i n the norms used to c a l c u l a t e deductions i n the order of approximately 30 percent."'" A minimum f l o o r of 40 percent of the planned a l l o -c a t i o n s to these funds i s provided to m i t i g a t e the e f f e c t of 2 gross e r r o r s m achievement. The p r o f i t f i g u r e against which a l l of the above sets of norms use as a foundation f o r c a l c u l a -t i o n i s net p r o f i t ( i . e . , gross p r o f i t minus c a p i t a l , r ent and i n t e r e s t charges). For a l l of the above funds a p r e c o n d i t i o n f o r p r o f i t deductions to the i n c e n t i v e funds i s the achievement of the firm's assortment mix t a r g e t s . For e n t e r p r i s e s t h a t are to operate at a planned l o s s , the deductions to various funds are based on the decrease i n costs expressed as a percentage of the firm's c a p i t a l . """Nove, The Sov i e t Economy, p. 36. Another source notes t h a t the amount of re d u c t i o n of the norms f o r u n d e r f u l f i l l m e n t of p r o f i t s or sa l e s i s f i x e d by the m i n i s t r y i n charge, but the r e d u c t i o n cannot be l e s s than 3 percent f o r each percentage p o i n t of u n d e r f u l f i l l m e n t . ( Z a l e s k i , Planning Reforms, p.151). 2 Nove, The Soviet Economy, p.37. 50 C o n t r o l s In the S o v i e t Union a l l economic u n i t s can be c l a s s i f i e d as e i t h e r budget supported i n s t i t u t i o n s or agencies and khozra-schet o r g a n i z a t i o n s or e n t e r p r i s e s . The c o n t r o l exerted over budget financed i n s t i t u t i o n s was d e s c r i b e d i n the s e c t i o n of the paper d e a l i n g w i t h the implementation of the budget. 1 The khozraschet system i s the form of f i n a n c i a l o r g a n i z a t i o n that i s a p p l i e d to a l l i n d u s t r i a l e n t e r p r i s e s , as w e l l as those o r -g a n i z a t i o n s t h a t are i n v o l v e d i n the intermediate and f i n a l d i s t r i b u t i o n of goods i n the economy. A l l khozraschet o r g a n i -z a t i o n s have the f o l l o w i n g c h a r a c t e r i s t i c s : they are l e g a l e n t i t i e s and can t h e r e f o r e enter c o n t r a c t u a l o b l i g a t i o n s and i n c u r m a t e r i a l r e s p o n s i b i l i t i e s ; each o r g a n i z a t i o n i s assigned an economic plan to f u l f i l l ; the operations of these o r g a n i z a -t i o n s are subject to ' c o n t r o l by the r u b l e ' to ensure the f u l -f i l l m e n t of t h e i r assigned plans. The f o l l o w i n g s e c t i o n deals s p e c i f i c a l l y w i t h the microeconomic c o n t r o l s t h a t are u t i l i z e d i n c o n t r o l l i n g the operations of i n d u s t r i a l e n t e r p r i s e s but the methods of c o n t r o l are g e n e r a l l y a p p l i c a b l e to a l l khozraschet i n s t i t u t i o n s . C o n t r o l over the economic operations of the v a r i o u s s t a t e e n t e r p r i s e s i s maintained by a combination of p h y s i c a l and monetary c o n t r o l s . The f u l f i l l m e n t of both p h y s i -c a l and f i n a n c i a l i n d i c e s or t a r g e t s are reported by the f i r m i n the monthly, q u a r t e r l y and y e a r l y r e p o r t s i t must submit to the a d m i n i s t r a t i v e l e v e l to which i t s subordinate to (glavk or m i n i s t r y ) . - The a u d i t i n g of e n t e r p r i s e records take place on a '''See pp.26-27. 51 y e a r l y b a s i s to ensure the accuracy of the above r e p o r t s . 1 The above-mentioned c o n t r o l procedures are only e f f e c t i v e during a prolonged time span and consequently are i n e f f e c t i v e f o r the c o n t i n u a l c o n t r o l of e n t e r p r i s e a c t i v i t i e s . Constant observa-t i o n of e n t e r p r i s e a c t i v i t i e s i s provided by the constant s c r u -t i n y of the f i n a n c i a l t r a n s a c t i o n s of a l l e n t e r p r i s e s through the s t a t e bank. To provide f o r ' c o n t r o l by the r u b l e ' a l l goods and s e r v i c e s r e c e i v e d by any economic u n i t i n the country must be paid f o r . Payment f o r goods and s e r v i c e s must take place i n the p r e s c r i b e d form as the g r a n t i n g of commercial c r e d i t i s banned and the 'cash' balances maintained by the e n t e r p r i s e s are r i g i d l y c o n t r o l l e d . Cash payments made by e n t e r p r i s e s are r e s t r i c t e d to the payment of wages, and minor s e r v i c e s (which may be paid f o r out of pe t t y cash). For the vast m a j o r i t y of the goods and s e r v i c e s r e c e i v e d by an e n t e r p r i s e , payments must be made through book account t r a n s f e r s of bank deposits v i a the s t a t e bank. The most common method of payment used i s where payment i s i n i t i a t e d by the payee by means of the 'acceptance method'. Under t h i s method the s u p p l i e r d r a f t s an invoice-payment demand which i s a non-negotiable, non-assignable d r a f t on the purchaser. Campbell notes t h a t i n a d d i t i o n to the above c o n t r o l s , the e n t e r p r i s e books are a v a i l a b l e to the a u d i t i n g s t a f f s of the M i n i s t r y of Finance, the C e n t r a l S t a t i s t i c a l A d m i n i s t r a t i o n and the Committee of State S e c u r i t y . I n t e r n a l observations of the firm' s a c t i v i t i e s are a l s o provided by the c h i e f bookkeeper, who i s p r i m a r i l y r e s p o n s i b l e to the a d m i n i s t r a t i v e agencies above tne f i r m , and by r e p r e s e n t a t i v e s of the Communist Party who operate w i t h i n the e n t e r p r i s e . (Robert Campbell, Soviet  Economic Power, p . 6 8 ) . The payee d e l i v e r s the d r a f t to h i s branch of the s t a t e bank a f t e r the goods covered i n the i n v o i c e have been shipped. I f the method of payment s t i p u l a t e d i n the i n t e r - f i r m c o n t r a c t i s t h a t of subsequent acceptance, the d r a f t i s forwarded to the payer's branch bank f o r acceptance. The payer must acknowledge acceptance w i t h i n two days f o r i n t r a - c i t y d e l i v e r i e s , t hree days f o r most i n t e r - c i t y d e l i v e r i e s , and w i t h i n seven days f o r de-l i v e r i e s to remote areas of the country."'" A f t e r acceptance i s g i v e n , the payer's account i s d e b i t e d and the payee's account i s c r e d i t e d . In the m a j o r i t y of cases acceptance i s of the subsequent s o r t where payment demands are c o n s i d e r e d accepted u n l e s s a d v i s e d otherwise w i t h i n the p r e s c r i b e d time l i m i t s . Under the subsequent acceptance method and i n cases where accept ance r i g h t s have been waived the payee's account i s c r e d i t e d and the payer's account i s d e b i t e d on the p r e s e n t a t i o n of the d r a f t by the payee to h i s branch bank. G a l l i c k g i v e s the f o l l o w i n g d i s t r i b u t i o n of the v a r i o u s types of acceptance methods used. TABLE IX ACCEPTANCE METHODS EMPLOYED* Type of Acceptance Percentage D i s t r i b u t i o n 1958 1961 P r i o r acceptance 62.8 42.0 Subsequent acceptance 31.5 55.1 Acceptance waived 5.7 2.9 Source: U.S. Bureau of the Census, The S o v i e t F i n a n - c i a l System, p.272. Hodgman, " S o v i e t Monetary C o n t r o l s through the Banking System", p.373. 53 The acceptance method i s used only i n payments f o r goods and s e r v i c e s and accounts f o r 80 percent of a l l such payments.""" The i n c r e a s i n g use of the subsequent acceptance procedure that i s evident i n the above d i s t r i b u t i o n i s a t t r i b u t a b l e to the d e s i r e of the f i n a n c i a l a u t h o r i t i e s to hasten c l e a r i n g proce-dures and thus reduce the working c a p i t a l balances needed by the e n t e r p r i s e s . A v a r i a t i o n of the acceptance methods noted above, which has been i n c r e a s i n g l y adopted to s i m p l i f y c l e a r i n g o p e r a t i o n s , i s the opening of mutual o f f s e t c l e a r i n g accounts. Under t h i s scheme, groups of e n t e r p r i s e s which have many mutually compen-s a t i n g t r a n s a c t i o n s w i t h one another are given s p e c i a l accounts which are kept separated from t h e i r b a s i c account. The account i s used f o r t r a n s a c t i o n s w i t h firms p a r t i c i p a t i n g i n the mutual o f f s e t group. Subsequent acceptance methods are used and each account i s netted and audit e d at i n t e r v a l s that are adopted to the p a r t i c u l a r e n t e r p r i s e production schedule. The net balance of the account i s then t r a n s f e r r e d to the e n t e r p r i s e s ' r e g u l a r account. Other non-cash methods of payment used i n c l u d e payment a u t h o r i z a t i o n s , l e t t e r s of c r e d i t s , settlement cheques and c o l -l e c t i o n a u t h o r i z a t i o n s . Payment a u t h o r i z a t i o n s are general pur-pose payment documents i n which the payer d i r e c t s h i s bank to 2 t r a n s f e r the s t i p u l a t e d funds to the account of the payee. U.S. Bureau of the Census, The Soviet F i n a n c i a l System, p. 2 72 . 2 G a l l i c k notes t h a t i n a 1961 survey the above method accounted f o r 20.7 percent of the volume of payments f o r goods and s e r v i c e s and 97.8 percent of a l l other non-cash t r a n s a c t i o n s (U.S. Bureau of the Census, The S o v i e t F i n a n c i a l System, p.273). L e t t e r s of c r e d i t are s i m i l a r to those used by the Western-bloc and provide guaranteed payment to the payee under the c o n d i t i o n s s t i p u l a t e d i n the document. Settlement cheques are used only f o r payment of goods and s e r v i c e s and may guarantee payment i n f u l l or to a s t i p u l a t e d amount f o r c e r t i f i e d or l i m i t e d s e t t l e -ment cheques r e s p e c t i v e l y . C o l l e c t i o n a u t h o r i z a t i o n s are used to e x p r o p r i a t e funds from s p e c i f i e d accounts and are granted on the b a s i s of court o r d e r s , a r b i t r a t i o n board decrees, and var i o u s other types of executive documents. In a d d i t i o n , ex-p r o p r i a t i v e powers are given to the m i n i s t r y (sovnarkhoz) f o r the r e d i s t r i b u t i o n of working c a p i t a l or p r o f i t s between e n t e r -p r i s e s . The s t a t e bank may a l s o remove funds from e n t e r p r i s e accounts f o r payments on bank loans. I t should be noted t h a t i n a l l of the methods of payment desc r i b e d above, the payment documents are non-negotiable and n o n - t r a n s f e r r a b l e . In the case of i n s u f f i c i e n t funds i n the payer's account, the payment document i s assigned to a s p e c i a l overdue f i l e . The bank undertakes c o l l e c t i o n s e r v i c e s f o r a l l of the above-mentioned payment methods w i t h the exception of o r d i n a r y cheque payments. B i l l s t h a t accumulate i n the overdue f i l e are p a i d when funds become a v a i l a b l e but payment of such b i l l s i s on a p r i o r i t y system, r e g a r d l e s s of the due date of the b i l l . The p r i o r i t y of payments from the overdue f i l e are as f o l l o w s : 1) wages and e q u i v a l e n t payments to worker and employ-ees, s t a t e s o c i a l insurance payments; 2) payments to the budget; 3) payments f o r goods and s e r v i c e s , ( i n c l u d i n g payments to b a l -ance mutual o f f s e t c l e a r i n g b a l a n c e s ) ; 4) depos i t s of p r o f i t s and a m o r t i z a t i o n deductions i n the accounts f o r f i n a n c i n g c a p i t a l 55 investments and c a p i t a l r e p a i r s ; 5) payments on bank loans and other bank c l a i m s ; 6) a l l other payments.""" By l i m i t i n g a l l f i n a n c i a l t r a n s a c t i o n s of the firms to the above methods of payment the s t a t e bank e f f e c t i v e l y l i m i t s the amount of 'cash' at the d i s p o s a l of the e n t e r p r i s e and can thereby c o n t i n u a l l y s c r u t i n i z e the a c t i v i t y of e n t e r p r i s e s as the above-mentioned settlements must be made v i a the s t a t e bank. In t h i s way the s t a t e bank can oversee a l l payments and d i s b u r s e -ments to and from the e n t e r p r i s e accounts to assure t h a t they are i n accordance w i t h planned flows and that payments are made at the p r i c e s s t i p u l a t e d by the s t a t e . The wide use of c r e d i t i n f i n a n c i n g the operations of e n t e r p r i s e s provides an a d d i t i o n a l means of s u r v e i l l a n c e over e n t e r p r i s e a c t i v i t i e s . I t i s customary p r a c t i c e i n the S o v i e t Union t h a t the working c a p i t a l granted to the f i r m approaches a p r a c t i c a l minimum w i t h regard to the t r a n s a c t i o n balances r e q u i r e d to finance i t s a c t i v i t i e s . By t h i s means the i d l e balances h e l d by the f i r m are minimized, thus ensuring the proper u t i l i z a t i o n of funds t h a t are at the d i s p o s a l of the e n t e r p r i s e . Short-term c r e d i t s provide the d i f f e r e n c e between 2 the maximum and minimum t r a n s a c t i o n balances r e q u i r e d . C r e d i t s are granted to the e n t e r p r i s e i n accordance w i t h planned needs de r i v e d through a n a l y s i s of the flows of incomes and expenditures "'"U.S. Bureau of the Census, The Soviet F i n a n c i a l System, pp.276-277. 2 The a u t h o r i t i e s ' d e s i r e f o r minimal t r a n s a c t i o n b a l -ances are balanced aga i n s t the costs of a d m i n i s t r a t i n g the f i r m ' s c r e d i t requirements. For d e t a i l s on the d i s t r i b u t i o n of these c r e d i t s and i n t e r e s t r a t e s a p p l i c a b l e , see p.29. with time, and are t h e r e f o r e provided f o r i n the c r e d i t plan of the e n t e r p r i s e . Since a l l of the c r e d i t s are granted f o r spe-c i f i c purposes and d e f i n i t e periods of time, the bank has an a d d i t i o n a l b a s i s of monitoring the a c t i v i t i e s of the e n t e r p r i s e as repayment of the c r e d i t s can only come about through income r e c e i v e d by f u l f i l l i n g i t s p l a n . In the case of overdue c r e d i t s the bank imposes c r e d i t s a nctions which increase the i n t e r e s t r a t e on the overdue loan from 1-2 percent to 3-5 p e r c e n t . 1 I f t h i s proves i n e f f e c t i v e the bank may u t i l i z e any one of the f o l l o w i n g a l t e r n a t i v e s : i t may e x p r o p r i a t e any a v a i l a b l e funds i n the account of the enter-p r i s e up to the l i m i t of the unpaid loan and i n t e r e s t ; i t may s p e c i f y t h a t only guaranteed methods of payment ( c e r t i f i e d cheques, l e t t e r s of c r e d i t ) may be used f o r o u t - o f - c i t y pay-ments; i t may prevent an e n t e r p r i s e from u t i l i z i n g any unpaid shipments of goods; i t may refuse to grant any f u r t h e r c r e d i t unless the loan i s guaranteed by the e n t e r p r i s e ' s s u p e r i o r s ; and as a l a s t r e s o r t , the bank may d e c l a r e the f i r m i n s o l v e n t , thus provoking a f u l l s c a l e i n q u i r y of e n t e r p r i s e operations. Gosbank i s a l s o the f i s c a l agent f o r the government; i n f u l f i l l i n g t h i s r o l e i t i s r e s p o n s i b l e f o r the c o l l e c t i o n of budgetary revenues, which allows f o r f u r t h e r s c r u t i n y of enter-p r i s e operations i n the f u l f i l l m e n t of t h e i r economic plans. Through the c o l l e c t i o n of turnover taxes, r e n t a l charges, p r o f i t taxes and c a p i t a l charges, which are a l l s t i p u l a t e d i n the enter p r i s e plans and c o l l e c t e d at various times, ranging from d a i l y ''"Spulber, The Soviet Economy, p. 170. See Table I I , p.20. 57 to q u a r t e r l y c o l l e c t i o n , any d e v i a t i o n s from ex ante expectations w i l l be r e f l e c t e d i n ex post balances of the various accounts s p e c i f i e d f o r the above c o l l e c t i o n s . In a d d i t i o n Gosbank has a correspondent r e l a t i o n s h i p w i t h the investment bank (Stroibank) and i s r e s p o n s i b l e f o r the c o l l e c t i o n of that p o r t i o n of the d e p r e c i a t i o n allowances and p r o f i t s t h a t are a l l o c a t e d to the c e n t r a l investment f u n d . 1 From the preceding d e s c r i p t i o n i t i s seen that Gosbank u t i l i z e s a v a r i e t y of methods i n s u b j e c t i n g a l l khozraschet o r g a n i z a t i o n s to c o n t r o l by the ruble i n t h e i r f u l f i l l m e n t of t h e i r economic plans. By using a system of monetary accounting, the v a r i e t y of heterogeneous inputs and outputs of a f i r m can be converted i n t o t h e i r monetary e q u i v a l e n t s and the planned flows of these goods can be evaluated through monitoring the f i n a n c i a l t r a n s a c t i o n s of the e n t e r p r i s e . As the f i n a n c i a l balances of e n t e r p r i s e s are r i g i d l y c o n t r o l l e d , planned deduc-t i o n s from p r o f i t s , a m o r t i z a t i o n allowances, turnover taxes, repayment of c r e d i t s and a l l other f i n a n c i a l o b l i g a t i o n s of the f i r m can be met only through the proper execution of t h e i r econ-omic p l a n , which w i l l ensure the s u f f i c i e n t means w i t h which to meet the above o b l i g a t i o n s . Proper execution of e n t e r p r i s e plans i s a l s o r e i n f o r c e d through the o b l i g a t i o n of the e n t e r p r i s e to enter c o n t r a c t u a l The appropriate sums are c o l l e c t e d and deposited i n s p e c i f i c accounts every ten days. (U.S. Bureau of the Census, The S o v i e t F i n a n c i a l System, p.27.) I t should be noted here th a t Stroibank provides a l l banking f u n c t i o n s f o r the con-s t r u c t i o n o r g a n i z a t i o n s . In a d d i t i o n , i t administers enter-p r i s e development funds and disbursements from these funds are made only on the ba s i s of the approved investment plans. 58 agreements w i t h i t s s u p p l i e r s and w i t h the purchasers of the planned output of the enterprise.- Both s u p p l i e r s and purchasers are s t i p u l a t e d i n the e n t e r p r i s e plan but the formal s i g n i n g of c o n t r a c t s i s necessary f o r g i v i n g d e t a i l to the general a s s i g n -ments s p e c i f i e d i n the plan. Thus the c o n t r a c t u a l o b l i g a t i o n s s t i p u l a t e such things as packaging requirements, d e l i v e r y dates, d e t a i l e d s p e c i f i c a t i o n s and q u a l i t y of goods contracted f o r , method of payment, and the p r i c e s of the contracted goods. In the case of c o n t r a c t s f o r custom orders or experimental models t h a t are not s p e c i f i e d i n s t a t e p r i c e l i s t s the f i r m i s allowed to set i t s own p r i c e i n agreement w i t h the purchaser, the p r i c e being based on the average cost of production of the order plus a 5 percent markup.""" C o n t r a c t u a l disputes are o u t s i d e the j u r i s d i c t i o n of c i v i l courts when both p a r t i e s are ' s o c i a l i s t o r g a n i z a t i o n s ' , settlements of such disputes being c a r r i e d out e i t h e r by super-i o r a d m i n i s t r a t i v e organs, or by s t a t e a r b i t r a t i o n t r i b u n a l s . The m i n i s t r y of the respondent o r g a n i z a t i o n s e t t l e s disputes where the sum does not exceed 1,000 r u b l e s ; a l l disputes i n 2 excess of t h i s amount are r e f e r r e d to a r b i t r a t i o n t r i b u n a l s . A r b i t r a t i o n t r i b u n a l s deal w i t h a l l p r e - c o n t r a c t d i s -putes and disputes a r i s i n g out of breach of c o n t r a c t . In "^"Martin Spechler, " D e c e n t r a l i z i n g the S o v i e t Economy: Legal Regulation of P r i c e and Q u a l i t y " , Soviet S t u d i e s , Vol.XXII (October, 1970), p.231. The above a r t i c l e notes t h a t a f t e r 1965 the p r i c e s of such goods were allowed a markup of 10-20 percent over average c o s t s . 2 E.L. Johnson, "Planning and Contract Law", S o v i e t S t u d i e s , V o l . X I I (February, 1961) , p. 263. 59 p r e - c o n t r a c t u a l disputes i n v o l v i n g the r e f u s a l to c o n t r a c t or the terms of the c o n t r a c t , the t r i b u n a l w i l l decide the disputed p o i n t s and order the p a r t i e s to conclude the c o n t r a c t on what-ever terms i t has decided. For breach of c o n t r a c t the a r b i t r a -t i o n board may order s p e c i f i c performance or money damages. Ge n e r a l l y s p e c i f i c performance can be ordered only where the execution of such an order w i l l not i n t e r f e r e w i t h the normal operations of the e n t e r p r i s e . In such cases where s p e c i f i c performance i s i m p o s s i b l e , due to such f a c t o r s as a l a c k of necessary s u p p l i e s , the a r b i t r a t i o n board w i l l grant money damages i f the c o n t r a c t i s s t i l l v a l i d under the plan i n force at the time of the d i s p u t e . 1 In the i m p o s i t i o n of f i n e s and i n the g r a n t i n g of money damages the t r i b u n a l has the power to en-for c e such awards by g r a n t i n g execution warrants, which order Gosbank to e x p r o p r i a t e the s t i p u l a t e d sum from the e n t e r p r i s e ' s account. By e n t e r i n g i n t o c o n t r a c t u a l o b l i g a t i o n s the various e n t e r p r i s e s 'pledge' to f u l f i l l these assigned t a s k s . As a l l c o n t r a c t s are drawn up to r e f l e c t the planned o b l i g a t i o n s of the f i r m i n f u l f i l l i n g i t s output orders the d e f a u l t on any c o n t r a c t r e f l e c t s d e v i a t i o n s from the p l a n , which can then be subjected to i n v e s t i g a t i o n by the appropriate a u t h o r i t i e s . Changes i n e n t e r p r i s e plans t h a t occur during the planned year, t h a t make i t impossible to f u l f i l l previous con-t r a c t s under the terms of the new p l a n , are recognized as a v a l i d defence f o r breach of c o n t r a c t . These types of disputes occur f r e q u e n t l y due to changes i n the plan where the a u t h o r i -t i e s f a i l to consider the r a m i f i c a t i o n s i n v o l v e d i n changing e n t e r p r i s e assignments. 60 CHAPTER I I AGRICULTURE The f o l l o w i n g chapter on the a g r i c u l t u r a l s e c t o r of the economy w i l l f o l l o w a s i m i l a r i n v e s t i g a t i v e format as t h a t used i n the chapter on i n d u s t r y . Three areas of i n v e s t i g a t i o n w i l l be pursued: macro production-supply planning and micro plans and c o n t r o l s ; a g r i c u l t u r a l p r i c e s ; and the s t r u c t u r e and l e v e l of i n c e n t i v e s at the farm l e v e l . The i n t e g r a t i o n of these above-mentioned v a r i a b l e s i n forming a coherent system of a l l o -c a t i o n mechanics v a r i e s s i g n i f i c a n t l y from t h e i r r e l a t i v e im-portance i n the i n d u s t r i a l guidance mechanism; thus the r o l e of p r i c e s and i n c e n t i v e s i n the a l l o c a t i v e mechanics a p p l i e d to a g r i c u l t u r e w i l l be i n t e n s i v e l y examined i n the f o l l o w i n g chapter. The d i f f e r e n c e s i n the two microeconomic o r g a n i z a t i o n -a l forms i n a g r i c u l t u r e , namely c o l l e c t i v e farms and s t a t e farms, w i l l be d i s t i n g u i s h e d , and the changes th a t have taken place i n t h e i r r e s p e c t i v e a l l o c a t i o n mechanics, since the death of S t a l i n to the present time, w i l l be explored. Production-Supply Planning and Micro Cont r o l s i n A g r i c u l t u r e Production-supply planning farms Soviet a g r i c u l t u r e and c o l l e c t i v e farms i s b a s i c a l l y organized i n t o s t a t e , w i t h both types of micro o r g a n i z a -61 t i o n a l forms subject to comprehensive systems of s t a t e c o n t r o l . The system of planning to be described below r e f e r s to the p e r i o d a f t e r 1955. The methods used i n plan f o r m u l a t i o n changed i n 1954 and 1955 f o r s t a t e and c o l l e c t i v e farms r e s p e c t i v e l y but these changes were g e n e r a l l y r e s t r i c t e d to the fo r m u l a t i o n of .micro plans f o r the farms, although they had an e f f e c t at the macro l e v e l by reducing the number of c e n t r a l l y determined i n d i c e s . The methods u t i l i z e d i n f o r m u l a t i n g the a g r i c u l t u r a l p o r t i o n of the n a t i o n a l economic plan f o l l o w a p a r a l l e l p a t t e r n to the methods des c r i b e d f o r i n d u s t r i a l production-supply p l a n -ning. The core of the a g r i c u l t u r a l plan i s the d i r e c t i v e s formulated by the Party l e a d e r s . Basing t h e i r d e c i s i o n s on aggregated past and p r o j e c t e d year-end achievements, i n d u s t r i a l demand f o r a g r i c u l t u r a l raw m a t e r i a l s , the n u t r i t i o n a l consump-t i o n standards d e s i r e d f o r the po p u l a t i o n and the investments necessary to achieve these standards, d i r e c t i v e s are sent to Gosplan. These d i r e c t i v e s s t i p u l a t e the d e s i r e d increase i n gross production of major crops, gross s t a t e purchase t a r g e t s f o r these crops, cost r e d u c t i o n t a r g e t s f o r p r i n c i p a l s t a t e farm crops and the l e v e l of c e n t r a l i z e d investments a l l o c a t e d to a g r i c u l t u r e . Gosplan then c o n s t r u c t s c o n t r o l f i g u r e s f o r s t a t e purchases of farm and l i v e s t o c k products f o r the So v i e t Union "'"Private farming s t i l l e x i s t s where i t was not f e a s i b l e to c o l l e c t i v i z e p r i v a t e holdings due to t h e i r geographical l o c a t i o n or other extenuating circumstances. Since p r i v a t e farms account f o r such a small f r a c t i o n of the t o t a l a g r i c u l -t u r a l output, and since most of t h e i r output i s d i r e c t l y con-sumed, they w i l l not be discussed i n t h i s study. as a whole, and f o r each r e p u b l i c . In a d d i t i o n , the t o t a l wage fund and number of workers, and the volume of c a p i t a l i n v e s t -ments are s t i p u l a t e d f o r the s t a t e farm s e c t o r . These f i g u r e s i n t u r n are passed down the s t a t e and c o l l e c t i v e farms' admini-s t r a t i v e h i e r a r c h i e s where they are p r o g r e s s i v e l y disaggregated u n t i l each c o l l e c t i v e and s t a t e farm i s assigned a s a l e s t a r g e t f o r major crops and l i v e s t o c k d e l i v e r i e s to the s t a t e . I n d i v i -dual s t a t e farms a l s o r e c e i v e t a r g e t s f o r t h e i r wage fund and number of workers, cost r e d u c t i o n t a r g e t s f o r p r i n c i p a l farm products, and l e v e l s of c a p i t a l investment. From the c o n t r o l f i g u r e s assigned, s t a t e and c o l l e c t i v e farms formulate t h e i r annual p r o d u c t i o n - f i n a n c i a l p l a n s , which are composed of the f o l l o w i n g s e c t i o n s : 1 1) t a r g e t s sent to the c o l l e c t i v e and s t a t e farms by the s t a t e ; 2) land u t i l i z a t i o n plan ( i n c l u d i n g the a v a i l a b i l i t y and u t i l i -z a t i o n of a r a b l e and g r a z i n g l a n d s ) ; 3) crop farming program ( i n c l u d i n g sown areas, crop areas, y i e l d s and gross outputs of main crops, p r o d u c t i v i t y , r e -quirements i n seed, f e r t i l i z e r s , p e s t i c i d e s , land improvement measures and d i r e c t o u t l a y s on p r o d u c t i o n ) ; 4) animal farming program ( i n c l u d i n g l i v e s t o c k and p o u l t r y stocks and t h e i r reproduction r a t e s , p r o d u c t i v i t y of the animals, fodder requirements, z o o t e c h n i c a l and v e t r i n a r y measures, and d i r e c t o u t l a y s on p r o d u c t i o n ) ; 5) c o n s t r u c t i o n program and programs f o r a n c i l l a r y e n t e r p r i s e s Compiled from i n f o r m a t i o n given i n M.L. Terentev, "Meth ods and P r a c t i c e of A g r i c u l t u r a l Production Planning i n the U.S.S.R.", United Nations Seminar on Planning Techniques, pp.108 109, and V.A. Abramov, The Economics of A g r i c u l t u r e , pp.108-110. ( i n c l u d i n g volume of production and q u a l i t y i n d i c e s ) ; 6) mechanization of p r i n c i p a l work processes, u t i l i z a t i o n and r e p a i r s to equipment ( i n c l u d i n g MTS s e r v i c e s r e q u i r e d f o r c o l l e c t i v e s p r i o r to 1958); 7) labour plan ( i n c l u d i n g labour forces and i t s u t i l i z a t i o n , and the wage fund); 8) estimated production c o s t s ; 9) measures f o r r a i s i n g c u l t u r a l and l i v i n g standards and f o r t r a i n i n g s p e c i a l i s t s ; 10) statement on sources and a p p l i c a t i o n of funds. Once the d r a f t p r o d u c t i o n - f i n a n c i a l plans have been approved by the farms' immediate s u p e r i o r s , the above i n d i c e s are aggregated along w i t h the r e q u i s i t i o n s f o r the necessary m a t e r i a l inputs and a c o n s o l i d a t e d a g r i c u l t u r a l plan i s c a l c u -l a t e d i n d i v i d u a l l y f o r both s t a t e and c o l l e c t i v e farms and f o r both farm c a t a g o r i e s as whole. The d r a f t a g r i c u l t u r a l plan i s then i n c l u d e d as part of the general plan f o r the development of the n a t i o n a l economy and t h i s general plan i s then forwarded to the C o u n c i l of M i n i s t e r s , U.S.S.R., and the l e g i s l a t u r e f o r t h e i r approval. A f t e r the plan has been approved i t i s d i s -aggregated i n i t s passage down through the a d m i n i s t r a t i v e h i e r -archy u n t i l each farm r e c e i v e s i t s f i n a l assignments. On the b a s i s of these assignments, d e t a i l e d o p e r a t i o n a l production and f i n a n c i a l plans are cons t r u c t e d and approved, c o n t r a c t u a l o b l i -g a tions are e s t a b l i s h e d v i s - a - v i s s t a t e purchases of outputs, and d e t a i l e d orders f o r m a t e r i a l inputs are sent to the appro-p r i a t e supply agencies. I t was p r e v i o u s l y noted t h a t the above planning 64 techniques r e f e r r e d to those used a f t e r 1955. During the e a r l y 1950's numerous other c o n t r o l f i g u r e s were e s t a b l i s h e d to c o n t r o l the f o r m u l a t i o n of the micro plans. In the case of c o l l e c t i v e farms, t h e i r production plans were constructed by t h e i r immedi-ate s u p e r i o r s , the r a i o n S o v i e t s and the d i s t r i c t motor t r a c t o r s t a t i o n (MTS), and were rubber stamped by the general meetings of the c o l l e c t i v e farms. In 1954 the number of c e n t r a l l y set i n d i c e s f o r s t a t e farms were reduced to those mentioned above. In the f o l l o w i n g year a l l c e n t r a l l y set i n d i c e s f o r c o l l e c t i v e farms, w i t h the exception of s t a t e purchase t a r g e t s f o r major crops and l i v e s t o c k , were a b o l i s h e d and o s t e n s i b l e c o n t r o l over plan f o r m u l a t i o n was granted to the farm membership. The numerous reforms i n the a g r i c u l t u r a l a d m i n i s t r a t i v e h i e r a r c h y t h a t were undertaken between 1957 and 1965 a l t e r e d the flow of c e n t r a l l y determined i n d i c e s to the farms, as w e l l as agencies r e s p o n s i b l e f o r the implementation of the p l a n s , but the reforms had l i t t l e e f f e c t on the a c t u a l a c t i v i t i e s i n v o l v e d i n f o r m u l a t i n g the a g r i c u l t u r a l plan. Throughout t h i s p e r i o d the government continued to encourage the amalgamation of c o l l e c t i v e farms i n t o l a r g e r u n i t s and the conversion of c o l l e c t i v e farms i n t o s t a t e farms, although the amalgamations and conversions took place at a somewhat slower r a t e than had p r e v i o u s l y been the case. In a s i n g l e year, between the begin-ning and end of 1950, the number of c o l l e c t i v e farms was reduced from approximately 252,000 u n i t s to 121,000 u n i t s . 1 Between Lazar V o l i n , " A g r i c u l t u r a l P o l i c y of the S o v i e t Union", i n The Soviet Economy, ed. by Morris B o r n s t e i n and Daniel F u s f e l d , p.177. 65 1953 and 1963 the number of c o l l e c t i v e farms had decreased from 91,200 to l e s s than 40,000, whi l e the number of s t a t e farms increased from 5,000 to 9,176 over the same p e r i o d ; 1 by 1964 2 the r e s p e c t i v e numbers were 37,618 and 10,075. The r a t i o n a l e behind the amalgamations was to c o n s o l i d a t e weaker c o l l e c t i v e s i n t o l a r g e r o p e r a t i n g u n i t s i n the hope of improving e f f i c i e n c y , w h i l e the t r a n s f o r m a t i o n of c o l l e c t i v e s i n t o s t a t e farms was undertaken on those c o l l e c t i v e s which were i n need of l a r g e -s c a l e s t a t e investments f o r such things as i r r i g a t i o n or e l e c -t r i f i c a t i o n . Although the amalgamation of c o l l e c t i v e farm u n i t s g r e a t l y s i m p l i f i e d the planning process and increased the ease of c e n t r a l s u p e r v i s i o n over farm o p e r a t i o n s , the consequent problems of e f f e c t i v e i n t e r n a l management more than o f f s e t these 3 b e n e f i t s . A f t e r the removal of Khrushchev the new l e a d e r s h i p ordered a stop to the amalgamation of c o l l e c t i v e farms, and the conversion of c o l l e c t i v e farms i n t o s t a t e farms was s e v e r e l y decreased. Along w i t h e l i m i n a t i n g and reducing the amalgamations and conversions of c o l l e c t i v e farms, one of the f i r s t reforms ''"Jerry Karcz and V. Timoshenko, "Soviet A g r i c u l t u r a l P o l i c y , 1953-1962", Food Research I n s t i t u t e S t u d i e s , Vol.IV, No.2, 1964, p.137. 2 U.S. Congress, J o i n t Economic Committee, " A g r i c u l t u r a l Reforms Since Khrushchev", by K e i t h Bush, New D i r e c t i o n s i n the  S o v i e t Economy, p.467. ^The average sown area f o r c o l l e c t i v e and s t a t e farms at the end of 1950 was 2,400 and 6,400 acres r e s p e c t i v e l y . By the end of 1963 the comparable f i g u r e s were 7,156 acres and 24,000 acres. (Lazar V o l i n , "Khrushchev and S o v i e t A g r i c u l t u r e " , i n S o v i e t and East European A g r i c u l t u r e , ed. by J e r r y Karcz, p.16.) Spulber gives the average sown area of s t a t e farms i n 1965 as 60,000 acres. (The Soviet Economy, p.79.) introduced by the new l e a d e r s h i p was to provide s t a b l e t a r g e t s f o r g r a i n procurements f o r the 1966-1970 f i v e - y e a r plan p e r i o d . The e f f e c t of t h i s reform was that the procurement t a r g e t s r e -ceived by the i n d i v i d u a l farms i n 1965 were to be s t a b l e f o r the f o l l o w i n g four years, thus f a c i l i t a t i n g meaningful long-term planning of crop r o t a t i o n systems and other long-term s o i l p r e s e r v a t i o n measures. The l a s t m o d i f i c a t i o n to the planning system was under-taken i n l a t e 1967 when i t was decided to convert s t a t e farms on to a s i m i l a r p r o f i t a b i l i t y i n c e n t i v e system t h a t had been i n i t i a t e d i n i n d u s t r y a f t e r the 1965 reforms. By the end of 1969 some 3,800 s t a t e farms (roughly o n e - t h i r d of the t o t a l ) had been t r a n s f e r r e d to the new system and current i n t e n t i o n s are to convert a l l s t a t e farms to the new system. 1 The e f f e c t of these f i n a n c i a l and i n c e n t i v e r e l a t e d reforms was to reduce the number of c e n t r a l l y t a r g e t e d i n d i c e s assigned to the converted farms. By r e l a t i n g i n c e n t i v e s to the p r o f i t a b i l i t y of farm o p e r a t i o n s , the c e n t r a l a u t h o r i t i e s were able to e l i m i n a t e the t a r g e t i n g of cost r e d u c t i o n s and the maximum number of workers th a t could be employed by r e l y i n g on m a t e r i a l s e l f - i n t e r e s t to r e s p e c t i v e l y maximize and minimize the now redundant t a r g e t v a r i a b l e s . Micro c o n t r o l s The degree of c o n t r o l exerted over c o l l e c t i v e and s t a t e farm a c t i v i t i e s by the c e n t r a l a u t h o r i t i e s has s i g n i f i c a n t l y decreased since the death of S t a l i n . Up to 1953 the r e s p o n s i -"^Gertrude Schroeder, "Soviet Economic Reform at an Impasse", Problems of Communism, Vol.XX (July-August, 1970) , p. 39. 67 b i l i t y f o r guidance and c o n t r o l over c o l l e c t i v e farm a c t i v i t i e s was vested i n the f o l l o w i n g i n s t i t u t i o n s : the r a i o n government and Party organs and the agronomic departments attached to these agencies; the motor t r a c t o r s t a t i o n s ; the d i s t r i c t p r o c u r a t o r s ; and the v i l l a g e S o v i e t s . The r a i o n agencies were r e s p o n s i b l e f o r d r a f t i n g the production plans of the i n d i v i d u a l c o l l e c t i v e farms, which contained some 200-250 ta r g e t e d indices;"'" review-i n g the income and expenditure balances of t h e i r subordinate farms; approving c o n t r a c t s signed between the farms and the MTS; and a n n u l l i n g any d e c i s i o n s undertaken by the general meetings of the c o l l e c t i v e farms which i t considered unlawful. The agronomic departments attached to the raion s determined produc-t i o n quotas, sowing p a t t e r n s , seasonal use of lands, and the implementation of a g r i c u l t u r a l i n novations and mechanization. These same departments were a l s o r e s p o n s i b l e f o r g i v i n g d a i l y ' a s s i s t a n c e ' t o the c o l l e c t i v e farms i n a l l of t h e i r productive and a d m i n i s t r a t i v e matters. The MTS was to ' a s s i s t ' the kolkhoz i n the f o l l o w i n g matters; the p r e p a r a t i o n of i t s o p e r a t i o n a l production and f i n a n c i a l p l ans, the d i s t r i b u t i o n and remuneration of the economic a c t i v i t i e s undertaken on the farm, and to help the farm determine the most advantageous u t i l i z a t i o n of i t s lands. The d i s t r i c t p r ocurator's primary f u n c t i o n was to ensure t h a t the production and c o l l e c t i o n of farm outputs was i n ac-cordance w i t h s p e c i f i e d q u a n t i t i e s . In a d d i t i o n , these agencies reported on the compliance of c o l l e c t i v e farms and i n d i v i d u a l k o l k h o z n i k i with c e n t r a l government d i r e c t i v e s regarding "'"Erich S t r a u s s , S o v i e t A g r i c u l t u r e i n P e r s p e c t i v e , p. 37. 68 c o l l e c t i v e farm p r a c t i c e s . F i n a l l y , the v i l l a g e S o v i e t s were l e g a l l y empowered to p a r t i c i p a t e i n the o p e r a t i v e guidance of the kolkhozy. Constant c o n t r o l over plan f u l f i l l m e n t and the o r g a n i z a t i o n of a c t i v i t i e s w i t h i n the kolkhozy was maintained by these bodies through a s s i g n i n g deputies or a k t i v s to each working u n i t w i t h i n the farm. The comprehensive and o f t e n o v e r l a p p i n g c o n t r o l s des-c r i b e d above e x i s t e d u n t i l 1953. At t h a t time the a g r i c u l t u r a l departments of the r a i o n executive committees were a b o l i s h e d and t h e i r f u n c t i o n s were l a r g e l y t r a n s f e r r e d to the MTS. In 1955 a c e n t r a l government decree a b o l i s h e d the numerous ta r g e t e d i n d i c e s t h a t were p r e v i o u s l y assigned to the c o l l e c t i v e farms. Henceforth the c e n t r a l agencies would only a s s i g n procurement targets to the i n d i v i d u a l farms. The farms were now r e s p o n s i b l e f o r c o n s t r u c t i n g t h e i r own production and f i n a n c i a l plans w i t h i n the minimum requirements p r e s c r i b e d by t h e i r procurement t a r -gets. The i n c r e a s e i n farm autonomy was nominal; the farms co n s t r u c t e d t h e i r plans under the t u t e l a g e of the MTS and they were subject to approval and r e v i s i o n by the r a i o n executive committees. When the MTS was d i s s o l v e d i n 19 58 t h e i r machinery was acquired by the i n d i v i d u a l kolkhozy. Although the farms obtained c o n t r o l over the type and t i m i n g of s o i l improvement measures, h a r v e s t i n g , ploughing, and other mechanized a c t i v i t i e s , general c o n t r o l and s u p e r v i s i o n over farm operations was main-t a i n e d by the r a i o n o f f i c e s . In 1962 the r u r a l r a i o n o f f i c e s were e l i m i n a t e d and a u n i f i e d system of s t a t e c o n t r o l over a g r i c u l t u r e was created. Nearly 1,000 t e r r i t o r i a l production a d m i n i s t r a t i o n s were created 69 and charged w i t h the fu n c t i o n s of executing the d e c i s i o n s of the party and government regarding c o l l e c t i v e and s t a t e farms, and c o n t r o l l i n g the production and procurements of a g r i c u l t u r a l products."'" Thus the previous f u n c t i o n s undertaken by the r a i o n o f f i c e s and the d i s t r i c t p r ocurators were now undertaken by the t e r r i t o r i a l p roduction a d m i n i s t r a t i o n s . In 1965, under the massive reforms c a r r i e d out by the new l e a d e r s , the t e r r i t o r i a l p r o duction a d m i n i s t r a t i o n s were d i s s o l v e d and the sup e r v i s o r y agencies f o r c o l l e c t i v e farm a c t i v i t i e s r e v e r t e d back to the pre-1957 s t r u c t u r e , minus the defunct MTS. The s t r u c t u r e of the sup e r v i s o r y and c o n t r o l agencies has remained constant from 1965 to the present time. The c o l -l e c t i v e farms are assigned quota d e l i v e r i e s by the c e n t r a l government through t h e i r r a i o n o f f i c e s and c o n s t r u c t t h e i r production plans under the guidance of t h e i r d i s t r i c t agronomic departments and subject to the approval of t h e i r r e s p e c t i v e r a i o n executive committees. Once these plans have been approved, the c o l l e c t i v e farms c o n t r a c t to d e l i v e r t h e i r quota assignments to the s t a t e procurement agencies. The c o n t r o l s over the op e r a t i o n of s t a t e farms were very s i m i l a r to those that e x i s t e d i n the i n d u s t r i a l s e c t o r of the economy. Up u n t i l 1962 c o n t r o l over s t a t e farm operations was maintained by the o p e r a t i v e management agencies of the various 2 a g r i c u l t u r a l g l a v k i c a l l e d t r u s t s . These agencies were Howard Swearer, " A g r i c u l t u r a l A d m i n i s t r a t i o n under Khrushchev", i n Soviet A g r i c u l t u r e and Peasant A f f a i r s , ed. by R.D. L a i r d , p.29. 2 State farms l o c a t e d i n the same area and engaged i n the same type of production were grouped under a s i n g l e a d m i n i s t r a t i v e 70 r e s p o n s i b l e f o r m a i n t a i n i n g continuous c o n t r o l over the f u l f i l l -ment of production plans and the u t i l i z a t i o n of funds and c r e d i t s by the i n d i v i d u a l farms. In a d d i t i o n the t r u s t s were r e s p o n s i b l e f o r the o v e r a l l o r g a n i z a t i o n of work processes w i t h i n the s t a t e farms and f o r r e v i e w i n g , modifying, and approv-i n g the p r o d u c t i o n , f i n a n c i a l , and c a p i t a l expenditure plans of t h e i r subordinate farms. Although the s t a t e farms are nominally r e s p o n s i b l e f o r d r a f t i n g t h e i r own p r o d u c t i o n - f i n a n c i a l p l a n s , w i t h i n the context of the c e n t r a l l y determined i n d i c e s t h a t were l i s t e d above, they are subject to major m o d i f i c a t i o n before approval i s given. When these plans are returned to the t r u s t s f o r approval the various input c o e f f i c i e n t s contained i n these p l a n s , f o r example, the consumption of fodder per u n i t of l i v e -s tock, labour inputs per hectare of the main a g r i c u l t u r a l crops, and f u e l and l u b r i c a n t inputs per u n i t of output, are compared w i t h c e n t r a l l y determined input norms and are adjusted accord-i n g l y , unless the proposed c o e f f i c i e n t can be adequately j u s t i -f i e d . Aside from these d i r e c t c o n t r o l s over farm o p e r a t i o n s , the production and f i n a n c i a l plans are subject to supplementary c o n t r o l s through c o n t r a c t u a l o b l i g a t i o n s between the farms and the procurement agencies f o r the s a l e s of the t a r g e t e d outputs, and through the f i n a n c i a l c o n t r o l s over planned operations exe-cuted through the s t a t e banking system. In 1962 the t r u s t s were a b o l i s h e d i n favour of the u n i -f i e d system of s t a t e c o n t r o l over a g r i c u l t u r a l operations t h a t was executed through the t e r r i t o r i a l production a d m i n i s t r a t i o n s . body, c a l l e d a t r u s t , f o r c o o r d i n a t i o n and management purposes 71 This reform had l i t t l e e f f e c t on the system of c o n t r o l s des-c r i b e d above, other than they were now c a r r i e d out by the newly formed a d m i n i s t r a t i v e bodies. In 1965 the new l e a d e r s h i p d i s s o l v e d the u n i f i e d system of s t a t e c o n t r o l over a g r i c u l t u r e and r e - e s t a b l i s h e d the pre-1962 c o n t r o l agencies. The reform t h a t was i n i t i a t e d i n 1967, which c a l l e d f o r the gradual conversion of s t a t e farms to a system of f i n a n c i a l s e l f - r e l i a n c e , o s t e n s i b l y reduced the degree of e x t e r n a l c o n t r o l over the i n t e r n a l operations of the s t a t e farms. Under the new-arrangement the t r u s t s may only modify the s a l e s , wage fund, and p r o f i t i n d i c e s , and set l i m i t s f o r working c a p i t a l and c a p i t a l c o n s t r u c t i o n . The increased d i s c r e t i o n allowed to farm managers under t h i s arrangement i s dubious; through modifying the above planned i n d i c e s the t r u s t s can i n d i r e c t l y i n f l u e n c e the v a r i -ables from which these i n d i c e s are d e r i v e d . A g r i c u l t u r a l P r i c e s Two o b j e c t i v e s were pursued i n the s e t t i n g of a g r i c u l -t u r a l p r i c e s , namely to e s t a b l i s h favourable terms of trade f o r the i n d u s t r i a l s e c t o r of the economy, v i s - a - v i s the a g r i c u l t u r a l s e c t o r , and to simultaneously set the p r i c e s p a i d f o r a g r i c u l -t u r a l products at a l e v e l s u f f i c i e n t to provide adequate incen-t i v e s to encourage production. Obviously both o b j e c t i v e s of the p r i c i n g s t r a t e g y could not be simultaneously s a t i s f i e d . During the p e r i o d being considered, i t w i l l be shown that the balance between these two c o n f l i c t i n g o b j e c t i v e s has been pro-g r e s s i v e l y s h i f t i n g i n favour of p r o v i d i n g adequate p r i c e 72 i n c e n t i v e s f o r a g r i c u l t u r a l production at the expense of i n -cr e a s i n g the terms of trade of the a g r i c u l t u r a l s e c t o r , r e l a t i v e to i n d u s t r y . There were four r e l e v a n t p r i c e s t r u c t u r e s faced by c o l -l e c t i v e farms from 1950 to 1958: compulsory d e l i v e r y p r i c e s ; p r i c e s p a i d by the s t a t e f o r d e l i v e r i e s i n excess of the com-puls o r y t a r g e t ; s t a t e c o n t r a c t p r i c e s ? and c o l l e c t i v e farm market p r i c e s . State c o n t r a c t p r i c e s were only r e l e v a n t to those c o l l e c t i v e farms which s p e c i a l i z e d i n growing t e c h n i c a l crops. These farms would c o n t r a c t to s e l l the whole of t h e i r output to the s t a t e at c o n t r a c t u a l p r i c e s which were p r o g r e s s i v e , depending on the output a c h i e v e d . 1 Throughout most of t h i s p e r i o d these c o n t r a c t u a l p r i c e s were r e l a t i v e l y higher than the compulsory d e l i v e r y or s t a t e purchase p r i c e s i n order to pro-vi d e adequate production i n c e n t i v e s , as these crops were impor-tan t as a raw m a t e r i a l base f o r the t e x t i l e and food processing i n d u s t r i e s , and the revenues from these crops were o f t e n the so l e source of income f o r the c o l l e c t i v e farms concerned wi t h t h e i r p r oduction. With regard to the other p r i c e s , compulsory d e l i v e r y p r i c e s were set at the lowest l e v e l , p r i c e s f o r de-l i v e r i e s made above the compulsory minimums were higher, w h i l e c o l l e c t i v e farm market p r i c e s were the highest. The p r i c e s p a i d f o r compulsory d e l i v e r i e s of farm out-puts, and f o r s t a t e purchases above the compulsory minimum, were d i f f e r e n t i a t e d by re g i o n s , and were o s t e n s i b l y based on the "''Generally a c o n t r a c t p r i c e was set f o r the targeted output expected. For o v e r f u l f i l l m e n t of the output plan the s t a t e would pay p r o g r e s s i v e l y higher p r i c e s . 73 average cost of production of the commodity w i t h i n the defined r e g i o n , plus a small ' p r o f i t ' markup. D e l i v e r i e s of commodities above the compulsory minimum i n c l u d e d an a d d i t i o n a l p r o f i t mark-up. Through a combination of z o n a l l y d i f f e r e n t i a t i n g the p r i c e s p a i d f o r commodities, and by v a r y i n g the compulsory l i m i t s set f o r d e l i v e r i e s , the s t a t e could m i t i g a t e , to some degree, the excessive p r o f i t a b i l i t y of farms l o c a t e d i n areas of r i c h s o i l s , and/or favourable c l i m a t i c a l c o n d i t i o n s . High y i e l d i n g farms co u l d be given a r e l a t i v e l y high compulsory d e l i v e r y t a r g e t , f o r which they were p a i d r e l a t i v e l y low p r i c e s , thus l e a v i n g p r o p o r t i o n a t e l y l e s s of t h e i r t o t a l output t h a t could be mark-eted at the higher above-target p r i c e s or the s t i l l higher c o l -l e c t i v e farm market p r i c e s . 1 The MTS payments i n k i n d were a l s o i n s t r u m e n t a l i n ' l e v e l i n g ' the v a r i a t i o n s i n p r o f i t a b i l i t y among c o l l e c t i v e farms i n th a t the charges f o r work done were o f t e n expressed as a percentage of the gross harvest. Through the manipulation of the above v a r i a b l e s the s t a t e could, to some degree, c o n t r o l the d i s t r i b u t i o n of p r o f i t s among the c o l l e c t i v e farms, as w e l l as d i r e c t l y i n f l u e n c e the supply of commodities on the kolkhoz markets, and thus the. p r i c e s obtained f o r these commodities. The above d e s c r i p t i o n gives a t h e o r e t i c a l and r a t h e r D e l i v e r i e s above the compulsory minimum were not i n f a c t v o l u n t a r y due to the f a c t that outputs i n excess of the compulsory t a r g e t s could be s o l d at the higher c o l l e c t i v e farm market p r i c e s . Various inducements, such as g i v i n g p r i o r i t y i n the a l l o c a t i o n of scarce m a t e r i a l s and s e l l i n g c e r t a i n commodities to the farms at discount p r i c e s , were used to induce farms to meet the planned d e l i v e r i e s t h a t were i n excess of the compulsory minimum. 74 i d e a l i z e d account of the p r i c e s t r u c t u r e faced by the c o l l e c t i v e farms up to 1958. From 1950 to 1952 the p r i c e s of many goods d e l i v e r e d under the compulsory t a r g e t s f a i l e d to cover the costs of production."'" Compulsory d e l i v e r y p r i c e s had remained v i r t u -a l l y unchanged from t h e i r 1940 l e v e l , while r e t a i l p r i c e s had 2 increased 1000 percent over t h e i r 1940 l e v e l . C o n t r a c t u a l p r i c e s p a i d f o r t e c h n i c a l crops were g e n e r a l l y f a r more favour-able throughout t h i s p e r i o d as the frequent r e v i s i o n s made to these p r i c e s kept them more i n l i n e w i t h the r i s i n g consumer p r i c e l e v e l s . A f t e r S t a l i n ' s death there were a s e r i e s of p r i c e r e -v i s i o n s ; the l a r g e s t t a k i n g place i n 1953, 1954, and 1956. A l -though these upward r e v i s i o n s of both the compulsory d e l i v e r y p r i c e s and s t a t e purchase p r i c e s g r e a t l y increased the l e v e l of remuneration f o r farm p r o d u c t i o n , they were i n s u f f i c i e n t to cover production costs i n a l l cases, e s p e c i a l l y f o r l i v e s t o c k products, and where they d i d cover costs the l e v e l of p r o f i t -a b i l i t y v a r i e d g r e a t l y between d i f f e r e n t commodities. The f o l l o w i n g t a b l e i n d i c a t e s the r a p i d increase i n p r i c e s and the change i n the p r i c e s t r u c t u r e t h a t occurred during t h i s p e r i o d . In 1958 major changes were c a r r i e d out i n the government a g r i c u l t u r a l procurement system. The dual p r i c e system of com-puls o r y d e l i v e r y and s t a t e purchase p r i c e s was abol i s h e d and "''Labour costs f o r c o l l e c t i v e farms are imputed c o s t s , using s t a t e farm wage r a t e s . U n t i l the a b o l i t i o n of the labour day system i n 1966, the l e v e l of remuneration was dependent on the r e s i d u a l income of the c o l l e c t i v e farm. 2 Morris B o r n s t e i n , "Soviet P r i c e Theory and P o l i c y " , i n New Currents i n Soviet-Type Economies: A Reader, ed. by George F e i w e l , p.238. 75 TABLE X INDICES OF SELECTED SOVIET AGRICULTURAL PROCUREMENT PRICES* (1952=100) Commodity Group 1953 A l l a g r i c u l t u r a l products 154 Grain ^ 236 Tec h n i c a l crops 115 Sunflowers 528 F r u i t s 119 Potatoes 316 C a t t l e 385 M i l k 202 Eggs 126 Wool 10 7 1954 1955 1956 1958 207 209 251 296 739 553 634 695 111 117 147 . 143 626 987 928 774 135 138 192 179 369 368 814 789 579 585 665 1,175 289 303 334 404 135 152 155 297 146 158 246 352 Source: B o r n s t e i n , "Soviet P r i c e Theory", p.239. The p r i c e s quoted are average s t a t e procurement p r i c e s on a g r i c u l -t u r a l products. Includes raw c o t t o n , f l a x f i b e r , hemp f i b e r , sugar-beets and tobacco. re p l a c e d by a u n i f i e d s t a t e purchase p r i c e f o r each commodity. Compulsory d e l i v e r i e s were replaced by quotas, or tar g e t e d s a l e s to the s t a t e , and the s a l e s of quota and above-quota commodities were p a i d f o r at uniform p r i c e s . Although the systems of r e -c i p r o c a l s a l e s and s u b - r e t a i l p r i c i n g were a l s o a b o l i s h e d as a means f o r encouraging above-quota d e l i v e r i e s , 1 the quota a s s i g n -ments were s t i l l compulsory, w h i l e above-quota d e l i v e r i e s were s t i l l planned and were quasi-compulsory i n nature. The f i n a l general aspect of t h i s reform was the scrapping of the Motor T r a c t o r S t a t i o n s and t h e i r conversion i n t o r e p a i r and s e r v i c i n g depots. The MTS equipment was s o l d to c o l l e c t i v e farms w i t h the a i d of long-term c r e d i t s extended by the government. With the a c q u i s i t i o n of t h e i r own a g r i c u l t u r a l machinery, the previous """See n. 1, p. 7 3 . 76 system of payments i n k i n d paid to the MTS f o r t h e i r s e r v i c e s was a l s o a b o l i s h e d . Table X i n d i c a t e s the extent of the p r i c e r e v i s i o n s undertaken i n 1958. The l e v e l of the p r i c e increase was c i r -cumscribed by the c o n s t r a i n t t h a t the t o t a l p r i c e p a i d by the s t a t e f o r i t s purchases of a g r i c u l t u r a l commodities was not to exceed the pre-1958 l e v e l , plus the costs of MTS operations and investments. Therefore the o v e r a l l increase i n a g r i c u l t u r a l purchase p r i c e s was to provide a d d i t i o n a l revenues to the c o l -l e c t i v e farms f o r the purpose of f i n a n c i n g the repayment of the long-term c r e d i t s , extended f o r the a c q u i s i t i o n of the MTS equipment. 1 W i t h i n the o v e r a l l c o n s t r a i n t mentioned above, there was s i g n i f i c a n t improvement i n the r e g i o n a l d i f f e r e n t i a -t i o n of p r i c e s toward an i n c e n t i v e o r i e n t a t i o n . Although pro-curement p r i c e s were set h igher f o r high cost r e g i o n s , the p r o f i t margins i n low cost regions were to be h i g h e r , thereby 2 s t i m u l a t i n g r e g i o n a l s p e c i a l i z a t i o n of production. P r o v i s i o n s were made at t h i s time to a d j u s t s t a t e purchase p r i c e s to the v a r i a t i o n s i n gross h a r v e s t s ; i n e x c e p t i o n a l l y good harvest years the p r i c e s were to be lowered, while i n poor years the p r i c e s were 'supposed' to be adjusted upwards. The p r i c e reforms undertaken i n 1963 and 1965 f u r t h e r i n c r e a s e d the general l e v e l of a g r i c u l t u r a l procurement p r i c e s , ^ "''Collective farm revenues were al s o increased at t h i s time b y ^ p e r m i t t i n g the farms to o b t a i n machinery, t r u c k s , spare pa r t s and^gasoline at s t a t e i n d u s t r i a l wholesale p r i c e s , r a t h e r than r e t a i l p r i c e s . ( B o r n s t e i n , "Soviet P r i c e Theory", p.239.) 2 Farms could only respond to these p r o f i t i n c e n t i v e s a f t e r they had s a t i s f i e d t h e i r quota o b l i g a t i o n s . 77 and modified the r e l a t i v e p r i c e s i n order to make p r i c e s cor-respond more c l o s e l y to the average costs of production w i t h i n any given p r i c e zone. In the course of the 1965 reform minor a l t e r a t i o n s were made i n the zonal p r i c e boundaries, and the supposed f l e x i b i l i t y i n purchase p r i c e s , v i s - a - v i s the v a r i a -t i o n s i n gross harvest l e v e l s , was e l i m i n a t e d . In a d d i t i o n , above-quota premium p r i c e s were re i n t r o d u c e d f o r wheat, r y e , cotton and sunflowers."'" Since 1965 there has been no fundamental changes i n the system of a g r i c u l t u r a l p r i c e s f a c i n g c o l l e c t i v e farms. Several a d d i t i o n a l p r i c e adjustments have taken place i n recent years which have served to modify the r e l a t i v e p r i c e s t r u c t u r e as w e l l as i n c r e a s e the general l e v e l of purchase p r i c e s ; r e f l e c t i n g the new l e a d e r s h i p ' s d e s i r e to continue to improve the terms of trade of the a g r i c u l t u r a l s e c t o r . The p r i c e s t r u c t u r e of a g r i c u l t u r a l products t h a t was a p p l i c a b l e to s t a t e farms was g e n e r a l l y lower than the compar-able p r i c e s p a i d to c o l l e c t i v e farms, but the economic e f f e c t s of s t a t e farm p r i c e s d i f f e r e d c o n s i d e r a b l y from those p r i c e s p a i d to c o l l e c t i v e farms. State farms are e s s e n t i a l l y enter-p r i s e s ' i n the f i e l d ' , consequently the main f u n c t i o n of s t a t e farm p r i c e s , l i k e e n t e r p r i s e wholesale p r i c e s , i s to provide a means f o r accounting and c o n t r o l . State farm workers are paid wages on a piecework scheme, and the u t i l i z a t i o n of farm lands, u n t i l r e c e n t l y , has been r i g i d l y c o n t r o l l e d by s u p e r i o r agencies. Therefore the s t r u c t u r e of the r e l a t i v e a g r i c u l t u r a l p r i c e s , and "'"Above-quota premium p r i c e s were extended to s e v e r a l other commodities during 19 70; see page 158. 78 the l e v e l of these p r i c e s , had very l i t t l e a l l o c a t i v e or incen-t i v e e f f e c t s on s t a t e farm production. The p r i c e s paid to s t a t e farms were based on c o l l e c t i v e farm compulsory d e l i v e r y p r i c e s but were set at a m a r g i n a l l y lower l e v e l , due to the f a c t t h a t s t a t e farms were supposed to represent the i d e a l model of farm o r g a n i z a t i o n . 1 The l o s s e s i n c u r r e d by the m a j o r i t y of the s t a t e farms under t h i s p r i c i n g arrangement were o f f s e t by s u b s i d i e s from the s t a t e budget. The reforms undertaken i n the p r i c i n g of s t a t e farm out-puts between 1950 and 1965 g e n e r a l l y p a r a l l e l e d the r e g i o n a l l y d i f f e r e n t i a t e d p r i c e increases t h a t a p p l i e d to procurements from the c o l l e c t i v e farm s e c t o r , but throughout t h i s p e r i o d the s t a t e farm p r i c e s were h e l d c o n s i s t e n t l y below the procurement p r i c e s p a i d to c o l l e c t i v e farms, f o r the vast m a j o r i t y of a g r i -c u l t u r a l products. The r a p i d r i s e i n the sovkhoz p r i c e l e v e l during t h i s p e r i o d served to reduce the l e v e l of s t a t e s u b s i d i e s p a i d the sovkhozy, but average costs s t i l l exceeded average 2 revenues f o r seven of these f i f t e e n years. In A p r i l , 1967, some 390 s t a t e farms were t r a n s f e r r e d to a system of ' f u l l economic s e l f - r e l i a n c e ' , s i m i l a r to the type of system i n s t i t u t e d i n the i n d u s t r i a l s e c t o r a f t e r the 19 6 5 reforms. Under t h i s new system the above farms were to r e c e i v e long-term c r e d i t s to finance t h e i r c a p i t a l investments, 1 A f t e r 1958 s t a t e farm p r i c e s were based on the u n i f i e d s t a t e purchase p r i c e s and were s e t , on an average, 15 percent to 20 percent lower than the p r i c e s p a i d to c o l l e c t i v e farms. (Roger C l a r k e , "Soviet A g r i c u l t u r a l Reforms Since Khrushchev", Sov i e t S t u d i e s , Vol.XX (October, 1968), p.175.) 2 From f i g u r e s c i t e d i n B o r n s t e i n , "Soviet P r i c e Theory", p.242. r a t h e r than r e c e i v e non-repayable budgetary a l l o c a t i o n s f o r c a p i t a l expenditures. In order to provide s u f f i c i e n t revenues to finance the repayment of the long-term c r e d i t s , the p r i c e s paid to the sovkhozy t r a n s f e r r e d to the new system were rea-l i g n e d to equal the g e n e r a l l y higher quota purchase p r i c e s p a i d to c o l l e c t i v e farms. By the end of 1969 about 3,800 s t a t e farms had been t r a n s f e r r e d to the new system of f i n a n c i a l s e l f -r e l i a n c e , 1 and i t i s the expressed i n t e n t i o n of the government to convert a l l s t a t e farms to the new system during the course 2 of the n i n t h f i v e - y e a r p l a n . Thus the present s i t u a t i o n i s that a minor p r o p o r t i o n of s t a t e farms are under the new system of f i n a n c i a l s e l f - r e l i a n c e and are p a i d p r i c e s equal to the quota p r i c e s p a i d to c o l l e c t i v e farms i n t h e i r r e g i o n , while the other s t a t e farms, which are s t i l l r e c e i v i n g budgetary grants to finance t h e i r investments, are paid p r i c e s t h a t are g e n e r a l l y lower than those p a i d to the c o l l e c t i v e farms i n t h e i r r e s p e c t i v e r e g i o n s . I n c e n t i v e s at The Farm Level In the case of c o l l e c t i v e farms, the method used to r e -munerate members f o r t h e i r work was to d i s t r i b u t e the r e s i d u a l income of the farm among i t s members, i n accordance w i t h the q u a l i t y and q u a n t i t y of t h e i r labour c o n t r i b u t i o n s . The labour day system, which was used up u n t i l 1966, was devised to """Schroeder, "Soviet Economic Reform at an Impasse", p. 39. 2 A l e x e i Kosygin, D i r e c t i v e s of the Five-Year Economic Development Plan of the U.S.S.R. f o r 1971-1975, p.42. 80 c a l c u l a t e what p r o p o r t i o n each member made to the t o t a l produc-t i v e e f f o r t s of the farm. Using c e n t r a l l y e s t a b l i s h e d labour day s c a l e s as a guide, each farm was to e s t a b l i s h a norm or d a i l y expected achievement f o r each task undertaken on the farm. These tasks would then be placed i n t o one of nine c a t e g o r i e s , depending on the e f f o r t and s k i l l r e q u i r e d , and labour values ranging from one-half to two and one-half labour days would be assigned to each job category."'" Farm members were assigned to brigades or work teams who were r e s p o n s i b l e f o r working a d e f i n e d s e c t i o n of land or number of l i v e s t o c k . Each day the b r i g a d i e r (or team supervisor) as-signed the necessary tasks to be undertaken among the members r e p o r t i n g f o r work, and at the end of each day he c r e d i t s the members w i t h the labour day values of t h e i r r e s p e c t i v e j o b s , i n accordance w i t h t h e i r p r o p o r t i o n a l f u l f i l l m e n t of the job norm. Bonus payments of labour day c r e d i t s were made at the brigade l e v e l and were c a l c u l a t e d on the b a s i s of o v e r f u l f i l l m e n t of the y i e l d t a r g e t s assigned to the brigade, and the r e l a t i v e p e r f o r -mance of the brigade w i t h other brigades r e s p o n s i b l e f o r s i m i l a r types of work. Wi t h i n the brigade the bonus labour day c r e d i t s were a l l o c a t e d among members i n accordance w i t h t h e i r propor-t i o n a l c o n t r i b u t i o n to the t o t a l labour day c r e d i t s amassed by the brigade. At the end of the a g r i c u l t u r a l season, the t o t a l number of labour day c r e d i t s awarded to farm members were t o -t a l e d , and the value of each labour day u n i t v;as c a l c u l a t e d by t a k i n g the r e s i d u a l income i n cash and i n k i n d of the farm and "'"Spulber, The So v i e t Economy, p.86. 81 d i v i d i n g these amounts by the t o t a l labour day c r e d i t s awarded during the year. The r e s i d u a l income i n k i n d was the amount of t o t a l commodity outputs l e f t a f t e r meeting the f o l l o w i n g deductions: the compulsory t a r g e t s (or quotas) assigned by the government; the MTS payments i n k i n d ; 1 the w i n t e r feed requirements f o r farm l i v e s t o c k ; and the seeding requirements f o r the next years crops. In a d d i t i o n , the farm could decide to s e l l a p o r t i o n of the remaining produce on the kolkhoz markets to increase t h e i r monetary revenues. The remaining amounts of commodity outputs were then d i v i d e d between members, i n accordance w i t h t h e i r r e l a t i v e p r o p o r t i o n s of the t o t a l labour day u n i t s . Out of the gross money income r e c e i v e d by the farm f o r the s a l e of i t s out-puts, deductions f o r taxes, insurance, production and administra-t i v e expenses, c a p i t a l fund c o n t r i b u t i o n s , and c u l t u r a l fund deductions were made to d e r i v e the r e s i d u a l money income, which was then subject to d i s t r i b u t i o n i n accordance w i t h the labour 2 day scheme. Thus the value of a labour day u n i t remained "'"When the MTS was d i s s o l v e d i n 1958 these payments were e l i m i n a t e d . 2 Taxes were l e v i e d on gross farm revenues, i n c l u d i n g income i n k i n d d i s t r i b u t e d to the workers, valued at s t a t e purchase p r i c e s , but e x c l u d i n g allowances f o r fodder. Previous to 1958 the tax r a t e s were v a r i a b l e , depending on the source of income. From 1958 to 1965 a f l a t r a t e tax of 12.5 percent was a p p l i e d . C a p i t a l fund c o n t r i b u t i o n s were s t i p u l a t e d by the c e n t r a l a u t h o r i t i e s and up to 1958 averaged around 16 per-cent of gross cash revenues. A f t e r 1958 the deductions approached 30 percent of gross cash revenues i n order to finance the repayment of long-term c r e d i t s extended f o r the a c q u i s i t i o n of the MTS equipment. (Nove, The S o v i e t Economy, p. 55. ) 82 u n c e r t a i n u n t i l year-end c a l c u l a t i o n s were made. Considerable v a r i a t i o n s i n labour day values occurred from year to year, as the u n i t value depended on the favourableness of the c l i m a t e and on the t o t a l number of labour day u n i t s awarded, as w e l l as the l e v e l of procurements e x t r a c t e d by the government and the p r i c e s p a i d f o r these procurements. The i n c e n t i v e system used to remunerate the managerial e f f o r t s of c o l l e c t i v e farm chairman d i f f e r e d a p p r e c i a b l y from the method used to remunerate, l o w e r - l e v e l personnel described above. The base pay of c o l l e c t i v e farm chairman was composed of two p a r t s : 1) labour day c r e d i t s , awarded on the b a s i s of the number of hectares under c u l t i v a t i o n and on the q u a n t i t y and kinds of the.various l i v e s t o c k holdings of the farm, as w e l l as a percentage supplement to the labour day c r e d i t s so c a l c u -l a t e d based on the l e n g t h of s e r v i c e ; 1 2) a monthly rub l e amount th a t v a r i e d according to the money income of the c o l l e c t i v e farm. Bonus payments were made f o r o v e r f u l f i l l m e n t of crop y i e l d plans and/or l i v e s t o c k p r o d u c t i o n , p r o v i d i n g t h a t the planned assortment of farm outputs had been achieved. The bonus payments were c a l c u l a t e d as a percentage of the base pay and were p r o g r e s s i v e , r e l a t i v e to the percentage increase i n plan o v e r f u l f i l l m e n t . Penalty l e v i e s were made against the base pay of the c o l l e c t i v e farm chairman f o r u n d e r f u l f i l l m e n t of the planned output t a r g e t s . The percentage u n d e r f u l f i l l m e n t of the """A 5 percent supplement to the labour day c r e d i t s was given f o r three years of s e r v i c e , up to a maximum supplement of 15 percent f o r s e r v i c e of f i v e years or more. (Robert S t u a r t , "Managerial I n c e n t i v e s i n S o v i e t C o l l e c t i v e A g r i c u l t u r e during the Khrushchev Era", Soviet S t u d i e s , Vol.XXII ( A p r i l , 1971), p.550.) 83 planned output f o r each crop was summed and an eq u i v a l e n t per-centage of the chairman's labour day c r e d i t s was deducted from th a t p o r t i o n of h i s base pay, up to a maximum of 25 p e r c e n t . 1 Minor m o d i f i c a t i o n s were made to the labour day scheme from 1950 to 1966 but the b a s i c c h a r a c t e r i s t i c s of the ince n -t i v e scheme remained unchanged'. In 1956 the c e n t r a l a u t h o r i t i e s recommended that the c o l l e c t i v e farms make advance monthly money payments to the workers and charge the advance payments against the f i n a l d i s t r i b u t i o n of the r e s i d u a l farm income. To finance the money advances, arrangements were made to advance payment to the farms of up to one-half of the t o t a l value of the major 2 crops subject to compulsory d e l i v e r i e s . By 1958 95.3 percent 3 of a l l farms had adopted an advance payment scheme. In addi -t i o n to the above change, the r a p i d i ncrease i n s t a t e purchase p r i c e s a f t e r 1953 served to markedly s h i f t the form of labour remuneration from payments i n k i n d to cash, as w e l l as r a i s e the value of labour day u n i t s a p p r e c i a b l y . The u n c e r t a i n t y as to the value of labour day c r e d i t s , and the general inadequacy of the labour remuneration i n pro-v i d i n g s u f f i c i e n t i n c e n t i v e s to produce, lead to the a b o l i t i o n of the labour day scheme i n 1966. A decree issued i n March 1966 ordered the c o l l e c t i v e farms to replace the labour day scheme wi t h a system of minimum guaranteed payments i n cash and k i n d "'"Robert S t u a r t , "Managerial I n c e n t i v e s i n Soviet C o l l e c -t i v e A g r i c u l t u r e during the Khrushchev Era" , Sov i e t Studies ,• Vol.XXII ( A p r i l , 1971), p.542. 2 Karcz and Timoshenko, "Soviet A g r i c u l t u r a l P o l i c y " , p.136. 3 I b i d . 84 f o r c o l l e c t i v e farm workers. To a s s i s t the farms i n meeting the guaranteed wage payments, the government c a n c e l l e d the outstand-i n g debts owed by the c o l l e c t i v e farms f o r purchases of the MTS equipment, and extended f i v e - y e a r loans to the poorer c o l l e c t i v e farms; by e a r l y 1968 some 93 percent of the c o l l e c t i v e farms had been converted to the new scheme."'" Under the new system workers were to be pai d f o r work they had done at minimum pay r a t e s , which were to equal those pa i d on s t a t e farms f o r s i m i l a r types and amounts of work. The d i s t r i b u t i o n of labour payments be-tween cash and k i n d was l e f t to the d i s c r e t i o n of the i n d i v i d u a l farms. Income i n k i n d was to be valued at s t a t e purchase p r i c e s and the t o t a l value of payments i n cash and k i n d had to equal the remuneration pa i d under s t a t e farm r a t e s ; t h e r e f o r e the money payments d i s t r i b u t e d monthly were equal to the p r o p o r t i o n of t o t a l labour remuneration to be made i n cash. In order to provide a guarantee of the payments i n k i n d t h a t were owing to the workers at year end, a guaranteed fund of produce, s t i p u -l a t e d as a f i x e d p r o p o r t i o n of the gross h a r v e s t , was to be set 2 aside f o r the payments i n k i n d t h a t were outstanding. M o d i f i c a t i o n s to farm manager i n c e n t i v e s , the f i n a n c i a l p r i o r i t i e s faced by the c o l l e c t i v e farm, and the system of bonus payments to workers were a l s o an i n t e g r a l part of the new inc e n -t i v e scheme. Under the new i n c e n t i v e scheme farm managers were to r e c e i v e a guaranteed monthly s a l a r y . Supplemental bonus "'"Clarke, " A g r i c u l t u r a l Reforms Since Khrushchev", p. 160. 2 Cash payments were guaranteed i n that payments f o r work done were to be the f i r s t charge on the gross cash incomes of the farms. 85 payments were to be p a i d on a p r o g r e s s i v e b a s i s , the amounts depending on the degree of o v e r f u l f i l l m e n t of planned outputs. Payments f o r the labour s e r v i c e s of both managers and workers now have the highest p r i o r i t y on gross revenues, followed by taxes, s o c i a l and comprehensive insurance payments, c a p i t a l fund c o n t r i b u t i o n s , and deductions to the c u l t u r a l fund. Worker bonuses were to be l i n k e d to the q u a n t i t y and q u a l i t y of output produced and were to be p a i d from the net income remaining a f t e r the above-noted deductions had been made. Throughout t h e i r h i s t o r y c o l l e c t i v e farms have been competing w i t h the p r i v a t e household p l o t s f o r the labour s e r -v i c e s of i t s members.1 The a t t r a c t i v e n e s s of t h i s a l t e r n a t i v e source of income f o r the peasants made i t necessary f o r the government to s t i p u l a t e annual mandatory minimum labour day requirements f o r c o l l e c t i v e farm members. The minimum r e q u i r e d labour days were r e g i o n a l l y d i f f e r e n t i a t e d and by 1954 v a r i e d 2 from 100 to 150 labour days. A f t e r 1956, c o l l e c t i v e farms were granted the a u t h o r i t y of s t i p u l a t i n g minimum labour day c o n t r i -butions s u f f i c i e n t to c a r r y out the necessary work. The devolu-t i o n of t h i s a u t h o r i t y apparently has not r e s u l t e d i n decreased 3 minimum requirements. Although c o l l e c t i v e farm revenues have g r e a t l y i n c r e a s e d since 1953, which consequently has permitted The maximum s i z e of p r i v a t e p l o t s i s approximately two and one-half acres, but they vary up to t h i s maxima, depending on the q u a l i t y and q u a n t i t y of land a v a i l a b l e . Although pea-sants may own l i v e s t o c k up to s p e c i f i e d numbers, t h e i r r i g h t s to t h e i r p r i v a t e p l o t s are c o n d i t i o n a l on remaining•members of the c o l l e c t i v e farm. 2 Bergson, The Economics of Soviet Planning, p.223. 3See p. 163. a marked inc r e a s e i n the value of labour day payments, the a t t r a c t i v e n e s s of c o l l e c t i v e farm work r e l a t i v e to the c u l t i v a -t i o n of p r i v a t e p l o t s has not shown a corresponding increase because of the m o d i f i c a t i o n s made tha t have a f f e c t e d the labour i n c e n t i v e s toward p r i v a t e c u l t i v a t i o n . P r i o r to 19 53 compulsory d e l i v e r i e s f o r p r i v a t e p l o t s i n c l u d e d a l l major farm products. The d e l i v e r y l e v e l s were a s u b s t a n t i a l p r o p o r t i o n of the p o t e n t i a l output of the sown areas, and were p a i d f o r at the nominal procurement p r i c e s then i n a f f e c t . F a i l u r e to meet the compulsory d e l i v e r y t a r -gets r e s u l t e d i n o u t r i g h t c o n f i s c a t i o n and/or monetary f i n e s . Aside from the high compulsory d e l i v e r i e s demanded from the p r i v a t e p l o t s , an a g r i c u l t u r a l t ax was l e v i e d on the assumed income r e c e i v e d from p r i v a t e c u l t i v a t i o n and animal husbandry, and was s u b j e c t to p r o g r e s s i v e taxes ranging from 12 to 48 p e r c e n t . 1 In mid 1953 the compulsory d e l i v e r y t a r g e t s on p r i v a t e p l o t s were c o n s i d e r a b l y reduced, thereby f r e e i n g a l a r g e r p r o p o r t i o n of t h e i r t o t a l outputs f o r c o l l e c t i v e farm market s a l e s . S e v e r a l months l a t e r the a g r i c u l t u r a l tax base was s h i f t e d to a s t r a i g h t land tax and tax r a t e s were lessened, r e s u l t i n g i n an average r e d u c t i o n i n the tax burden on proceeds 2 from p r i v a t e c u l t i v a t i o n of some 58 percent. The l a s t p o s i -t i v e inducement undertaken by the Khrushchev regime toward i n -c r e a s i n g the a t t r a c t i v e n e s s of p r i v a t e c u l t i v a t i o n occurred w i t h the e l i m i n a t i o n of d e l i v e r y quotas, that took e f f e c t . "'"Nove, The Soviet Economy, p. 62. 2 Karcz and Timoshenko, "Soviet A g r i c u l t u r a l P o l i c y " , p.133. 87 beginning January, 1958. 1 I t i s d i f f i c u l t to determine the changes i n the r e l a t i v e i n c e n t i v e s of c o l l e c t i v e , versus p r i v a t e labour i n p u t s . The government d i d i n s t i g a t e negative pressures on p r i v a t e c u l t i v a -t i o n f o r almost a decade f o l l o w i n g 19 55 through reducing the s i z e of p r i v a t e p l o t s and 'encouraging' the s a l e s of l i v e s t o c k 2 to c o l l e c t i v e farms. A f t e r the f a l l of Khrushchev i n 1964, the s t r i c t enforcement of the r e g u l a t i o n s regarding the s i z e of the p r i v a t e p l o t s and the amount of p r i v a t e l i v e s t o c k owned was l i f t e d by the new l e a d e r s . Undoubtedly the various a g r i -c u l t u r a l reforms t h a t were introduced between 1953 and 1966 changed the r e l a t i v e i n c e n t i v e s of p r i v a t e versus c o l l e c t i v e labour, n e v e r t h e l e s s , on an absolute b a s i s , the l e v e l of remun-e r a t i o n f o r labour inputs remained h e a v i l y i n favour of p r i v a t e 3 household p l o t s throughout t h i s p e r i o d . The i n t r o d u c t i o n of guaranteed minimum pay f o r c o l l e c t i v e farm work, based on s t a t e farm pay r a t e s , w i l l undoubtedly increase the a t t r a c t i v e n e s s of c o l l e c t i v e farm labour. Whether the increased remuneration f o r c o l l e c t i v e farm labour inputs w i l l be s u f f i c i e n t to s h i f t the balance of labour i n c e n t i v e s i n favour of c o l l e c t i v e pro-d u c t i o n , i s as y e t , u n c e r t a i n . The system of labour remuneration and i n c e n t i v e s f o r s t a t e farm personnel d i f f e r e d c o n s i d e r a b l y from the methods used "'"Ibid. , p. 134 . 2 Between 1957 and 1960 the average s i z e of household p l o t s were reduced by 9 percent while p r i v a t e holdings of c a t t l e decreased by 19 percent. ( I b i d . , p.145.) 3 Nove, The Soviet Economy, p.212. i n the c o l l e c t i v e farm s e c t o r . State farm d i r e c t o r s , other l o w e r - l e v e l a d m i n i s t r a t i v e personnel, and a g r i c u l t u r a l s p e c i a l -i s t s were pai d a b a s i c monthly s a l a r y ; the s a l a r i e s v a r y i n g i n accordance w i t h the r e s p o n s i b i l i t i e s and s k i l l s i n v o l v e d i n the s p e c i f i c p o s i t i o n s . Seventy percent of the b a s i c y e a r l y s a l a r y was p a i d out at monthly i n t e r v a l s , w h i l e the remaining 30 per-cent was accumulated and d i s t r i b u t e d at year end, i n accordance w i t h the p r o p o r t i o n a l f u l f i l l m e n t of the output p l a n . 1 State farm workers are p a i d i n accordance w i t h wage rat e s and output norms e s t a b l i s h e d by the c e n t r a l a u t h o r i t i e s . Pay r a t e s are d i f f e r e n t i a t e d i n accordance w i t h the s k i l l and e f f o r t i n v o l v e d and the normed d a i l y outputs e s t a b l i s h e d f o r each task. I n d i -v i d u a l workers are p a i d on a piecework type b a s i s , t h e i r a c t u a l d a i l y wages v a r y i n g i n p r o p o r t i o n to t h e i r f u l f i l l m e n t of the output norm f o r t h e i r jobs. P r i o r to 1961 s t a t e farm workers r e c e i v e d t h e i r f u l l piecework wages, regardle s s of year-end plan f u l f i l l m e n t . During t h i s year the wage system was modified; henceforth the workers were to r e c e i v e 80 percent of t h e i r b a s i c piecework wages, the remainder was to be p a i d out at year end, i n accord-2 ance w i t h the p r o p o r t i o n a l f u l f i l l m e n t of the output p l a n . Aside from the wages and s a l a r i e s p a i d , a l l s t a t e farm person-n e l are a l l o t t e d p r i v a t e p l o t s of approximately one acre. Out-put from these p l o t s i s f o r personal consumption only and cannot be s o l d on the c o l l e c t i v e farm markets. ''"Allan Gruchy, Comparitive Economic Systems, p. 736 . 2 A l l e n B a l l a r d J r . , "Problems of State Farm Ad m i n i s t r a -t i o n " , S o v i e t S t u d i e s , Vol.XVII (June, 1966), p.350. 89 Bonuses f o r overf u l f i l Intent of planned outputs f o l l o w e d a system very c l o s e to that used i n i n d u s t r y p r i o r to the 1965 reforms. Bonus payments were made by a l l o c a t i n g 5-12 percent of over-plan p r o f i t s to the e n t e r p r i s e fund. Managerial bonuses were p a i d from t h i s fund, w h i l e worker bonuses f o r over-plan f u l f i l l m e n t were l i m i t e d to the bonuses i n k i n d r e c e i v e d from the e n t e r p r i s e fund and to e x t r a o r d i n a r y bonuses i n c a s h . 1 The gradual conversion of s t a t e farms to a system of 'economic s e l f - r e l i a n c e ' , t h a t has been t a k i n g place s i n c e 1967, in v o l v e d a r e s t r u c t u r i n g of the i n c e n t i v e system f o r the con-ve r t e d e n t e r p r i s e s . Three i n c e n t i v e funds, s i m i l a r to those organized f o r i n d u s t r i a l e n t e r p r i s e s a f t e r the 1965 reforms were formed to provide bonuses f o r both worker and managerial person-n e l . F i n a n c i n g of the i n c e n t i v e funds i s provided by the d i s -t r i b u t i o n of planned net p r o f i t , a l l o c a t e d i n the f o l l o w i n g man-ner: 15 percent to the m a t e r i a l i n c e n t i v e funds; 10 percent to the s o c i a l - c u l t u r a l and housing fund; 20 percent to the insurance fund; the remainder being used to repay bank c r e d i t s , supplement 2 working c a p i t a l , and finance c e n t r a l investments. Over-plan p r o f i t s are d i s t r i b u t e d i n a s i m i l a r manner w i t h lower norms be-in g used f o r a l l o c a t i o n s to the i n c e n t i v e funds to discourage 1 F o r each 1 percent of o v e r f u l f i l l m e n t of the plans f o r sa l e s ( p r o d u c t i o n ) , managerial personnel r e c e i v e d bonuses of 0.3 percent of t h e i r base annual s a l a r y . ("On the S a l a r i e s of Managerial Personnel and S p e c i a l i s t s of State Farms and other State A g r i c u l t u r a l E n t e r p r i s e s " , Pravda, A p r i l 22, 1965. Tr a n s l a t e d i n the Current Digest of the Soviet Press, V o l . X V I I , N o . l , 1965 , p.10. ) 2 C l a r k e , " A g r i c u l t u r a l Reforms Since Khrushchev", pp.163-164. 90 farms from seeking easy assignments. T o t a l a l l o c a t i o n s of pro-f i t s to the m a t e r i a l i n c e n t i v e fund i s l i m i t e d to a maximum of 12 percent of the farm's wage f u n d , 1 but u n l i k e i n d u s t r y , where the free remainder of p r o f i t s i s t r a n s f e r r e d to the budget, a l l p r o f i t s are r e t a i n e d by the s t a t e farm. "'"Ibid, p.164. 91 CHAPTER I I I TRADE The f o l l o w i n g chapter on trade w i l l be d i v i d e d i n t o two major c a t e g o r i e s ; r e t a i l t r a d e , and f o r e i g n trade. In the study of r e t a i l trade three areas of i n v e s t i g a t i o n w i l l be pursued; the planning and o r g a n i z a t i o n of t r a d e , r e t a i l p r i c e s , and microeconomic f i n a n c i a l c o n t r o l s and i n c e n t i v e s . The planning processes u t i l i z e d i n l i g h t i n d u s t r y w i l l be d i s t i n g u i s h e d from those discussed f o r heavy i n d u s t r y , and the m o d i f i c a t i o n s t h a t have occurred i n the a l l o c a t i v e mechanics u t i l i z e d f o r r e t a i l trade i n the past two decades w i l l be examined. In the s e c t i o n d e a l i n g w i t h f o r e i g n trade the planning and a d m i n i s t r a t i v e sys-tems used to determine and c o n t r o l f o r e i g n trade flows w i l l be s c r u t i n i z e d . The study of f o r e i g n trade w i l l conclude w i t h an examination of the p r i c e s a p p l i e d to traded commodities, the methods used to finance trade flows, and the recent reforms undertaken i n the methods used to finance i n t r a - b l o c trade. R e t a i l Trade Planning and o r g a n i z a t i o n of trade I t was shown i n the previous d i s c u s s i o n on the formula-t i o n of the annual plan t h a t the planning of consumer goods production was an i n t e g r a l p a r t of t h i s p r o j e c t i n g process. Previous to the c o m p i l a t i o n of the annual production-supply p l a n , fundamental d e c i s i o n s as to the d i s t r i b u t i o n of the na-t i o n a l income between producer and consumer i n d u s t r i e s were made by the Party leaders on the b a s i s of t h e i r p o l i t i c a l - e c o n o m i c o b j e c t i v e s . Consequently, the planning and a l l o c a t i o n of con-sumer goods i s ci r c u m s c r i b e d by these b a s i c d e c i s i o n s regarding the a l l o c a t i o n of resources to l i g h t i n d u s t r y . R e t a i l trade planning i s t h e r e f o r e a matter of d e c i d i n g on the production mix w i t h i n the confines of the resources a v a i l a b l e , and d i s t r i -b u t i n g the f i n a l products i n a manner th a t w i l l best s a t i s f y consumer demands. Planning the production of consumer goods c l o s e l y r e -sembles the annual planning techniques described f o r i n d u s t r i a l goods i n general. Consumer goods are a l s o evaluated w i t h regard to t h e i r importance and/or s c a r c i t y and are c l a s s i f i e d as funded goods, r e g u l a t e d goods, and n o n - p r i o r i t y or l o c a l l y produced goods. S i m i l a r l y , planning f o r the production and a l l o c a t i o n of these goods v a r i e s according to importance. Funded commodi-t i e s are planned and a l l o c a t e d by the A l l - U n i o n M i n i s t r y of Trade and Gosplan wh i l e r e g u l a t e d commodities are planned and a l l o c a t e d by the corresponding organs at the union-republican l e v e l . At these v a r i o u s planning l e v e l s p r e l i m i n a r y production and a l l o c a t i o n plans are drawn up t a k i n g i n t o account orders r e c e i v e d i n the previous planned year, and past and p r o j e c t e d c a p a c i t i e s of l i g h t i n d u s t r y . The d r a f t plans are then passed through the h i e r a r c h y of t r a d i n g organs, where they are pro-g r e s s i v e l y disaggregated, u n t i l they reach the i n d i v i d u a l r e t a i l o u t l e t s . The r e t a i l o u t l e t s then place p r e l i m i n a r y o r d e r s , based 93 on t h e i r d r a f t allotments and i n d i v i d u a l experiences regarding s a l e s trends and seasonal requirements, w i t h t h e i r r e s p e c t i v e l o c a l trade o r g a n i z a t i o n s ( t o r g i ) . The various t o r g i summate the orders of t h e i r subordinate s t o r e s and pass them back up through the a d m i n i s t r a t i v e h i e r a r c h y , a f t e r having made the necessary m o d i f i c a t i o n s to the aggregated orders based on c i t y and area budget s t u d i e s conducted by the C e n t r a l S t a t i s t i c a l A d m i n i s t r a t i o n . These aggregated orders are then used i n p l a n -ning the output, s t r u c t u r e , and a l l o c a t i o n of consumer goods. Wit h i n the l i m i t s of the productive c a p a c i t y of l i g h t i n d u s t r y the various goods are a l l o c a t e d by m a t e r i a l balances showing the expected output and demands f o r the commodity. Where supply i s inadequate r e l a t i v e to ex ante demand, the a l l o c a t i o n s of goods are d i s t r i b u t e d on a pre-determined p r i o r i t y b a s i s , or the a l l o c a t i o n s are pro-rate d and p r i c e adjustments may be made to equate ex ante demand and supply. The planning methods des-c r i b e d above are only a p p l i c a b l e to the a l l o c a t i v e mechanics u t i l i z e d f o r funded and re g u l a t e d goods. Non-regulated goods are a l l o c a t e d by means of d i r e c t c o n t r a c t u a l arrangements be-tween the buyer and s e l l e r . Normally the r e t a i l s t o r e s order goods, i n accordance w i t h t h e i r approved quotas, from t h e i r t o r g a d m i n i s t r a t i o n which f i l l s the order from i t s own sto c k s . In the event of i n s u f f i c i -ent s t o c k s , the order i s passed up the h i e r a r c h y to whatever l e v e l necessary which f i l l s the order and ships i t d i r e c t l y to the r e t a i l o u t l e t . Each warehouse i n the trade h i e r a r c h y r e -ple n i s h e s i t s depleted stocks by o r d e r i n g the r e q u i r e d goods from i t s s u p e r i o r trade organ. At the top l e v e l , the wholesale 94 warehouses, r e p l e n i s h t h e i r stocks from orders submitted to the f a c t o r y v i a the s a l e s a d m i n i s t r a t i o n of the producing m i n i s t r y . The a d m i n i s t r a t i v e r e o r g a n i z a t i o n of 1957-1958 had s i g n i f i c a n t e f f e c t s on the planning system de s c r i b e d above. The A l l - U n i o n M i n i s t r y of Trade was ab o l i s h e d and some of i t s p l a n -ning f u n c t i o n s were s h i f t e d down to the r e p u b l i c a n , sovnarkhozi, and other lower a d m i n i s t r a t i v e l e v e l s , while Gosplan, U.S.S.R., assumed r e s p o n s i b i l i t y f o r the planning of funded commodities and the o v e r a l l c o o r d i n a t i o n of the t r a d i n g organs. Large reductions i n the number of c e n t r a l l y planned and a l l o c a t e d goods were a l s o c a r r i e d out at t h i s time and have con-t i n u e d to decrease i n number up to the present time. D i s t r i b u -t i o n of the m a j o r i t y of consumer goods now take place through d i r e c t c o n t r a c t s between the producer and var i o u s trade o r g a n i -z a t i o n s , down to the l e v e l of the l a r g e r r e t a i l o u t l e t s . To f a c i l i t a t e these d i r e c t c o n t r a c t u a l r e l a t i o n s h i p s , trade f a i r s f o r d i f f e r e n t branches of l i g h t i n d u s t r y have been h e l d during the summer months i n i n c r e a s i n g numbers since 1957. 1 During these f a i r s new orders are placed by the trade organs and l a r g e r r e t a i l o u t l e t s w i t h producers, and o l d stocks of wholesale and r e t a i l o r g a n i z a t i o n s are readjusted among themselves according 2 to t h e i r needs. Before the onset of the next plan year d e t a i l e d c o n t r a c t s , s p e c i f y i n g assortments, method of payment, and "''The movement toward d i r e c t n e g o t i a t i o n s between pro-ducers and t r a d i n g o r g a n i z a t i o n s was i n t e n s i f i e d a f t e r the i n t r o d u c t i o n of the 1965 reforms. 2 Surplus commodities of wholesale and r e t a i l o u t l e t s are s o l d to other trade o r g a n i z a t i o n s who have shortages of those commodities. d e l i v e r y dates, are drawn up on the b a s i s of the p r e v i o u s l y e s t a b l i s h e d orders. The vast m a j o r i t y of a l l r e t a i l o u t l e t s are subject to the planning and d i s t r i b u t i o n system described above, the major exception being the c o l l e c t i v e farm market o u t l e t s . These kolkhoz markets provide an o u t l e t f o r the c o l l e c t i v e farms 1 and i n d i v i d u a l peasants' surplus f o o d s t u f f s , p r i m a r i l y f r e s h vegetables, g r a i n products, meat and m i l k . The markets are supervised by the government to the extent of ensuring h e a l t h requirements as w e l l as p r o v i d i n g and maintaining the necessary s t a l l s f o r the peasants at a nominal d a i l y fee. P r i c e s i n the markets are f r e e to vary w i t h supply and demand, although the government i n d i r e c t l y i n f l u e n c e s supply by the procurement p o l i c i e s i t f o l l o w s , which a f f e c t s the amount of surplus pro-du c t i o n o f f e r e d f o r s a l e , and demand through i t s a b i l i t y to s a t i s f y consumer requirements through s t a t e and cooperative r e t a i l o u t l e t s . The f o l l o w i n g t a b l e i n d i c a t e s the i n c r e a s i n g degree of divergence between the f i x e d p r i c e s charged by the government stores and the c o l l e c t i v e farm market p r i c e s . A comparison of the f i g u r e s i n the f o l l o w i n g t a b l e does not d i r e c t l y i n d i c a t e the r e a l divergence of s t a t e p r i c e s on comparable commodities from e q u i l i b r i u m l e v e l s . Since s t a t e p r i c e s are set below the market c l e a r i n g l e v e l s f o r these com-mo d i t i e s , the demand i n the c o l l e c t i v e farm markets i s l a r g e l y a r e s i d u a l demand which tends to i n f l a t e c o l l e c t i v e farm market p r i c e s above what the e q u i l i b r i u m p r i c e would be i f a l l non-processed foods were a l l o c a t e d i n a f r e e market. Since s t a t e p r i c e s are f i x e d , what a comparison of r e l a t i v e p r i c e s does 96 provide i s a rough i n d i c a t o r of the d i f f e r e n c e s i n repressed i n f l a t i o n a r y pressures o p e r a t i v e i n the economy at d i f f e r e n t p o i n t s i n time. TABLE XI INDICES OF SOVIET STATE RETAIL PRICES AND COLLECTIVE FARM MARKET PRICES FOR SELECTED YEARS, 1958-1964* (1950=100) 1958 1963 1964 Commodity State C o l l e c t i v e State C o l l e c t i v e State C o l l e c t ; Group Farm Farm Farm Food 73 107 75 129 75 135 Meat 66 105 85 121 85 151 Bread products 59 67 59 100 59 119 Potatoes 92 119 112 170 110 159 Vegetables 88 131 90 158 83 161 Vegetable o i l 65 70 65 68 65 75 B u t t e r 65 87 83 102 83 131 * Compiled from f i g u r e s c i t e d i n B o r n s t e i n , "Soviet P r i c e Theory", pp.248-251. The r e l a t i v e importance of c o l l e c t i v e farm markets as r e t a i l o u t l e t s has s t e a d i l y d e c l i n e d throughout the 1950's and 1960's, and by 1965 accounted f o r only 3 percent of the t o t a l r e t a i l s a l e s . 1 However t h i s f i g u r e tends to d i m i n i s h t h e i r true importance, i n 19 6 5 these markets provided more than 10 percent 2 of the r e t a i l s a l e s of f o o d s t u f f s to the country as a whole. The d e c l i n i n g importance of the kolkhoz markets can i n part be Spulber, The Soviet Economy, p.105. See Table X I I , p. 98. 2 I b i d . C o l l e c t i v e farm markets vary c o n s i d e r a b l y i n im-portance depending on t h e i r l o c a t i o n . In 1955 they accounted f o r 60 percent of the s a l e s of r e t a i l f o o d s t u f f s i n Odessa. (Marshall Goldman, " R e t a i l i n g i n the Soviet Union", J o u r n a l of  Marketing, Vol.XXIV ( A p r i l , 1960), p.12.) 97 e x p l a i n e d by the i n c r e a s i n g number of consumer cooperatives"'", and p a r t i c u l a r l y by the d e c i s i o n of the c e n t r a l a u t h o r i t i e s i n 1953 to allow the cooperatives to accept produce from the c o l -l e c t i v e farms and peasants to s e l l on a commission b a s i s . The cooperatives s o l d these consignment goods through t h e i r own shops as w e l l as through s t a l l s rented i n the c o l l e c t i v e farm markets, r e c e i v i n g a 10 percent commission on the s e l l i n g 2 prxce. Consumer cooperatives are predominantly l o c a t e d i n r u r a l areas and are the sol e r e t a i l o u t l e t s i n many s p a r s e l y populated regions of the country. In a d d i t i o n to the non-processed food-s t u f f s s o l d on consignment the cooperative s t o r e s r e t a i l con-sumer s t a p l e s , f o r example, soaps, c i g a r e t t e s , kerosene, and matches obtained through the government wholesales. The ma-j o r i t y of cooperative o u t l e t s c o n s i s t of a small shop, but i n populated r u r a l r e g i o n a l centers the cooperatives may be la r g e enough to provide wider r e t a i l i n g s e r v i c e s such as s p e c i a l i z e d food s t o r e s , i n d u s t r i a l goods s t o r e s or small department s t o r e s . O s t e n s i b l y consumer cooperatives are s e l f - g o v e r n i n g e n t i t i e s w i t h o f f i c i a l s being e l e c t e d by the members. In a c t u a l i t y the degree of autonomy e x e r c i s e d by the i n d i v i d u a l cooperative i s "'"Approximately 49 to 51 percent of the r u r a l p o p u l a t i o n belonged to consumer cooperatives i n 1965, versus 30 percent i n 1950. (Nancy N i m i t z , "Consumption Cooperation i n Rural Areas i n the U.S.S.R.: A Comment", Rand Paper, P-3674, p.4.) Part of the d e c l i n e i n the volume of the kolkhoz markets can a l s o be a t t r i b u t e d to the i n c r e a s i n g p r i c e s p a i d by the s t a t e procure-ment agencies which increased the i n c e n t i v e s f o r farms to s e l l more of t h e i r above-quota outputs to the government. In ad d i -t i o n , the s i z e of the p r i v a t e p l o t s were reduced during t h i s p e r i o d . 2 Goldman, So v i e t Marketing, p.43. 98 l i m i t e d , due to the f a c t that cooperative d i r e c t o r s , as w e l l as stor e allotments of goods and the s a l e s p r i c e s of these goods, are determined above the l e v e l of the membership. A l l coopera-t i v e wholesales o b t a i n t h e i r goods through government wholesale organs, and the d i s t r i b u t i o n of these goods must be made i n accordance w i t h the a l l o c a t i o n plans and s t i p u l a t e d p r i c e s that have been approved by the government. Consequently the amount of c o n t r o l the government exerts over cooperative o u t l e t s c l o s e l y p a r a l l e l s the l e v e l achieved over t h e i r own r e t a i l o u t l e t s . State r e t a i l o u t l e t s are e x c l u s i v e l y l o c a t e d to serve the urban p o p u l a t i o n . The f o l l o w i n g t a b l e i n d i c a t e s the domi-nant r o l e of government s t o r e s i n r e t a i l s a l e s . TABLE XII PERCENTAGE SHARE OF TOTAL RETAIL SALES BY THE THREE MAIN TRADE NETWORKS FOR SELECTED YEARS, 1950-1965* 1950 1955 1960 1962 1965 State r e t a i l o u t l e t s 63.9 63.2 66.8 67.3 68.0 Cooperative stores 24.1 28.1 28.8 28.4 28.0 C o l l e c t i v e farm markets 12.0 8.7 4.4 4.3 4.0 * Adapted from f i g u r e s c i t e d i n Jere L. F e l k e r , S o v i e t  Economic C o n t r o v e r s i e s , p.132, and Goldman Sov i e t Marketing, p.46. In a d d i t i o n to the above networks s p e c i a l r e t a i l o u t l e t s f o r example, worker supply shops i n i n d u s t r i a l e n t e r p r i s e s , a l s play a minor r o l e i n the d i s t r i b u t i o n of some goods and are i n c l u d e d i n the f i g u r e s given f o r government s t o r e s . Producer cooperative s a l e s are i n c l u d e d i n the f i g u r e s l i s t e d f o r cooper a t i v e s t o r e s . From the above t a b l e i t i s evident t h a t the government and cooperative trade networks are accounting f o r an i n c r e a s i n g p r o p o r t i o n of the t o t a l r e t a i l trade over time. Since both government and cooperative o u t l e t s , aside from the l a t t e r ' s commission s a l e s , are subject to s i m i l a r c o n t r o l s regarding the planning procedures followed i n the a l l o c a t i o n of consumer goods and the p r i c e s at which these goods are s o l d , i t can be seen t h a t the p r o p o r t i o n of t o t a l r e t a i l trade subject to government c o n t r o l s exceeds 95 percent of the t o t a l r e t a i l trade turnover. R e t a i l p r i c e s The p r i c i n g of consumer goods i s c a r r i e d out w i t h the o v e r a l l o b j e c t i v e of absorbing the t o t a l d i sposable income of the p o p u l a t i o n minus savings, thereby c r e a t i n g a balance between the supply and demand f o r consumer goods i n a macro sense. The b a s i s of r e t a i l s e l l i n g p r i c e s i s the branch average e n t e r p r i s e wholesale p r i c e s . P r o f i t markups of the d i s t r i b u t i o n agencies,"'" v a r y i n g l e v e l s of turnover taxes, and t r a n s p o r t a t i o n charges are added to the e n t e r p r i s e wholesale p r i c e to a r r i v e at the r e t a i l s e l l i n g p r i c e s . Of the t o t a l value of r e t a i l s a l e s i n 1965, e n t e r p r i s e wholesale p r i c e s accounted f o r 50 percent w h i l e t u r n -over taxes accounted f o r 40 percent, the remaining 10 percent 2 being taken up by the two trade margins. The d i s t r i b u t i o n of costs and taxes has v a r i e d w i d e l y among i n d i v i d u a l items as the turnover tax a p p l i e d i s u t i l i z e d to manipulate the r e l a t i v e p r i c e s of consumer goods. The turnover tax plays four major r o l e s i n the Sov i e t economic system: i t provides the major source of budgetary revenues; 3 i t provides a 'cushion' so that p r i c e changes may "'"Industry and r e t a i l trade s a l e s o r g a n i z a t i o n s add pro-f i t markups. 2 B o r n s t e i n , "Soviet P r i c e Theory", p.250. 3 Turnover tax as a percentage of t o t a l budget revenues 100 be made independently at e i t h e r the r e t a i l or wholesale l e v e l without n e c e s s i t a t i n g other p r i c e adjustments; i t i s used as an instrument i n b a l a n c i n g the o v e r a l l purchasing power of the p o p u l a t i o n w i t h the supply of goods a v a i l a b l e ; and i t i s the primary t o o l used to r e g u l a t e demand pressures f o r s p e c i f i c goods. The r e g u l a t i o n of demand pressures i s done by v a r y i n g the turnover tax a p p l i e d e i t h e r to c u r t a i l or s t i m u l a t e demand i n accordance w i t h market pressures, or a l t e r n a t i v e l y to imple-ment d e s i r e d s o c i a l p o l i c y . When p r i c e s are found to be above market c l e a r i n g l e v e l s , the tax may be reduced to s t i m u l a t e demand, or conversely, when p r i c e s are below c l e a r i n g l e v e l s , the turnover tax may be i n c r e a s e d to c u r t a i l e xcessive demand. 1 In other cases the tax r a t e s are set purposely low to e s t a b l i s h r e l a t i v e l y low r e t a i l p r i c e s , f o r example, i n the case of c h i l d r e n ' s c l o t h i n g and reading m a t e r i a l s , to encourage the f u l f i l l m e n t of d e s i r e d s o c i a l o b j e c t i v e s . The f i n a l c o n s i d e r a t i o n taken i n t o account i n r e t a i l p r i c e s e t t i n g i s t r a n s p o r t a t i o n charges. Average t r a n s p o r t a t i o n charges are assessed against c e r t a i n goods, f o r example such commodities as shoes, t e x t i l e s , l i q u o r , and tobacco, which f a c i l i t a t e s uniform countrywide p r i c e s . For most other commodi-t i e s , e s p e c i a l l y f o r a r t i c l e s whose t r a n s p o r t a t i o n costs are equaled 55.8 percent i n 1950, 43 percent i n 1955, 40 percent i n 1961 and 34.2 percent i n 1968. (Edward Ames, S o v i e t Economic Processes, p.161. The 1968 f i g u r e i s c i t e d i n Spulber, The  S o v i e t Economy, p.184.) '''Underpricing of some mass consumption goods i s t o l e r -ated to reduce the d i f f e r e n t i a l s i n r e a l income through i n f o r m a l r a t i o n i n g (quequing) which causes d e f l e c t i o n of demand of the high income earners to luxury goods. 101 h i g h , the p r i c e s are v a r i e d according to the area of consump-t i o n . Most products are c l a s s i f i e d i n t o one of three zones; g e n e r a l l y zone one i n c l u d e s d i s t r i c t s where a given a r t i c l e i s produced, zone two p r i c e areas are those i n t o which given a r -t i c l e s are imported, w h i l e zone three u s u a l l y covers remote areas of the country. The p o l i c y of uniform zonal p r i c e s c r e -ates uniform p r i c e s f o r a l l areas of consumption designated as having the same zonal c l a s s i f i c a t i o n f o r any p a r t i c u l a r commod-i t y . O s t e n s i b l y , zonal p r i c e v a r i a t i o n s r e f l e c t d i f f e r i n g t r a n s p o r t a t i o n c o s t s , but they are a l s o u t i l i z e d to a d j u s t r e g i o n a l demand pressures to the a v a i l a b l e supply, and to en-1 courage economic aims. The concept of uniform zonal p r i c e s f o r consumer goods presents a r a t h e r exaggerated image of tideness to S o v i e t p r i c -i n g p r a c t i c e s . In a c t u a l p r a c t i c e the p r i c e s charged f o r a wide v a r i e t y of goods s o l d i n r u r a l cooperative o u t l e t s were, on an average, 7 percent higher than the p r i c e s of s i m i l a r commodities 2 s o l d i n urban areas, r e g a r d l e s s of the zonal d i s t i n c t i o n s . In In many remote areas of development high money wages are o f f e r e d to l u r e the necessary labour force to these areas. High money wages are reduced i n r e a l terms and demand i s cur-t a i l e d by the i n o r d i n a t e l y high zonal c l a s s i f i c a t i o n s placed on many of the consumer goods s o l d i n these areas. Goldman c i t e s the example of food products i n Uzbeckstan being c l a s s i -f i e d as zone one even though most food i s imported. The gov-ernment s u b s i d i z e s food p r i c e s to discourage peasants from growing t h e i r own food, a l l o w i n g them more time to concentrate on growing c o t t o n . (Goldman, So v i e t Marketing, p.93.) 2 The goods which had premium p r i c e s attached to them amounted to approximately 40 percent of the cooperative t u r n -over i n the l a t e 1950's. Hence the r u r a l p r i c e l e v e l as a whole was 2.8 percent higher than the urban p r i c e l e v e l . ( N i m i t z , "Consumption i n Rural Areas", p.2.) 102 a d d i t i o n the p r i c e s of commodities under the j u r i s d i c t i o n s of r e p u b l i c a n and other l o w e r - l e v e l a d m i n i s t r a t i o n s v a r i e d con-s i d e r a b l y between l o c a t i o n s , as d i d the p r i c e s of products which were a l t e r e d i n response to seasonal f l u c t u a t i o n s or end-of-season inventory g l u t s . The major economic reforms undertaken i n 1957 had sev-e r a l s i g n i f i c a n t e f f e c t s on the p r i c i n g of consumer goods. Previous to 1957 approximately 80 percent of a l l r e t a i l p r i c e s were set by the A l l - U n i o n M i n i s t r y of Trade and Gosplan. 1 With the a b o l i t i o n of the M i n i s t r y of Trade during the i n s t i t u t i o n -a l i z a t i o n of the sovnarkhozi system of a d m i n i s t r a t i o n p r i c e making a u t h o r i t y f o r approximately 45 percent of a l l consumer 2 goods was d e c e n t r a l i z e d to the r e p u b l i c a n l e v e l . During t h i s p e r i o d zonal p r i c e d i f f e r e n t i a t i o n s were a l s o reduced and r u r a l premiums were e l i m i n a t e d on a number of commodities. The system of consumer goods p r i c i n g has remained s t a b l e s i n c e 1957, w i t h the exception of the a b o l i t i o n of r u r a l prem-iums on consumer goods undertaken during the 1965 reforms. The general r e v i s i o n of i n d u s t r i a l wholesale p r i c e s undertaken during 1966 and 1967 engendered the r a i s i n g of the f a c t o r y p r i c e of most consumer goods. The increase i n e n t e r p r i s e wholesale p r i c e s was n e c e s s i t a t e d by the i n c l u s i o n of c a p i t a l charges, which were deducted from e n t e r p r i s e o p e r a t i n g p r o f i t s , which i n t u r n n e c e s s i t a t e d a higher gross p r o f i t l e v e l to enable the v a r i o u s e n t e r p r i s e s to absorb the c a p i t a l charges wh i l e main-t a i n i n g a net p r o f i t . R e t a i l p r i c e s remained unchanged as the 1 2 Nove, The S o v i e t Economy, p.152. I b i d . 103 increase i n e n t e r p r i s e - wholesale p r i c e s was o f f s e t by a cor-responding r e d u c t i o n i n the turnover taxes a p p l i e d against the various consumer goods. F i n a n c i a l c o n t r o l s and i n c e n t i v e s The v a r i o u s p h y s i c a l and f i n a n c i a l t a r g e t s assigned and/or approved by the c e n t r a l a u t h o r i t i e s f o r s t a t e and co-o p e r a t i v e trade o u t l e t s were s i m i l a r to the c o n t r o l mechanisms used f o r i n d u s t r i a l e n t e r p r i s e s . Both government and coopera-t i v e s t o r e s operate on a khozraschet b a s i s and were assigned a l l o c a t i o n s of various goods as w e l l as t a r g e t s f o r s a l e s , cost r e d u c t i o n s , i n v e n t o r i e s , c r e d i t and profit."'" G e n e r a l l y the con-t r o l s faced by both the s t a t e and cooperative trade networks 2 were s x m i l a r . Therefore the systems of c o n t r o l s and i n c e n t i v e s to be d e s c r i b e d below r e f e r s s p e c i f i c a l l y to s t a t e r e t a i l out-l e t s although i t i s g e n e r a l l y a p p l i c a b l e to both government and cooperative r e t a i l o u t l e t s . Aside from the p h y s i c a l i n d i c a t o r s assigned to r e t a i l o u t l e t s , the f i n a n c i a l plan d e r i v e d from these p h y s i c a l i n d i c e s provide the main source of c o n t r o l over r e t a i l o p e r a t i o n s . The s a l e s i n d i c e s assigned f o r i n d i v i d u a l products are used to "'"Smaller r e t a i l o u t l e t s o f t e n d i d not operate i n d i v i d -u a l l y on a khozraschet b a s i s but were grouped wi t h the f i n a n c i a l plans of s u p e r i o r a d m i n i s t r a t i v e and o p e r a t i o n a l o r g a n i z a t i o n s . 2 • S p e c i f i c d i f f e r e n c e s d i d e x i s t i n the c o n t r o l s faced by the two r e t a i l trade systems, f o r example, cooperatives were assigned t a r g e t s f o r commission s a l e s and were a l s o allowed to d i s t r i b u t e a maximum of 20 percent of t h e i r p r o f i t s as ' d i v i -dends' to t h e i r members. In a d d i t i o n , the s p e c i f i c r u l e s a p p l y i n g to the c a l c u l a t i o n of worker bonuses were d i f f e r e n t f o r consumer cooperatives but the general p r i n c i p l e s a p p l i e d i n the c a l c u l a t i o n of these bonuses were s i m i l a r to those used f o r s t a t e r e t a i l o u t l e t s . 104 c a l c u l a t e the percentage rebates that the o u t l e t s r e c e i v e f o r the s a l e of t h e i r products. The rebates r e c e i v e d vary f o r i n -d i v i d u a l products, and between s i m i l a r products, depending on the geographic region of s a l e . To s i m p l i f y planning procedures an average rebate i s used to c a l c u l a t e gross p r o f i t from gross s a l e s revenues. Net p r o f i t i s then determined by s u b t r a c t i n g estimated d i s t r i b u t i o n expenses from the gross p r o f i t estimate. Receipts from the s a l e of goods are deposited d a i l y and payments f o r goods and s e r v i c e s r e c e i v e d are a l l t r a n s a c t e d through Gosbank using s i m i l a r methods to those d e s c r i b e d f o r i n d u s t r i a l e n t e r p r i s e s . Payments f o r inventory purchases are made through book account t r a n s f e r s , p r i m a r i l y by means of the acceptance method, o r , i n unusual circumstances, by l e t t e r s of c r e d i t . 1 Cash disbursements are l i m i t e d to the payment of wages and very small expenses p a i d from p e t t y cash. Working c a p i t a l requirements needed to finance inven-t o r y requirements cannot normally be met from the i n t e r n a l r e -2 sources of the r e t a i l o u t l e t s . A d d i t i o n a l c r e d i t s necessary to f inance seasonal needs are a l l o c a t e d to the f i r m by Gosbank, i n accordance w i t h the c r e d i t plan approved f o r the r e t a i l Subsequent acceptance methods are used so the r e t a i l e r may r e j e c t u n s u i t a b l e or shoddy merchandize w i t h r e l a t i v e ease. P r i o r acceptance methods were t r i e d f o r a p e r i o d of time to speed up c l e a r i n g procedures and thus reduce the l e v e l of funds at the d i s p o s a l of the f i r m . These methods were found to en-courage sub-standard d e l i v e r i e s , which were harder to r e t u r n once payment t r a n s a c t i o n s had been c a r r i e d out, and thus were repl a c e d i n favour of subsequent acceptance methods. 2 For consumer cooperatives short-term bank loans are used to finance 85 to 90 percent of t h e i r inventory h o l d i n g s . (Allakhuerdyan, S o v i e t F i n a n c i a l System, p.169.) 105 o u t l e t . The funds at the d i s p o s a l of the r e t a i l e n t e r p r i s e s are segregated i n t o two accounts: a s p e c i a l loan account and a r e g u l a r t r a n s a c t i o n account. A p o r t i o n of the i n t e r n a l work-ing c a p i t a l i s a l l o c a t e d to the loan account and i s supplemented by planned c r e d i t allowances granted by Gosbank. Proceeds from merchandise s a l e s are deposited d a i l y i n the loan account and are used to pay outstanding b i l l s from s u p p l i e r s and outstanding c r e d i t s extended by the bank. The r e g u l a r t r a n s a c t i o n account i s d e b i t e d f o r other expenses such as wage payments and payments f o r u t i l i t i e s , and i s r e p l e n i s h e d by frequent t r a n s f e r s of r e -bates on goods s o l d from the s p e c i a l loan account. Through the segregation of accounts, d e v i a t i o n s from planned p r o f i t s can be assessed from the balance of the t r a n s a c t i o n account wh i l e the o p e r a t i o n a l a c t i v i t i e s of the r e t a i l e n t e r p r i s e can be s c r u -t i n i z e d by movements i n the s p e c i a l loan account. The i n c e n t i v e scheme used to encourage plan f u l f i l l m e n t up u n t i l 1967 was s i m i l a r to the one o p e r a t i n g i n i n d u s t r i a l e n t e r p r i s e s p r i o r to the 1965 reforms. Managerial personnel and s t o r e c l e r k s were guaranteed a minimum of 90 percent of t h e i r b a s i c monthly s a l a r y , the remainder being p a i d at month end i n accordance w i t h t h e i r p r o p o r t i o n a l f u l f i l l m e n t s of t h e i r p r o f i t and s a l e s plans. Bonuses were pai d f o r o v e r f u l f i l l m e n t of these t a r g e t e d i n d i c e s i n p r o g r e s s i v e amounts, depending on the l e v e l of o v e r f u l f i l l m e n t . The bonus system de s c r i b e d above l e d to unfavourable d i s t o r t i o n s of assigned p l a n s , e s p e c i a l l y i n the l a r g e r r e t a i l o u t l e t s , due to the c o n f l i c t of i n t e r e s t between maximization 106 of m a t e r i a l rewards and f u l f i l l i n g many of the plan i n d i c e s . 1 Consequently a new bonus system modeled on the same general p r i n c i p l e s as the i n c e n t i v e system introduced i n i n d u s t r y a f t e r the 1965 reforms has been implemented i n both s t a t e and coopera 2 t i v e t r a d i n g networks. Foreign Trade The o r g a n i z a t i o n and planning  of f o r e i g n trade Since the end of World War I I Sov i e t f o r e i g n trade w i t h both Eastern-bloc c o u n t r i e s and 'Western' c o u n t r i e s has grown r a p i d l y , not only i n r e l a t i v e terms of past trade but a l s o i n r e l a t i o n to i t s gross n a t i o n a l product. The growth of Sov i e t trade can be a t t r i b u t e d to an in c r e a s e d r e c o g n i t i o n of compara-t i v e advantage, e s p e c i a l l y among Eastern-bloc c o u n t r i e s , as wel as to the r e d u c t i o n of i n t e r n a t i o n a l h o s t i l i t i e s and t h e i r de-s i r e to o b t a i n economic i n f l u e n c e over 'underdeveloped' coun-t r i e s . The i n c r e a s i n g l e v e l of e x t e r n a l trade has n e c e s s i t a t e d c e r t a i n changes i n t h e i r a d m i n i s t r a t i v e o r g a n i z a t i o n of trade Due to the high p r o g r e s s i v e bonuses pai d f o r o v e r f u l -f i l l i n g the sa l e s p l a n , a p p r e c i a b l e rewards could be obtained through attempting to minimize the sa l e s t a r g e t assigned. Through a r t i f i c i a l l y manipulating s a l e s records, by d e f l a t i n g s a l e s i n c e r t a i n months and i n f l a t i n g them i n other months, high p r o g r e s s i v e premiums would be paid f o r the o v e r f u l f i l l m e n t of c e r t a i n monthly s a l e s p l a n s , which would more than o f f s e t the p e n a l t i e s l e v i e d f o r plan u n d e r f u l f i l l m e n t i n other months. 2 The new i n c e n t i v e system has a l s o been introduced i n t o r e s t a u r a n t s and consumer s e r v i c e establishments as w e l l as r e -t a i l o u t l e t s f o r consumer goods. (Robert Campbell, "Economic Reform i n the U.S.S.R.", papers and proceedings of the 81st annual meeting of the American Economic A s s o c i a t i o n , American  Economic Review, V o l . L V I I I (May, 1968), p.550.) 107 as w e l l as i n the planning and f i n a n c i n g of trade flows. Foreign trade i n the S o v i e t Union i s a s t a t e monopoly which, up u n t i l recent times, was c a r r i e d out s o l e l y through the M i n i s t r y of Foreign Trade, U.S.S.R. The trade m i n i s t r y i s p r i m a r i l y an a d m i n i s t r a t i v e body whose c e n t r a l f u n c t i o n s i n c l u d e the f o r m u l a t i o n of import and export p l a n s , as w e l l as super-v i s i n g and c o o r d i n a t i n g the a c t i v i t i e s of subordinate agencies i n v o l v e d i n conducting the o p e r a t i o n a l a c t i v i t i e s a s s o c i a t e d w i t h f o r e i g n t r a d e . Implementing the f o r e i g n trade plan i s the r e s p o n s i -b i l i t y of the t h i r t y - f i v e trade associations.''" Each a s s o c i a t i o n i s r e s p o n s i b l e f o r the importing and e x p o r t i n g of a d e f i n e d . . . . 2 number of commodities t h a t are under i t s j u r i s d i c t i o n . W i thin i t s area of a u t h o r i t y the a s s o c i a t i o n i s r e s p o n s i b l e f o r the c o n t r a c t u a l n e g o t i a t i o n s , the purchases and s a l e s of imports and e x p o r t s , and the arrangements f o r export p r o d u c t i o n , t r a n s -p o r t a t i o n , and f i n a n c i n g of these goods. Formally these import-export a s s o c i a t i o n s are independent l e g a l e n t i t i e s and are thus i n d i v i d u a l l y r e s p o n s i b l e f o r t h e i r own c o n t r a c t u a l o b l i g a t i o n s , although i n a c t u a l i t y they are wholly owned by the government and are under the j u r i s d i c t i o n of the M i n i s t r y of Foreign Trade, U.S.S.R. The M i n i s t r y of Foreign Trade maintains a v a r i e t y of "'"Alec Flegon, S o v i e t Foreign Trade Techniques, p. 44. The author notes t h a t the above number i s approximate and can vary over time. 2 In some cases f o r e i g n trade a s s o c i a t i o n s may s p e c i a l -i z e i n the e x p o r t i n g or importing of a defined group of com-modities but i n the m a j o r i t y of cases one a s s o c i a t i o n i s r e s p o n s i b l e f o r both a c t i v i t i e s . 108 c o n t r o l s over the a c t i v i t i e s of i t s f o r e i g n trade a s s o c i a t i o n s . D i r e c t c o n t r o l i s provided by a s s i g n i n g o p e r a t i o n a l plans f o r each agency; plan f u l f i l l m e n t i s observed i n t e r n a l l y by a net-work of f o r e i g n trade commissioners, and e x t e r n a l l y by trade d e l e g a t i o n s attached to overseas embassies, who oversee the a c t i v i t i e s of the f o r e i g n agents of the import-export a s s o c i a -t i o n s . Commissioners are l o c a t e d i n main centres of export pro-d u c t i o n as w e l l as i n important p o r t c i t i e s and t r a n s p o r t a t i o n c e n t e r s . W i t h i n t h e i r areas they check on the f u l f i l l m e n t of export and import o r d e r s , and attempt to ensure t h a t the q u a l i t y and t i m e l i n e s s of trade orders are i n accordance w i t h s p e c i f i e d plans. In a d d i t i o n to these p h y s i c a l c o n t r o l s , f i n a n c i a l con-t r o l s over the f o r e i g n trade a s s o c i a t i o n s are maintained by Gosbank and the f o r e i g n trade bank. During the years f o l l o w i n g 1955, the monopoly of ex-t e r n a l trade through a s i n g l e m i n i s t r y was r a p i d l y s p l i n t e r e d . In 1956 the C o u n c i l of M i n i s t e r s , U.S.S.R., created a State Committee f o r Foreign Economic R e l a t i o n s , which i t placed under i t s own c o n t r o l , and i n t u r n t h i s committee formed a number of subordinate f o r e i g n trade o r g a n i z a t i o n s . The f u n c t i o n of these trade o r g a n i z a t i o n s was to arrange f o r the export of c o n s t r u c t i o n equipment and machinery i n accordance w i t h the f o r e i g n - a i d and t e c h n i c a l a s s i s t a n c e agreements undertaken by the c e n t r a l govern-ment. By 1959 seven other s t a t e o r g a n i z a t i o n s were autho r i z e d to conduct f o r e i g n trade operations through t h e i r own newly created f o r e i g n trade a g e n c i e s . 1 Although these newly created trade ''"Flegon, S o v i e t Foreign Trade, p.23. 109 agencies d i d not f a l l under the a u t h o r i t y of the M i n i s t r y of Foreign Trade, the m i n i s t r y s t i l l r e t a i n e d o v e r a l l r e s p o n s i b i l -i t y f o r d r a f t i n g the annual and long-term f o r e i g n trade plans of the economy. The f o r e i g n trade plan i s an i n t e g r a l p a r t of the annual and long-term economic plans. The framework of the f o r e i g n trade p l a n i s cons t r u c t e d i n the c o n t r o l f i g u r e s c a l c u l a t e d by Gosplan during i t s p r e l i m i n a r y f o r m u l a t i o n of the n a t i o n a l economic plan. These h i g h l y aggregated c o n t r o l f i g u r e s f o r imports and exports are based on preferences i n d i c a t e d by the p o l i t i c a l l e a d e r s , and the p r e l i m i n a r y m a t e r i a l balances f o r the domestic economy, i . e . the d e f i c i t and surplus balances, and c u r r e n t long-term trade agreements. 1 These c o n t r o l f i g u r e s are then handed down to the M i n i s t r y of Foreign Trade, U.S.S.R., which i n t u r n a l l o c a t e s the app r o p r i a t e p r e l i m i n a r y t a r g e t s to the r e l e v a n t trade o r g a n i z a t i o n s . The a c t u a l f o r m u l a t i o n of the import and export plans are c a r r i e d out by the va r i o u s trade a s s o c i a t i o n s f o r the pro-ducts w i t h i n t h e i r v a rious j u r i s d i c t i o n s . The import plans of the trade a s s o c i a t i o n s are cons t r u c t e d on the b a s i s of estimates of import needs of the economy, which i n t u r n are deri v e d from e n t e r p r i s e import o r d e r s , placed w t i h trade a s s o c i a t i o n s v i a t h e i r r e s p e c t i v e m i n i s t r i e s , and the import orders placed by 'design' o r g a n i z a t i o n s , the va r i o u s Gosplani and other admini-s t r a t i v e organs of the c e n t r a l government. The trade o r g a n i z a -"""Long-term trade agreements w i t h other c o u n t r i e s u s u a l l y run f o r a f i v e year p e r i o d and s t i p u l a t e minimum trade flows f o r key commodities, subject to annual r a t i f i c a t i o n . 110 t i o n s are r e s p o n s i b l e f o r checking on the p r i c e s and a v a i l a b i l -i t y of the commodities ordered, o b t a i n i n g d e t a i l e d s p e c i f i c a -t i o n s of non-standard import commodities and the terms and mediums of payment r e q u i r e d . With the above i n f o r m a t i o n the vari o u s trade o r g a n i z a t i o n s c o n s t r u c t t h e i r r e s p e c t i v e import plans i n p h y s i c a l terms ( c a t e g o r i z e d i n t o funded and non-funded commodities), the s p e c i f i c a t i o n s r e l e v a n t to these commodities, and the corresponding f i n a n c i a l p l a n which r e l a t e s the p r i c e and payment procedures r e q u i r e d f o r the planned imports. The p l a n -ning of exports i n v o l v e s many of the same procedures f o l l o w e d i n the planning of imports. Export a v a i l a b i l i t i e s are based on the surplus m a t e r i a l balances and are c a t e g o r i z e d on the b a s i s of funded and non-funded commodities; s p e c i f i c a t i o n s g e n e r a l l y are omitted w i t h the exception of those exports s t i p u l a t e d under long-term b i l a t e r a l trade agreements. The corresponding f i n a n -c i a l plan i s d e r i v e d from s t u d i e s of the export p o t e n t i a l of vari o u s products by country, as w e l l as the estimated p r i c e s and means of payment th a t can be obtained f o r these products. Once the d r a f t plans of the var i o u s trade a s s o c i a t i o n s have been completed they are forwarded to the M i n i s t r y of Trade, U.S.S.R. The m i n i s t r y must then compile a c o n s i s t e n t c o n s o l i d a t e d f o r e i g n trade p l a n . The i n i t i a l c o n s o l i d a t i o n i s i n v a r i a b l y i n -c o n s i s t e n t w i t h the f i n a n c i a l and, to a l e s s e r degree, the phys-i c a l c o n s t r a i n t s imposed on the f o r e i g n trade p l a n . The f i n a n -c i a l balances of the numerous trade a s s o c i a t i o n d r a f t plans show v a r y i n g degrees of o v e r a l l d e f i c i t s (or surpluses) as w e l l as i n d i v i d u a l imbalances among the various t r a d i n g c o u n t r i e s ; these are dependent upon the o v e r a l l trade balance f o r the range of I l l commodities handled through the trade o r g a n i z a t i o n and the b a l -ance of trade achieved i n these commodities with i n d i v i d u a l c o u n t r i e s . During the c o n s o l i d a t i o n of trade p l a n s , the t o t a l trade flows w i t h each t r a d i n g p a r t n e r must be balanced on a b i l a t e r a l b a s i s i n most cases, and an o v e r a l l balance of trade must a l s o be a c h i e v e d . 1 Through n e g o t i a t i o n procedures w i t h i n d i v i d u a l trade o r g a n i z a t i o n s , t h e i r d r a f t plans are r e v i s e d and a c o n s i s t e n t c o n s o l i d a t e d d r a f t plan f o r f o r e i g n trade i s e v e n t u a l l y achieved and submitted to Gosplan. Gosplan i n c o r p o r a t e s the c o n s o l i d a t e d d r a f t plan of f o r e i g n trade i n t o the va r i o u s m a t e r i a l and f i n a n c i a l balances t h a t are u t i l i z e d i n c o n s t r u c t i n g the f i n a l d r a f t of the n a t i o n -a l economic p l a n . In many cases the o r i g i n a l balances on which the i n i t i a l c o n t r o l f i g u r e s were based deviate from the f i n a l ' c orrected' balances used i n the f i n a l d r a f t of the annual p l a n . The d r a f t p l a n of f o r e i g n trade i s subsequently a l t e r e d , both i n the import and export f a c t o r s , i n order to achieve a con-2 s i s t e n t n a t i o n a l p l a n . A f t e r approval of the f o r e i g n trade p l a n , fondy f o r funded exports are d i s t r i b u t e d to the various trade o r g a n i z a -t i o n s who i n t u r n use the fondy to place d e t a i l e d orders w i t h "'"See n. 1, p. 112 . 2 In v a r y i n g the planned imports and export s , Gosplan must a l s o simultaneously maintain an o v e r a l l balance of t r a d e , unless f i n a n c i n g f o r planned d e f i c i t s has been obtained. For example, i f c e r t a i n imports must be increased to o f f s e t d e f i c i t s i n c e r t a i n m a t e r i a l balances, the increase i n imports w i l l i n tu r n n e c e s s i t a t e an increase i n exports. This s i t u a t i o n i n t u r n w i l l n e c e s s i t a t e an increase i n the demand f o r f a c t o r i n p u t s of these exports, unless new export reserves have become apparent i n the r e v i s e d balances or other p r e v i o u s l y planned imports are decreased. the s a l e s a d m i n i s t r a t i o n s of the producing m i n i s t r i e s . The m i n i s t r i e s i n tu r n a l l o c a t e these orders among t h e i r producing e n t e r p r i s e s . 1 The f o r e i g n trade a s s o c i a t i o n s may at any time duri n g the planned year modify or cancel t h e i r o r d e r s , i n accordance w i t h t h e i r success i n n e g o t i a t i n g the s a l e of planned export s , and the s p e c i f i c a t i o n s contained i n the completed con-t r a c t s . In the case of imports, the r e c i p i e n t o r g a n i z a t i o n s are a l l o t t e d fondy f o r t h e i r import orders which have been approved. The fondy permits the r e c i p i e n t o r g a n i z a t i o n s to place d e t a i l e d s p e c i f i c orders w i t h the appropriate trade o r g a n i z a -t i o n s . On the bases of the orders r e c e i v e d , the trade o r g a n i z a -t i o n s commence appropriate n e g o t i a t i o n s w i t h f o r e i g n producers to purchase the r e q u i r e d imports. The p r i c i n g and f i n a n c i n g  of f o r e i g n trade The domestic p r i c e s t r u c t u r e of the So v i e t Union i s not based on r e l a t i v e s c a r c i t y r a t i o s , and th e r e f o r e cannot be used to determine comparitive advantages; f o r t h i s reason comparitive p r i c e s are not used as a b a s i s f o r determining trade flows. In the previous d i s c u s s i o n on the c o n s t r u c t i o n of the import p l a n , i t was shown t h a t d e c i s i o n s to import were made on the bases of i n s u f f i c i e n t domestic s u p p l i e s and/or the lack of a v a i l a b l e technology to produce the s u p p l i e s necessary f o r f u l f i l l i n g the economic plan. The primary f u n c t i o n of exports i s to provide "'"During the p e r i o d of r e g i o n a l economic c o u n c i l s , the s p e c i f i c a t i o n s f o r funded and c e n t r a l l y planned exports were sent to a c o o r d i n a t i n g body, who i n t u r n d i s t r i b u t e d the orders among the various sovnarkhozi, who i n tu r n d i s t r i b u t e d them among t h e i r subordinate e n t e r p r i s e s . 113 the necessary f o r e i g n exchange needed to pay f o r the planned imports. Since the bulk of exports are 'surplus' production having low marginal use v a l u e , w h i l e imports have a high mar-g i n a l u t i l i t y , the d i f f e r e n c e s i n t h e i r r e l a t i v e u t i l i t i e s provide a r a t h e r loose s u b s t a n t i a t i o n of the b e n e f i t s of f o r e i g n trade. The p r i c e s charged and p a i d f o r export and imports g e n e r a l l y approximate the estimated c u r r e n t competitive 'world p r i c e ' f o r the commodity. Most of the trade w i t h Western c o u n t r i e s i s t r a n s a c t e d at 'world p r i c e s ' w h i l e i n t r a - b l o c trade p r i c e s are based on 'world p r i c e s ' averaged over s e v e r a l years to adjust f o r f l u c t u a t i o n s a r i s i n g out of 'market anarchy'. When trade was c a r r i e d out on a b a r t e r b a s i s , the terms of trade e s t a b l i s h e d the r e l a t i v e p r i c e s p a i d f o r the commodities ex-changed. In the case of commodities th a t could not be compared to 'world p r i c e s ' because of t h e i r p e c u l i a r i t i e s or unique a t t r i b u t e s , f o r example i n the case of ships or complex e l e c -t r o n i c equipment, then a bargained p r i c e i s e s t a b l i s h e d . The s o l e f u n c t i o n of the S o v i e t commercial exchange r a t e i s to f a c i l i t a t e the accounting of trade flows; i t has no r e l a -t i o n whatsoever to the i n t e r n a l p r i c e l e v e l of the country."'" Foreign trade a s s o c i a t i o n s buy export commodities from producer s a l e s a d m i n i s t r a t i o n s at o f f i c i a l i n t e r n a l p r i c e s , net of t u r n -"""The Sov i e t Union has a dual system of exchange r a t e s , one r a t e f o r commercial t r a n s a c t i o n s and the other r a t e f o r non-commercial t r a n s a c t i o n s . O s t e n s i b l y the non-commercial exchange ra t e i s supposed to r e f l e c t the r e l a t i v e purchasing power d i f f e r e n t i a l s between c o u n t r i e s , but i n r e a l i t y i s h i g h l y favourable to the S o v i e t Union. 114 over tax. Revenues from export r e c e i p t s are converted by the f o r e i g n trade bank i n t o domestic currency at the o f f i c i a l ex-change r a t e . Payments f o r imports are made by the f o r e i g n trade a s s o c i a t i o n s c o n v e r t i n g the necessary amounts of domestic cur-rency needed to pay f o r i t s purchases at the o f f i c i a l r a t e of exchange. Imported commodities are then s o l d to the domestic purchasers at the o f f i c i a l i n t e r n a l p r i c e . By monopolizing a l l f o r e i g n trade the import-export agencies e f f e c t i v e l y separate i n t e r n a l domestic p r i c e s from e x t e r n a l p r i c e s . The only e f f e c t t h a t the o f f i c i a l exchange r a t e has, i s tha t i t determines the s i z e of the l o c a l currency e q u i v a l e n t s of exports and imports, which a f f e c t s the t r a n s a c t i o n balances r e q u i r e d by the trade a s s o c i a t i o n s . The n o n - c o n v e r t i b i l i t y of the ruble r e s t r i c t e d the methods a v a i l a b l e f o r f i n a n c i n g trade flows. Up u n t i l 1964 the methods used f o r f i n a n c i n g i n t e r - b l o c and i n t r a - b l o c trade flows were s i m i l a r ; the bulk of a l l trade was conducted under b i l a t e r a l trade agreements between the t r a d i n g partners t h a t provided f o r an ex ante balance of trade. C l e a r i n g accounts were opened at the c e n t r a l banks i n the names of the t r a d i n g partners and a system of swing c r e d i t s was organized to f a c i l i t a t e c l e a r i n g when import r e c e i p t s from the s p e c i f i c country d i d not balance w i t h export payments at a po i n t i n time. I f there was an ex post imbalance of trade at year end the most common method of o b t a i n i n g a balance was to arrange f o r an o f f s e t t i n g ex ante imbalance f o r the f o l l o w i n g year. The method described above was used to finance a l l i n t r a - b l o c trade flows as w e l l as the m a j o r i t y of trade 115 agreements negotiated w i t h the governments of 'underdeveloped' and developed ( i . e . , Western-bloc) c o u n t r i e s . The remainder of i n t e r - b l o c trade i s financed through d i r e c t b a r t e r t r a n s a c -t i o n s , and payment of acceptable c o n v e r t i b l e c u r r e n c i e s f o r imports r e c e i v e d or exports s o l d . In the case of payment i n c o n v e r t i b l e c u r r e n c i e s , the f o r e i g n trade plan accounted f o r the amounts and t i m i n g of imports p a i d i n c o n v e r t i b l e c u r r e n -c i e s , as w e l l as f o r the accumulation of the necessary f o r e i g n exchange through the t i m e l y s a l e of appropriate q u a n t i t i e s of exports.""" S o v i e t trade w i t h developed Western n a t i o n s , whose cur-r e n c i e s were c o n v e r t i b l e , only n e c e s s i t a t e d an o v e r a l l balance of trade w i t h those n a t i o n s , as i n d i v i d u a l trade d e f i c i t s could be o f f s e t w i t h surplus trade balances w i t h other c o u n t r i e s i n t h i s group of n a t i o n s . In the case of a l l i n t r a - b l o c t r a d e , which accounted f o r the major p r o p o r t i o n of S o v i e t t r a d e , an e q u i l i b r i u m balance of trade had to be n e g o t i a t e d w i t h each country. This created a s i t u a t i o n where imports from a s p e c i -f i c E astern-bloc country were l i m i t e d to the value of exports d e s i r e d by t h a t country and conversely. With, the growing volume of i n t r a - b l o c trade the problems a s s o c i a t e d w i t h balanced b i -l a t e r a l c l e a r i n g became more exaggerated; the c r e a t i o n of the I n t e r n a t i o n a l Bank f o r Economic Cooperation (IBEC) was an a t -tempt to i n s t i t u t e an i n t r a - b l o c system of m u l t i l a t e r a l c l e a r i n g . "'"The S o v i e t purchases of Canadian wheat i n 1963 were of an unplanned nature and t h e r e f o r e were not provided f o r i n t h e i r f o r e i g n exchange plans. Although l a r g e c r e d i t s were provided, the a d d i t i o n a l c o n v e r t i b l e currency needed f o r the purchases was p a r t l y obtained through the s a l e of gold i n Western markets. 116 In l a t e 1963 B u l g a r i a , Czechoslovakia, East Germany, Hungary, Mongolia, Poland, Romania and the U.S.S.R. signed an agreement which created the IBEC. Member co u n t r i e s appointed three r e p r e s e n t a t i v e s each to the C o u n c i l of the bank, and the C o u n c i l was to have u l t i m a t e a u t h o r i t y over the bank's a f f a i r s . Each member country had one vote and a l l d e c i s i o n s of the Coun-c i l were to be unanimous. A new monetary u n i t c a l l e d the t r a n s f e r a b l e r u b l e was created to f a c i l i t a t e accounting and to provide c a p i t a l f o r the bank. 1 The bank's s t a t u t o r y c a p i t a l was set at 300 m i l l i o n t r a n s f e r a b l e r u b l e s and each member was a l l o c a t e d a s u b s c r i p t i o n quota p r o p o r t i o n a l to i t s t o t a l trade turnover w i t h p a r t i c i p a -2 t i n g member c o u n t r i e s . In 1964 each country p a i d 20 percent of i t s s u b s c r i p t i o n quota, w i t h 20 percent payable each f o l l o w i n g 3 year u n t i l the bank's c a p i t a l was f u l l y subscribed. S u b s c r i p -t i o n s were payable i n g o l d , c o n v e r t i b l e c u r r e n c i e s and t r a n s -f e r a b l e r u b l e s . T r a n s f e r a b l e r u b l e s were obtained by having a net c r e d i t balance of payments w i t h other t r a d i n g p a r t n e r s . The d e c l a r e d value of the t r a n s f e r a b l e r u b l e was 0.9874 grams of pure gold. (L. S u i l i a e v a , "Currency and F i n a n c i a l Cooperation Among Comecon Members", i n Contemporary So v i e t  Economics, ed. by Murray Yanowitch, p.158. 2 The s u b s c r i p t i o n quotas, i n m i l l i o n s of t r a n s f e r a b l e r u b l e s , of the p a r t i c i p a t i n g c o u n t r i e s were as f o l l o w s : B u i - c g a r i a , seventeen; Czechoslovakia, f o r t y - f i v e ; East Germany, f i f t y - f i v e ; Hungary, twenty-one; Mongolia, three; Poland, twenty-seven; Rumania, s i x t e e n ; U.S.S.R., 116. ("Agreement Concerning M u l t i l a t e r a l Settlements i n T r a n s f e r a b l e Rubles and the O r g a n i z a t i o n of the I n t e r n a t i o n a l Bank f o r Economic Coopera-t i o n " , American Review of S o v i e t and East European Trade, Vol.11 (January-February, 1966), p.11.) 3 L. Babitchev, "The I n t e r n a t i o n a l Bank f o r Economic Cooperation", i n Money and P l a n , ed. by Gregory Grossman, p.148. 117 Since i t i s mathematically impossible f o r a l l of the Eastern-b l o c c o u n t r i e s to have a net c r e d i t p o s i t i o n v i s - a - v i s each other, i t i s thought that the U.S.S.R. provided most of the necessary c a p i t a l by running d e f i c i t s w i t h each of i t s t r a d i n g 1 p a r t n e r s . The mechanics of c l e a r i n g take the f o l l o w i n g form. A l l payments f o r goods and s e r v i c e s as w e l l as e x t e r n a l c r e d i t s or loans are made by book entry at the IBEC, or w i t h i t s consent, i n the banks of the c o n t r a c t i n g p a r t i e s . In the l a t t e r case the bank of the e x p o r t i n g country sends the appropriate payment forms and t i t l e - t o - g o o d s documents d i r e c t l y to the bank of the importing country. These banks are o b l i g e d to provide d a i l y i n f o r m a t i o n to the IBEC of the t r a n s a c t i o n s undertaken f o r t h e i r import and export agencies. A l l reported t r a n s a c t i o n s among member c o u n t r i e s are recorded by the IBEC at the end of each working day and the d a i l y net p o s i t i o n s of each member country are determined, i . e . , a l l b i l a t e r a l balances are combined i n t o one m u l t i l a t e r a l balance and a net p o s i t i o n w i t h the bank i s o b t a i n e d . 2 Member c o u n t r i e s who have a short or long-term trade surplus may place t h e i r export earnings i n e i t h e r c u r r e n t or time d e p o s i t s . I n t e r e s t on c u r r e n t accounts i s 0.25 percent per annum, while i n t e r e s t on time deposits range from 0.5-1.5 ''"Ibid, p.136. 2 The primary method of payment used i s the subsequent acceptance method which permits immediate book account t r a n s f e r s once the goods have been shipped, thereby reducing the need f o r trade c r e d i t s . 118 percent per annum, depending on the d u r a t i o n of the d e p o s i t . 1 The bank a l s o extends seasonal and c l e a r i n g c r e d i t s to c o u n t r i e s e x p e r i e n c i n g temporary d e f i c i t balances beyond t h e i r quota con-t r i b u t i o n s ; these c r e d i t s are provided i n t e r e s t - f r e e i f the t o t a l c r e d i t outstanding does not exceed 2.5 percent of t h e i r 2 o v e r a l l trade turnover. I n t e r e s t charges are l e v i e d on out-standing c r e d i t s beyond t h i s amount, the rat e on seasonal and c l e a r i n g c r e d i t s being 1.5 percent and 2.0 percent per.annum r e s p e c t i v e l y , w h i l e a penalty r a t e of 3.0 percent per annum i s 3 l e v i e d against overdue c r e d i t s . Member c o u n t r i e s may a l s o ob-t a i n c r e d i t i n c o n v e r t i b l e c u r r e n c i e s from the bank, up to a maximum equal to t h e i r quota c o n t r i b u t i o n s t h a t were p a i d w i t h gold. Under the new system of s e t t l i n g accounts, the b i l a t e r a l b a l a n c i n g of trade w i t h each member country i s no longer o b l i g a -t o r y ; each country's f o r e i g n trade balance f o r i n t r a - b l o c trade w i l l be s a t i s i f e d i f there i s a net o v e r a l l balance of trade w i t h other member c o u n t r i e s . "'""Agreement Concerning M u l t i l a t e r a l Settlements," p. 14. 2 S u l i a e v a , "Currency and F i n a n c i a l Cooperation Among Comecon Members", p.162. 3 Babitchev, "The I n t e r n a t i o n a l Bank f o r Economic Cooper-a t i o n " , pp.138-139. 119 CHAPTER IV AN EVALUATION OF THE ECONOMIC REFORMS UNDERTAKEN  IN INDUSTRY, AGRICULTURE, AND TRADE, 1950-1970 The previous three chapters have been concerned w i t h examining the m o d i f i c a t i o n s made i n the a l l o c a t i o n mechanics u t i l i z e d i n i n d u s t r y , a g r i c u l t u r e , and trade i n the past two decades. The f o l l o w i n g chapter w i l l analyse the d e f i c i e n c i e s of the S t a l i n i s t forms of a l l o c a t i o n mechanics u t i l i z e d i n the above-mentioned s e c t o r s of the economy, and w i l l assess the successes and shortcomings of the m o d i f i c a t i o n s made i n t h e i r r e s p e c t i v e guidance systems to the present time. The chapter w i l l conclude w i t h a d i s c u s s i o n of the c o n f l i c t between c e n t r a l p lanning and the market, and the inherent d e f i c i e n c i e s i n the Sov i e t forms of a l l o c a t i o n . Industry E v a l u a t i o n of the production-supply planning  system and the reforms undertaken i n tha t system In the Sov i e t Union the d e s i r e f o r d i r e c t c e n t r a l i z e d c o n t r o l over economic a c t i v i t i e s has r e s u l t e d i n the e l i m i n a t i o n of market mechanisms f o r producer goods and intermediate products. The a l t e r n a t i v e form of a l l o c a t i o n mechanics chosen as a sub-s t i t u t e f o r market forms of a l l o c a t i o n i s provided by the cen-t r a l i z e d planning of production and d i s t r i b u t i o n d e c i s i o n s . The c r i t e r i a used to evaluate the production-supply planning system 120 w i l l be the f o l l o w i n g : given t h a t there are c e n t r a l i z e d expec-t a t i o n s as to the q u a n t i t y and q u a l i t y of goods d e s i r e d , how r e a l i s t i c are these e x p e c t a t i o n s , and how e f f i c i e n t l y does the planning system ' f u l f i l l ' these ex ante e x p e c t a t i o n s . In my e v a l u a t i o n I w i l l f i r s t examine the b a s i c methodological de-f i c i e n c i e s t h a t were inherent i n the planning system throughout the p e r i o d being considered, because i t i s i n t h i s area t h a t the fundamental d e f i c i e n c i e s of the system are found. The e v a l -u a t i o n w i l l then consider the reforms t h a t the system has under-gone i n attempts to remedy the b a s i c d e f i c i e n c i e s which are c o n s t i t u e n t to S o v i e t planning methodology. The source of many of the d i f f i c u l t i e s t h a t the S o v i e t Union has experienced i n i t s system of a l l o c a t i o n mechanics l i e s i n the methods used to determine i n d u s t r i a l output p o t e n t i a l , and i n the a l l o c a t i o n of the necessary s u p p l i e s to f a c i l i t a t e the attainment of production t a r g e t s . S p e c i f i c a l l y , the un-r e a l i s t i c and i n c o n s i s t e n t plans may be a t t r i b u t e d to f i v e f a c t o r s : 1) exaggerated expectations of p o t e n t i a l outputs or t a u t planning; 2) the methods of aggregating and d i s a g g r e g a t i n g economic i n f o r m a t i o n ; 3) the methods used i n m a t e r i a l b a l a n c i n g ; 4) the sequence of p l a n f o r m u l a t i o n ; 5) the d e f i c i e n c i e s i n the supply system. The b a s i c p r o p o r t i o n s of aggregate production are d e t e r -mined by Party and government l e a d e r s . Basing t h e i r d e c i s i o n s on an a n a l y s i s of aggregated data on the past and p r o j e c t e d year-end performance of the v a r i o u s s e c t o r s of the economy, the degree of c a p a c i t y u t i l i z a t i o n and other r e l e v a n t f a c t o r s , d i r e c t i v e s are i s s u e d d e t a i l i n g s p e c i f i c output t a r g e t s f o r 121 p r i o r i t y s e c t o r s and the d e s i r e d growth r a t e of the economy as a whole. These d i r e c t i v e s then form the b a s i s of Gosplan's t a s k , which i s to formulate s p e c i f i c production goals to f u l f i l l these c e n t r a l i z e d e x p e c t a t i o n s . The problem t h a t a r i s e s i s t h a t both the c e n t r a l d i r e c t i v e s p e r t a i n i n g to the d e s i r e d growth r a t e s , and the r e s u l t i n g c o n t r o l f i g u r e s e s t a b l i s h e d , are u n r e a l i s t i c i n terms of the resources a v a i l a b l e and the f e a s i b l e improve-ments i n labour p r o d u c t i v i t y . These exaggerated e x p e c t a t i o n s a r i s e out of a combination of i m p e r f e c t l y aggregated informa-t i o n , which gives a d i s t o r t e d p i c t u r e of the productive capa-b i l i t i e s of the economy, and the d e s i r e of the leaders t o achieve maximum growth r a t e s through the ' f u l l ' u t i l i z a t i o n of prod u c t i v e r e s o u r c e s . 1 This p r o p e n s i t y f o r o v e r - f u l l employ-ment planning continues and in c r e a s e s at each l e v e l of d i s -aggregation as the c o n t r o l f i g u r e s are disseminated down through 2 the a d m i n i s t r a t i v e h i e r a r c h y to the l e v e l of the e n t e r p r i s e . Aside from t h i s tendency of f o r m u l a t i n g t a u t expectations of resource usage, u n r e a l i s t i c c o n t r o l f i g u r e s o r i g i n a t e from the methods of aggregation used to c a l c u l a t e the v a r i o u s past and p r o j e c t e d i n p u t s and outputs of the previous planned p e r i o d . The r e s u l t i n g d i s t o r t e d data are used to provide the foundation f o r the c e n t r a l government d i r e c t i v e s , and the r e s u l t i n g c o n t r o l f i g u r e s c a l c u l a t e d by Gosplan. In order to allo w f o r the aggregation of the mu l t i t u d e of separate i n p u t s t h a t are needed to produce a given q u a n t i t y """To avoid u n d e r u t i l i z a t i o n of resources, t a u t planning p r a c t i c e s are, to a l i m i t e d e x t e n t , necessary. See n.1, p.3. of output, and to coordinate these q u a n t i t i e s at a l l the various stages of production i n t o an i n t e g r a t e d system, t e c h n i c a l -economic i n d i c e s or norms are c a l c u l a t e d . E s s e n t i a l l y these norms are i n d i c e s of inputs per u n i t of output or the r e c i p r o -c a l c a l c u l a t i o n . Three types of norms are pre v e l a n t i n the planning process; a r i t h m e t i c a l norms, progressive-average norms and t e c h n i c a l l y e s t a b l i s h e d norms. Some examples w i l l help e x p l i c a t e the d e r i v a t i o n of the above norms and the problems inherent i n t h e i r use. The a r i t h m e t i c a l input norm f o r labour i n the chemical i n d u s t r y would be d e r i v e d by the summation of e m p i r i c a l labour inputs f o r every chemical e n t e r p r i s e , d i v i d e d by the summed gross output of these f i r m s . The p r o g r e s s i v e -average input norm f o r labour i n the above example i s c a l c u -l a t e d as the average of the lowest i n p u t norm of the best e n t e r -p r i s e , and the a r i t h m e t i c a l i n p u t norm. T e c h n i c a l l y e s t a b l i s h e d norms are d e r i v e d from e m p i r i c a l research, i n t h i s example, labour time s t u d i e s , as to the t e c h n i c a l l y f e a s i b l e minimum labour i n p u t s . To continue the example f u r t h e r , suppose th a t the a r i t h m e t i c a l norm f o r labour inputs per ruble of output i s c a l c u l a t e d f o r one chemical f i r m and the f i r m wants to increase production i n one of i t s outputs so as to r a i s e i t s gross out-put by 5 percent. To increase i t s labour force by 5 percent to allow f o r the r e q u i r e d increase i n one of i t s outputs may w e l l over or understate the necessary labour requirements f o r that product. This i s p r e c i s e l y the problem inherent i n the use of norms. As the l e v e l of aggregation increases the l e v e l of gen-e r a l i z a t i o n i n c r e a s e s , which consequently increases the l e v e l 123 of distortion."'" At each l e v e l of aggregation g r e a t e r amounts of heterogeneous output assumes homogeneity. At the Gosplan l e v e l the h i g h l y aggregated norms represent i n a c c u r a t e t e c h n i c a l co-e f f i c i e n t s as a r e s u l t of the cumulative e r r o r s made i n the process of aggregation. The vast m a j o r i t y of the norms at t h i s l e v e l are s y n t h e t i c c o e f f i c i e n t s r e l a t i n g i n p u t s to outputs f o r wide groups of e n t e r p r i s e s . Only a f r a c t i o n of the aggregated norms are s y s t e m a t i c a l l y b u i l t up from t h e i r output-weighted components. I t i s these t e c h n i c a l c o e f f i c i e n t s t h a t f u r n i s h the i n f o r m a t i o n used by government leaders i n d e c i d i n g t h e i r d i r e c t i v e s , and to Gosplan, who u t i l i z e s these norms to con-s t r u c t a ' r a t i o n a l ' balanced p l a n . In the l a s t two decades there has been an i n c r e a s i n g tendency f o r Gosplan to r e p l a c e a r i t h m e t i c a l norms by average-p r o g r e s s i v e or t e c h n i c a l l y e s t a b l i s h e d a t t a i n a b l e norms i n the c o n s t r u c t i o n of t h e i r c o n t r o l f i g u r e s . The o b j e c t i v e of f o l -lowing such a p r a c t i c e i s to provide an appropriate stimulus f o r i n c r e a s i n g p r o d u c t i v i t y by ' f o r c i n g ' the d i s s e m i n a t i o n of t e c h n o l o g i c a l advances. Although t h i s p r a c t i c e may have stimu-l a t e d i n n o v a t i o n or the adoption of new techniques i n some i n -stances, the more frequent r e s u l t was to increase the tautness and the l e v e l of u n d e r f u l f i l l m e n t of planned e x p e c t a t i o n s . Obtaining c o n s i s t e n t plans i s f u r t h e r aggravated by the method of b a l a n c i n g used to o b t a i n e q u i l i b r i u m i n the ex ante supply and demand of resources. M a t e r i a l balances are drawn up """The output mix of some i n d u s t r i e s i s so complex th a t i n p u t s can be determined only i n r e l a t i o n to the gross value of output r a t h e r than each separate product. f o r wide groups of m a t e r i a l s and equipment. Thousands of these balances are drawn up during the c o n s t r u c t i o n of the annual plan and the o b j e c t i v e i s to simultaneously c l o s e a l l the primary, i n t e r m e d i a t e , and f i n a l demand and supply balances. The enor-mity of such a task, under the methods used, renders success im-p o s s i b l e . Due to the high degree of i n t e r r e l a t e d n e s s among the v a r i o u s balances, when a commodity has a d e f i c i t balance an i n -crease i n production of the commodity i s only u t i l i z e d as a l a s t r e s o r t to c l o s e the d e f i c i t b a l a n c e . 1 The most frequent method used i n c l o s i n g d e f i c i t balances i s to decrease the consumption of the d e f i c i t commodity through reducing the i n p u t norms of the consumers of t h a t commodity. Thus the tautness of the p l a n i s i n c r e a s e d i n order to o b t a i n apparent consistency i n demand and supply. When d e f i c i t balances are c l o s e d by an i n c r e a s e i n pro-d u c t i o n , a l l of the r e l a t e d balances c o n t a i n i n g the i n p u t s of the d e f i c i t commodity must be a l t e r e d a c c o r d i n g l y . This i n t u r n makes f o r r e c a l c u l a t i o n s of the balances c o n t a i n i n g the i n p u t s of the i n p u t s of the i n i t i a l d e f i c i t commodity to be i n c r e a s e d , and so on. These necessary i t e r a t i o n s , i n a c t u a l p r a c t i c e , are not c a r r i e d out due to the enormity of.the task. Gosplan econo-mist A.N. Efimov s t a t e s , " . . . r e c a l c u l a t i o n s may be l i m i t e d i n p r a c t i c e to balances d i r e c t l y e f f e c t e d by the changes. Balances r e l a t e d to the o r i g i n a l change by second, t h i r d , f o u r t h , e t c . , 2 order l i n k a g e s are only a l t e r e d where changes are s i g n i f i c a n t " . "'"See n. 2 , p. 5 . 2 John Montias, "Planning With M a t e r i a l Balances i n Soviet-Type Economies", American Economic Review, Vol.XLIX (December, 1959), p.976. 125 The r e s u l t s of the above p r a c t i c e s are concealed i n c o n s i s t e n t balances. The consequences of the i n c o n s i s t e n c i e s are t h a t even i f a l l the input norms are met by the firms a f f e c t e d by these de f a c t o d e f i c i t balances, a number of these firms w i l l have inadequate inputs to meet t h e i r output t a r g e t s . The e f f e c t s of u n f u l f i l l e d output plans w i l l have repercussions on the produc-t i v e c a p a b i l i t i e s of those firms which u t i l i z e the outputs of the firms i n i t i a l l y a f f e c t e d , and so on throughout the system. In r e a l i t y the e f f e c t s of d e f i c i t balances, and/or u n r e a l i s t i c input and output t a r g e t s , can be m i t i g a t e d by the i n v e n t o r i e s , or 'government r e s e r v e s ' , h e l d at v a r i o u s l e v e l s i n the admini-s t r a t i v e h i e r a r c h y . A determined e f f o r t i s made to ensure p r i -o r i t y s e c t o r s are adequately s u p p l i e d ; consequently the e n t e r -p r i s e s t h a t produce l o w - p r i o r i t y output bear the brunt of i n -adequate s u p p l i e s . I t can be assumed t h a t the problem of i n c o n s i s t e n t m a t e r i a l balances has been i n c r e a s i n g with the development of the economy. In the course of economic development the propor-t i o n of f i n a l demand to t o t a l output can be expected to f a l l , w h i l e the number of firms consuming each others outputs, e i t h e r d i r e c t l y or i n d i r e c t l y , w i l l i n c r e a s e . This w i l l have the e f f e c t of slowing down the convergence process of any method of i t e r a t i o n used. Therefore any given number of i t e r a t i o n s w i l l produce l a r g e r e r r o r s w i t h the growth of the economy over time. The i n c r e a s i n g use of input-output techniques during recent years i n plan f o r m u l a t i o n , e s p e c i a l l y i n checking the c o n s i s t e n c y of m a t e r i a l balances, may e v e n t u a l l y o f f e r a 126 s o l u t i o n to plan imbalances a r i s i n g out of i n s u f f i c i e n t c o n s i d -e r a t i o n of the li n k a g e s among the m a t e r i a l balances. Input-output techniques lend themselves to computer c a l c u l a t i o n s which enable s u f f i c i e n t c a l c u l a t i o n s to ensure the i n t e r n a l c o n s i s t -ency of the p l a n . 1 Although input-output techniques can theor-e t i c a l l y enable the c a l c u l a t i o n of a c o n s i s t e n t p l a n , i n h e r e n t l i m i t a t i o n s i n these techniques make them unusable as aids f o r 2 c o n s t r u c t i n g a r a t i o n a l p l a n . An i n t e r n a l l y c o n s i s t e n t ex ante plan would only reduce the l e v e l of e r r o r i n pla n f o r m u l a t i o n under curren t planning p r a c t i c e s ; so long as planning tautness i s maintained through the use of u n r e a l i s t i c i n p u t c o e f f i c i e n t s , there w i l l be ex post d e v i a t i o n s from the p l a n . Further d e f i c i e n c i e s i n the So v i e t form of a l l o c a t i o n are evident i n the s e q u e n t i a l planning p a t t e r n and the s p e c i -f i c a t i o n of gross output t a r g e t s i n t o d e t a i l e d orders. Once the e n t e r p r i s e r e c e i v e s i t s output t a r g e t s and inpu t a l l o c a t i o n s , i t s p e c i f i e s the exact requirements of i t s gross input a l l o c a t i o n s on the b a s i s of i t s approved t e n t a t i v e p l a n . The t r a n s f o r m a t i o n of output t a r g e t s i n t o s p e c i f i c c o n t r a c t s occurs s e v e r a l months a f t e r the f i r m has submitted i t s d e t a i l e d l i s t of r e q u i r e d ^ I f u n r e a l i s t i c i n p u t c o e f f i c i e n t s are used i n formu-l a t i n g the p l a n , the 'mathematical consistency' of the plan i s only t h e o r e t i c a l and i t w i l l prove to be i n c o n s i s t e n t on an a p p l i e d l e v e l . 2 The l i m i t a t i o n s inherent i n input-output techniques are the f o l l o w i n g : 1) they assume constant c o e f f i c i e n t s , independ-ent of the l e v e l of pro d u c t i o n ; 2) they cannot account f o r t e c h n o l o g i c a l change; 3) they cannot account f o r s u b s t i t u t i o n p o s s i b i l i t i e s ; 4) c a p i t a l equipment cannot be taken i n t o account. (Herbert Levine, " C e n t r a l i z e d Planning of Supply i n So v i e t Industry", i n The So v i e t Economy: A Book of Readings, ed. by Mor r i s B o r n s t e i n and Daniel F u s f e l d , p.64.) 127 i n p u t s . Consequently, when d e t a i l e d i n p u t s cannot be matched w i t h the s p e c i f i c a t i o n s of i n d i v i d u a l c o n t r a c t s , e i t h e r the plans must be changed o r the buyers must be induced to accept s u p p l i e s t h a t were not i n accordance w i t h s p e c i f i c a t i o n s . The reforms t h a t took p l a c e i n the p l a n n i n g system be-tween 1957 and 1964 were e s s e n t i a l l y a d m i n i s t r a t i v e i n nature and had l i t t l e i n f l u e n c e on the fundamental c h a r a c t e r i s t i c s of the p r e - e x i s t i n g system. The d i v i s i o n of the economy i n t o 104 r e g i o n a l economic c o u n c i l s was based on a d m i n i s t r a t i v e , r a t h e r than economic, c r i t e r i a . The sovnarkhozy e i t h e r conformed to or combined e x i s t i n g d i v i s i o n s of l o c a l government and p a r t y o r g a n i z a t i o n s and were too s m a l l t o be v i a b l e a d m i n i s t r a t i v e u n i t s . The c r e a t i o n of r e p u b l i c a n sovnarkhozy i n 1960, and the d i v i s i o n o f the country i n t o seventeen l a r g e r e g i o n s i n 1961, f o l l o w e d by the r e d u c t i o n of the number of sovnarkhozy from 104 to f o r t y - s e v e n i n 1963, were s u c c e s s i v e attempts to s o l v e the problem o f c o o r d i n a t i n g the a c t i v i t i e s o f those economic u n i t s . The l a r g e number of a d m i n i s t r a t i v e u n i t s l a c k e d adequate c o o r d i n a t i o n , e s p e c i a l l y i n t h e i r r e s e a r c h programs, and were a l s o found to be l a x i n i n s t i t u t i n g t e c h n o l o g i c a l advances i n t o t h e i r p r o d u c t i o n p r o c e s s e s . The sovnarkhozy system f u r t h e r c o m p l i c a t e d the complex system of supply p l a n n i n g . Under the m i n i s t e r i a l system each m i n i s t r y had a main a d m i n i s t r a t i o n of supply which was respon-s i b l e f o r the d i s t r i b u t i o n of major m a t e r i a l s and s u p p l i e s to a l l e n t e r p r i s e s under the j u r i s d i c t i o n o f the m i n i s t r y . Under the sovnarkhoz system, a number o.f supply a d m i n i s t r a t i o n s were s e t up under the j u r i s d i c t i o n o f Gosplan, each r e s p o n s i b l e f o r 128 a s p e c i f i c group of m a t e r i a l s u p p l i e s . I f an e n t e r p r i s e r e -q u i r e d f i v e funded commodities f o r i t s o p e r a t i o n s , there would p o s s i b l y be f i v e supply departments i n v o l v e d i n the a l l o c a t i o n of these goods. Under t h i s arrangement, ac h i e v i n g consistency i n the a l l o c a t i o n of r e q u i r e d goods became a l l the more d i f f i c u l t . 1 In summary the main d e f i c i e n c i e s i n the p r o d u c t i o n -supply planning system r e s u l t from the exaggerated and u n r e a l -i s t i c p l a n t a r g e t s , which give r i s e to i n c o n s i s t e n t plans. These exaggerated expectations a r i s e out of the u n r e a l i s t i c c a l c u l a t i o n of input norms and can only be solved through r e -f i n i n g the aggregating process and by g i v i n g i n d i v i d u a l firms more a u t h o r i t y i n d e c i d i n g t h e i r input norms. I t i s only w i t h c o n s i s t e n t , r e a l i s t i c p l a n s , and the a p p l i c a t i o n of an optimum inv e n t o r y theory on a n a t i o n a l l e v e l , t h a t the f r e q u e n t l y voiced c r i t i c i s m s of hoarding and m a l d i s t r i b u t e d i n v e n t o r i e s , black markets, and e n t e r p r i s e e x p e d i t e r s can be cured. E v a l u a t i o n of the f i n a n c i a l system  and i n d u s t r i a l wholesale p r i c e s The need f o r f i n a n c i a l planning a r i s e s out of the neces-s i t y of using a system of monetary accounting to c o n t r o l the a c t i v i t i e s of e n t e r p r i s e s and agencies i n the c a r r y i n g out of A f t e r the 1965 reforms the a d m i n i s t r a t i v e system r e -v e r t e d back to the branch of i n d u s t r y ( m i n i s t e r i a l ) system that had e x i s t e d p r i o r to 1957. The m a t e r i a l supply f u n c t i o n s c a r -r i e d out by the m i n i s t r i e s under the pre-1957 system were a b o l i s h e d to avoid the previous tendencies toward m i n i s t e r i a l s e l f - s u f f i c i e n c y . Under the new arrangements, m a t e r i a l supply i s c a r r i e d out by Gosplan and a newly formed State Committee f o r M a t e r i a l T e c h n i c a l Supply. 129 t h e i r economic f u n c t i o n s . Through f o r m u l a t i n g a p r i c e system and making economic e n t i t i e s pay f o r a l l of the goods and s e r -v i c e s i t u t i l i z e s , the multitude of heterogeneous inputs and outputs can be given s y n t h e t i c expression by a s s i g n i n g a p r i c e to each good. P r i c e s become a common measure by which means heterogeneous inputs and outputs can be aggregated, thus a l l o w -i n g the c e n t r a l a u t h o r i t i e s to e x e r t simultaneous c o n t r o l over the vast array of economic e n t i t i e s . Monetary accounting w i t h constant p r i c e s a l s o f a c i l i t a t e s i n t e r - t e m p o r a l comparisons of the performance of economic u n i t s , which r e f l e c t the r e l a t i v e e f f i c i e n c y of t h e i r operations during s p e c i f i c p o i n t s i n time. I t i s the n e c e s s i t y of having a monetary system of accounting f o r the purposes of c o n t r o l and accumulation t h a t gives r i s e to the demand f o r f i n a n c i a l planning i n the Sov i e t Union. F i n a n c i a l planning n e i t h e r precedes nor d i r e c t l y d e t e r -mines the f o r m u l a t i o n of p h y s i c a l plans f o r the economy. Rather, the f i n a n c i a l plans are a r e f l e c t i o n of the monetary e q u i v a l e n t s of the p h y s i c a l v a r i a b l e s t h a t compose the p h y s i c a l economic plans. Although f i n a n c i a l e q u i v a l e n t s of p h y s i c a l plans are used to check the coherency of the p h y s i c a l plans and the func-t i o n a l r e l a t i o n s h i p s between va r i o u s p h y s i c a l plans they are seldom used as the p r i n c i p a l i n d i c a t o r as to how p h y s i c a l imbal-ances i n these plans may be r e c t i f i e d . The lack of r e l i a n c e on f i n a n c i a l c r i t e r i a i n economic planning stems from the f a c t t h a t the p r i c e system, which provides the means f o r a l l f i n a n c i a l c a l c u l a t i o n s , i s compartmentalized and la c k s coherency. Only a p r i c e system which r e f l e c t s the true s c a r c i t y of resources, v i s - a - v i s the demands of the c e n t r a l a u t h o r i t i e s , or a l t e r n a -130 t i v e l y of consumers, can provide a b a s i s on which f i n a n c i a l magnitudes can be used to provide d i r e c t i v e guidance as to the u t i l i z a t i o n of resources i n the economy. The p r i c e system i n the Sov i e t Union does not e x h i b i t the above c h a r a c t e r i s t i c s . P r i c e s are not formed by the i n t e r -a c t i o n s of supply and demand which equates the s c a r c i t y of a good w i t h the o v e r a l l demand f o r t h a t good by a r r i v i n g at an appr o p r i a t e value through the i n t e r a c t i o n of these two for c e s i n the market. Market mechanisms i n the Soviet Union have been l a r g e l y replaced by an a l l o c a t i v e system which u t i l i z e s admini-s t r a t i v e a p p o r t i o n i n g to achieve a balance between supply and demand. Where markets are u t i l i z e d as an a l l o c a t i v e mechanism, f o r example i n the d i s t r i b u t i o n of consumer goods, i t f u n c t i o n s under r e s t r i c t e d c o n d i t i o n s where the r e l a t i v e p r i c e s are set and i n f l e x i b l e , thus e l i m i n a t i n g any r e a c t i v e feedback through the p r i c e mechanism. The b a s i s of the p r i c e s t r u c t u r e i s provided by the general p r i n c i p l e t h a t p r i c e s at the e n t e r p r i s e wholesale l e v e l r e f l e c t the average cost of production f o r the good i n question plus a p r o f i t markup. The Soviet methods of c a l c u l a t i n g costs are incomplete i n the sense t h a t land c o s t s , d e p l e t i o n c o s t s , and u n t i l r e c e n t l y c a p i t a l costs were a l l excluded from cost c a l c u l a t i o n s , and d e p r e c i a t i o n costs were undervalued i n r e l a -t i o n to the tru e r a t e of d e t e r i o r a t i o n of c a p i t a l a s s e t s . The r e s u l t of the above exemptions i s tha t the economic cost s attached to the u t i l i z a t i o n of c a p i t a l , l a n d , and the d e p l e t i o n of n a t u r a l resources were not accounted f o r . These omissions had the e f f e c t of d i s t o r t i n g r e l a t i v e costs i n favour of the 131 c a p i t a l i n t e n s i v e and e x t r a c t i v e branches of i n d u s t r y . I f one ignores the above d e f i c i e n c i e s there i s a tendency toward r a -t i o n a l r e l a t i v e costs f o r producer goods i n t h a t the labour c o s t s , which account f o r the major p r o p o r t i o n of t o t a l c o s t s , are d e r i v e d from the p r i c e s p a i d f o r labour. Although wages are set by the s t a t e , the f o r m u l a t i o n of labour wage rat e s are a r r i v e d at through a de f a c t o labour market. Due to the occupa-t i o n a l freedom th a t now e x i s t s i n the country, wages are set to achieve the d e s i r e d d i s t r i b u t i o n of labour, t a k i n g i n t o account the e d u c a t i o n a l l e v e l s and r e q u i r e d s k i l l s as w e l l as the geo-g r a p h i c a l l o c a t i o n of areas of demand. Wit h i n the realm of i n d u s t r i a l wholesale p r i c e s f o r producer goods m o d i f i c a t i o n s are made i n t h e r e l a t i v e p r i c e s of c l o s e s u b s t i t u t e s i n an attempt to adjust these p r i c e s toward t h e i r r e l a t i v e s c a r c i t i e s , thereby a c h i e v i n g appropriate sub-s t i t u t i o n r a t i o s . 1 The previous d i s c u s s i o n on the r o l e of p r i c e s i n the Sovi e t economy noted t h a t p r i c e s provide a guide to planners i n the s e l e c t i o n of s u b s t i t u t e s to c l o s e d e f i c i t m a t e r i a l b a l -ances, i n the choice of a l t e r n a t i v e investments, and a l s o i n d e c i s i o n s regarding the d e t a i l e d production f u n c t i o n s of new e n t e r p r i s e s and the b e n e f i t s of modernizing o l d f a c i l i t i e s . C l o s i n g m a t e r i a l balances by the s u b s t i t u t i o n of l e s s scarce commodities, as shown by t h e i r r e l a t i v e p r i c e s , probably does not r e s u l t i n se r i o u s s u b - o p t i m i z a t i o n of resource use as """It was p r e v i o u s l y noted that the 1963 p r i c e r e v i s i o n was p r i m a r i l y d i r e c t e d toward r e f l e c t i n g s t r u c t u r a l changes i n the economy, v i s - a - v i s the e x t r a c t i v e i n d u s t r i e s and the nation's ' f u e l b a l a n c e 1 . 132 c o n s i d e r a t i o n i s given to s c a r c i t y f a c t o r s i n s e t t i n g the r e l a -t i v e p r i c e s of c l o s e s u b s t i t u t e s . C o n s i d e r a t i o n of the l e v e l of t o t a l costs that i n f l u e n c e d e c i s i o n s regarding a l t e r n a t i v e investments and production f u n c t i o n s of firms undoubtedly r e s u l t i n c o n s i d e r a b l e sub-optimal resource use i n t h a t the r e l a t i v e p r i c e s considered deviate f u r t h e r from t h e i r s c a r c i t y values. Regardless of what r e l a t i v e p r i c e s or groups of p r i c e s being considered, i f p r i c e s are used f o r d i r e c t i v e c r i t e r i a i n the a l l o c a t i o n of resources sub-optimal resource usage w i l l r e s u l t . Even i n the case of c l o s e l y s u b s t i t u t a b l e products where r e l a -t i v e s c a r c i t i e s are considered i n f i x i n g t h e i r p r i c e s , the S o v i e t p r a c t i c e of f i x i n g p r i c e s f o r extended periods of time does not a l l o w f o r s t r u c t u r a l changes i n the economy to be r e -f l e c t e d i n p r i c e s during the time p e r i o d between p r i c e r e v i s i o n s . The i r r a t i o n a l i t y of i n d u s t r i a l wholesale p r i c e s , s p e c i f i c a l l y those f o r producer goods, has assumed gr e a t e r dimensions w i t h the i n t r o d u c t i o n of p r o f i t ( p r o f i t a b i l i t y ) as the p r i n c i p a l success i n d i c a t o r that occurred a f t e r the 1965 reforms. R e l a t i v e c o s t - p r i c e r a t i o s now assume paramount im-portance to the e n t e r p r i s e s i n t h e i r attempt to f u l f i l l t h e i r p r o f i t p l a n , but these c o s t - p r i c e r a t i o s i n no way r e f l e c t the r e l a t i v e s c a r c i t i e s of the goods produced by the f i r m . Under these circumstances the p h y s i c a l s t i p u l a t i o n of output a s s i g n -ments must remain and f l o u r i s h . 1 ''"Without p h y s i c a l assortment t a r g e t s , e n t e r p r i s e s would avoid the production of l o w - p r o f i t commodities even though the u t i l i t y of these goods may be very high. A s i m i l a r s i t u a t i o n e x i s t s w i t h the a l l o c a t i o n of inputs to i n d u s t r i a l f i r m s ; the u n d e r - p r i c i n g of producer goods n e c e s s i t a t e s the a d m i n i s t r a t i v e a l l o c a t i o n of many m a t e r i a l s and equipment to p r i o r i t y areas of The g r e a t e s t m o d i f i c a t i o n s to e n t e r p r i s e wholesale p r i c e s occur w i t h the a d d i t i o n of turnover taxes to consumer goods. 1 The f o l l o w i n g t a b l e shows the degree of m o d i f i c a t i o n i n consumer goods p r i c e s from the a p p l i c a t i o n of turnover taxes TABLE X I I I COMPOSITION OF INDUSTRIAL WHOLESALE PRICES, 1964* Production and P r o f i t Turnover Marketing Costs Tax Producer goods 81.6% 11.5% 6.9% Consumer goods 66.5% 8.2% 25.3% * Source: B o r n s t e i n , "Soviet P r i c e Theory and P o l i c y " , p.227. Turnover taxes are one of the p r i n c i p a l sources of ac-2 cumulation f o r the s t a t e . A l l productive processes both xnside and o u t s i d e the s t a t e s e c t o r generate income which i s e i t h e r spent or saved. Through c a l c u l a t i n g d r a f t balances of incomes and expenditures of the p o p u l a t i o n , d i s p a r i t i e s between the amount of disposable income spent on consumer goods and the planned volume of consumer goods a v a i l a b l e are made evident. Although v a r i o u s a l t e r n a t i v e s may be fol l o w e d to m i t i g a t e the expansion 1 E l e c t r i c i t y and f o s s i l f u e l s are the only producer goods t h a t have a turnover tax a p p l i e d to them. 2 P r o f i t deductions,- income taxes and other types of deductions, provide a d d i t i o n a l budgetary revenues, but turnover taxes up to 1965 provided the main source of unencumbered bud-getary revenue. The reason f o r a dual source of income from p r o d u c t i v e a c t i v i t i e s i s that p r o f i t s are not assured by the f u l f i l l m e n t of the output plans w h i l e turnover tax revenue i s assured and can be e x t r a c t e d more r a p i d l y . 134 d i s e q u i l i b r i u m , f o r example r a i s i n g p r i c e s , lowering wages or i n c r e a s i n g income taxes, the primary method used to equate supply and demand i s to apply high tax rates on new products e n t e r i n g the market. In a p p l y i n g turnover taxes to consumer goods the c e n t r a l a u t h o r i t i e s g e n e r a l l y f o l l o w the p r a c t i c e of a p p l y i n g r e l a t i v e l y high tax r a t e s to luxury goods and r e l a t i v e l y low r a t e s to most mass consumption goods. This p r a c t i c e serves to equate ex ante supply and demand f o r s p e c i -f i c goods as w e l l as reduce d i s p a r i t i e s i n the l e v e l of r e a l income between d i f f e r e n t o c c u p a t i o n a l groups i n the s o c i e t y . I t becomes obvious from the preceding a n a l y s i s t h a t the p r i c e s t r u c t u r e i n the S o v i e t Union i s g r e a t l y i n f l u e n c e d by the deployment of the p r i c e system to achieve a d e s i r a b l e d i s -t r i b u t i o n of the n a t i o n a l income. The c e n t r a l planners have u t i l i z e d i n d i r e c t t a x a t i o n i n the forms of the turnover taxes and p r o f i t deductions to provide the bulk of budgetary revenues, r a t h e r than r e s o r t i n g to d i r e c t t a x a t i o n as a means f o r forced saving. In essence, the turnover tax system i s an i n d i r e c t , p r o g r e s s i v e system of t a x a t i o n . The compartmentalized p r i c e s t r u c t u r e of the S o v i e t Union i s l a r g e l y a r e s u l t of the u t i l i -z a t i o n of the p r i c e system i n d i s t r i b u t i n g the n a t i o n a l income i n a manner appropriate to the aims of the c e n t r a l a u t h o r i t i e s . I t was p r e v i o u s l y s t a t e d t h a t the primary f u n c t i o n of the f i n a n c i a l system was to f a c i l i t a t e c o n t r o l over the execu-t i o n of p h y s i c a l and f i n a n c i a l plans. Thus the cash plan pro-vides a s y n t h e t i c measure of the f u l f i l l m e n t of a v a r i e t y of other plans which are i n c o r p o r a t e d i n t o the cash p l a n , e i t h e r wholly or i n p a r t . S p e c i f i c a l l y , the degree of f u l f i l l m e n t of the cash plan r e f l e c t s the degree of f u l f i l l m e n t of the produc-t i o n plan ( v i a wages), the plan f o r r e t a i l t r a d e , the c r e d i t p l a n , and the plan f o r a g r i c u l t u r a l procurements. S i m i l a r l y , the f u l f i l l m e n t of planned budgetary revenues f o r turnover and p r o f i t taxes provide an a d d i t i o n a l check on the f u l f i l l m e n t of production plans. At the micro l e v e l , c o n t r o l over e n t e r p r i s e a c t i v i t i e s i s provided by a combination of p h y s i c a l and f i n a n c i a l t a r g e t s , and severe r e s t r i c t i o n s on the u t i l i z a t i o n of the monetary funds a v a i l a b l e to the e n t e r p r i s e . The monetary funds a v a i l a b l e to the e n t e r p r i s e are h e l d by the s t a t e bank and c o n s i s t of 'cash' and book account balances. G e n e r a l l y cash balances may only be u t i l i z e d f o r wage payments and cash disbursements f o r these purposes must be w i t h i n the l i m i t s assigned by the wage fund f o r the e n t e r p r i s e . Since ' f r e e ' cash provides a high degree of freedom to the e n t e r p r i s e , movements of cash balances r e c e i v e a p p r o p r i a t e s c r u t i n y by the bank o f f i c i a l s . The payments f o r goods r e c e i v e d by an e n t e r p r i s e and a l l r e c e i p t s obtained through the s a l e of t h e i r output are made by a t r a n s f e r of bank balances between va r i o u s branch banks of the Gosbank. In t h i s manner a l l payments and r e c e i p t s of an e n t e r p r i s e can be checked f o r p r o p r i e t y w i t h the e n t e r p r i s e production-supply plan and w i t h the s t a t e p r i c e l i s t s . C r e d i t arrangements provide an a d d i t i o n a l means f o r c o n t r o l l i n g e n t e r p r i s e a c t i v i t i e s . By banning a l l commercial c r e d i t between e n t e r p r i s e s and making each e n t e r p r i s e dependent on c r e d i t provided by the s t a t e bank f o r f i n a n c i n g a p o r t i o n of t h e i r necessary working c a p i t a l , the i d l e bank balances are reduced to a minimum and the d a i l y operations of the e n t e r p r i s e are subjected to ' c o n t r o l by the r u b l e ' . Working c a p i t a l c r e -d i t s are a l l o c a t e d to the e n t e r p r i s e f o r planned tasks and i n accordance w i t h assigned quotas. Repayment of these c r e d i t s can only take place through revenues accumulated from the c a r r y i n g out of planned productive processes. Therefore the f u l f i l l m e n t of the c r e d i t plan r e f l e c t s the f u l f i l l m e n t of the production plan of the e n t e r p r i s e . 1 The above monetary c o n t r o l s , i n a d d i t i o n to the p r o f i t , a m o r t i z a t i o n and turnover tax c o l l e c t i o n s made by the s t a t e bank i n i t s c a p a c i t y as the f i s c a l agent f o r the government, must provide r a t h e r s t r i n g e n t r e g u l a t i o n over e n t e r p i s e a c t i v -i t y . From the numerous a r t i c l e s p e r t a i n i n g to the l a r g e hoards of m a t e r i a l and equipment kept i n e n t e r p r i s e basements and pre-valence of 'procurers' on e n t e r p r i s e p a y r o l l s i t i s evident t h a t the combination of p h y s i c a l and f i n a n c i a l c o n t r o l s a p p l i e d 2 to the e n t e r p r i s e are not e n t i r e l y comprehensive. I t i s probable t h a t the above t r a n s g r e s s i o n s occur p r i m a r i l y out of the ingenious f a l s i f i c a t i o n s p e r p e t r a t e d by e n t e r p r i s e managers i n t h e i r attempt to overcome the d e f i c i e n c i e s of the m a t e r i a l supply system (which would otherwise reduce t h e i r m a t e r i a l rewards), r a t h e r than from any gross d e f i c i e n c i e s i n the S o v i e t f i n a n c i a l - c o n t r o l system. '''The increa s e d use of mutual o f f s e t c l e a r i n g balances a f t e r 1960 was a refinement to other c l e a r i n g processes i n t h a t c o n t r o l l e d commercial c r e d i t was s u b s t i t u t e d f o r bank balances t h a t would otherwise have been necessary. 2 For example, see Margaret M i l l e r , "Markets i n Russia", i n Communist Economy Under Change, ed. by A. Deutsch, pp.25-28, and Nove, The S o v i e t Economy, pp.42, 223-227. E v a l u a t i o n of microeconomic planning:  i n c e n t i v e s , t a r g e t s , and c o n t r o l s The i n c e n t i v e system was supposed to encourage the f u l -f i l l m e n t of the t a r g e t e d i n d i c e s assigned to the f i r m by pro-v i d i n g m a t e r i a l rewards; u n t i l the 1965 reforms i t was undoubt-edly the weakest l i n k i n the system of c o n t r o l s over the execution of the p l a n . Rather than encourage plan f u l f i l l m e n t the i n c e n t i v e system only served to encourage the f u l f i l l m e n t or o v e r f u l f i l l m e n t of those t a r g e t e d v a r i a b l e s to which the i n c e n t i v e system was r e l a t e d , o f t e n to the detriment of those t a r g e t s which were not r e l a t e d to the m a t e r i a l rewards p r o f e r r e d to the e n t e r p r i s e manager. Up to 1958 the p r i n c i p a l c r i t e r i o n used to evaluate managerial bonuses was the degree of f u l f i l l m e n t of the gross value of output t a r g e t . Other i n d i c e s that a f f e c t e d managerial bonuses, such as cost r e d u c t i o n and assortment mix, were r e l a t e d i n such a way t h a t the t r a d e - o f f between the v a r i a b l e s favoured the maximization of output. The consequences of basing rewards p r i m a r i l y on the value of output r e s u l t e d i n the f o l l o w i n g d i s -economies i n resource usage: 1) P r o g r e s s i v e rewards f o r the degree of f u l f i l l m e n t of the gross value of output t a r g e t pro-vided s u f f i c i e n t i n c e n t i v e f o r managers to d e f l a t e t h e i r produc-t i v e c a p a c i t i e s and i n f l a t e m a t e r i a l requirements i n the b a r g a i n i n g of plan t a r g e t s w i t h s u p e r i o r a u t h o r i t i e s to ensure f u l f i l l m e n t of t h e i r assigned t a r g e t s . 2) The gross output t a r g e t was e i t h e r expressed i n p h y s i c a l u n i t s or i n value terms, depending on the s t a n d a r d i z a t i o n of production. Whatever the method of s p e c i f i c a t i o n used, i t lead to i t s own type of 138 d i s t o r t i o n of plan f u l f i l l m e n t , f o r example, when output of sheet metal was s p e c i f i e d i n tons, e x t r a - t h i c k sheets were pro-duced, when the t a r g e t was s p e c i f i e d i n square metres, e x t r a -t h i n sheets were produced. When output was s p e c i f i e d i n value terms, i t r e s u l t e d i n d i s t o r t i o n s of the product mix i n favour of high p r i c e d v a r i a n t s and the o r d e r i n g of the most expensive m a t e r i a l inputs to increase the value of the f i n a l o u t p u t . 1 3) Implementation of c e n t r a l l y s p e c i f i e d t e c h n o l o g i c a l innov-t i o n s was avoided as much as p o s s i b l e and in n o v a t i o n at the l e v e l of the e n t e r p r i s e was s t i f l e d because the problems associ-ated w i t h new production techniques jeopardized f u l f i l l m e n t of the output t a r g e t s . The above problems a s s o c i a t e d w i t h using gross output as the p r i n c i p a l determinant of managerial bonuses lead to a r e v i s i o n of the bonus c r i t e r i o n i n 1959. Henceforth bonuses were to be determined by the f u l f i l l m e n t of the cost r e d u c t i o n t a r g e t as w e l l as the gross output and labour p r o d u c t i v i t y i n d i c e s . The new c r i t e r i a l e a d to i t s own v a r i e t i e s of plan d i s t r i b u t i o n . Lower q u a l i t y work and lower cost v a r i a n t s of the output mix were favoured at the expense of high-cost 'mix' t a r g e t s . T e c h n o l o g i c a l i n n o v a t i o n was s t i f l e d to an even gre a t e r degree than before and the p r a c t i c e of d e f l a t i n g p l a n t c a p a c i t y continued to be p r o f i t a b l e . Various other techniques were t r i e d between 1958-1965 such as t y i n g the t a r g e t f o r implementation of technology to For example, spare p a r t s were f r e q u e n t l y undervalued r e l a t i v e to the value of these p a r t s i n f i n i s h e d u n i t s . The consequence of t h i s p r i c i n g p o l i c y was an acute shortage of spare parts and vast amounts of broken down, unusable equipment, 139 the managerial bonus scheme and using 1normed value of output' (standard c o s t i n g ) , but as r e a l costs diverged from normed costs the system produced i t s own v a r i e t y of d i s t o r t i o n s . Aside from the problems created through the managerial bonus scheme, the i n c e n t i v e funds f o r workers had l i t t l e or no e f f e c t on encour-aging plan f u l f i l l m e n t . The i n c e n t i v e funds were g r o s s l y i n -adequate and d i d l i t t l e to s t i m u l a t e worker i n i t i a t i v e . In 19 55 the amount of money deducted to the i n c e n t i v e funds amounted to 0.5 percent of the t o t a l wage fund f o r industry."'" Several other p r a c t i c e s t h a t were fol l o w e d i n e v a l u a t i n g and c o n t r o l l i n g e n t e r p r i s e performance a l s o r e s u l t e d i n c r e a t -i n g i n e f f i c i e n c i e s at the e n t e r p r i s e l e v e l . The e v a l u a t i o n of e n t e r p r i s e performance v i s - a - v i s t h e i r planned t a r g e t s by month-l y , q u a r t e r l y , and y e a r l y time periods lead to production 'storming' near the end of the performance p e r i o d i n an attempt to f u l f i l l the output requirements. The storming techniques had consequent e f f e c t s on o r d e r l y production runs and on the q u a l i t y of the commodities produced. The p r a c t i c e of d i v i d i n g the a m o r t i z a t i o n deductions between the budget and the enter -p r i s e and a l l o w i n g the e n t e r p r i s e to u t i l i z e i t s p o r t i o n only f o r c a p i t a l r e p a i r s induced many expensive r e p a i r s of obsolete equipment. The o b j e c t i v e of t h i s s t i p u l a t i o n on d e p r e c i a t i o n funds was to m i t i g a t e a tendency f o r firms to neglec t r e p a i r s and request new equipment. The o v e r c o n t r o l of d e p r e c i a t i o n expenses and the undercontrol of c a p i t a l investment grants lead to expensive r e p a i r s of obsolete equipment followed by requests "'"Nove, The Sov i e t Economy, p. 34. 140 f o r c a p i t a l grants to purchase new machinery i n the f o l l o w i n g p e r i o d . Since c a p i t a l grants were o s t e n s i b l y f r e e from the e n t e r p r i s e p o i n t of view many unnecessary requests f o r such grants were made which had the consequences of c r e a t i n g vast arrays of u n u t i l i z e d or u n d e r u t i l i z e d equipment at the enter -p r i s e l e v e l . The major reform of 1965 centred on the p r e - e x i s t i n g problems of microeconomic c o n t r o l and attempted to r e v i s e the s t r u c t u r e of c o n t r o l s to s t i m u l a t e g reater e f f i c i e n c y of r e -source use. The i n t r o d u c t i o n of a c a p i t a l charge and the r e l a t i o n s h i p of managerial and worker bonuses to e n t e r p r i s e p r o f i t a b i l i t y should c o n t r i b u t e to reducing some of the absurd-i t i e s t h a t were c h a r a c t e r i s t i c of the pre-reform system. The c a p i t a l charge, together w i t h the repayment of c e n t r a l i z e d investment c r e d i t s i s supposed to create d i s i n c e n t i v e s f o r o v e r c a p i t a l i z a t i o n and excessive investment requests. Although the c a p i t a l charge, which averages 6 percent f o r i n d u s t r y as a whole, may be s u f f i c i e n t to provide an adequate d i s i n c e n t i v e f o r o v e r c a p i t a l i z a t i o n , the i n t e r e s t charges on c e n t r a l i z e d investment c r e d i t s are t o t a l l y inadequate. C e n t r a l i z e d i n v e s t -ment c r e d i t s must be r e p a i d , but cu r r e n t p r o f i t s are only d i r e c t e d toward repayment of c r e d i t s a f t e r a l l deductions have been made to the e n t e r p r i s e i n c e n t i v e funds. Since c e n t r a l i z e d investments are exempted from the c a p i t a l charge u n t i l the repayment of the c r e d i t s has been completed, the only d i s i n c e n -t i v e ( i n the short run) a g a i n s t a p p l y i n g f o r investment c r e d i t s i s the n e g l i g i b l e i n t e r e s t charge of 0.5 p e r c e n t . 1 ''"Nove, The Soviet Economy, p. 200. 141 C r e a t i n g a new i n c e n t i v e system based on p r o f i t and p r o f i t a b i l i t y has allowed f o r a huge r e d u c t i o n i n c e n t r a l l y assigned i n d i c e s . The p r o f i t motive i s supposed t o provide s u f f i c i e n t i n c e n t i v e s to maximize the o b j e c t i v e s sought by the assignment of the vast array of t a r g e t s t h a t were c h a r a c t e r i s t i c of the pre-reform e r a . In p r o v i d i n g a common i n c e n t i v e system f o r m a n a g e r i a l - a d m i n i s t r a t i v e personnel and workers, the pre-vious tendency of managers to maximize t h e i r own bonuses to the e x c l u s i o n of worker i n c e n t i v e schemes has been r e c t i f i e d . Worker i n c e n t i v e funds are now based on the same c r i t e r i a used to evaluate managerial bonuses, thereby c r e a t i n g a common i n -t e r e s t i n f u l f i l l i n g the i n c e n t i v e r e l a t e d t a r g e t s . Under the post-reform system of a d m i n i s t r a t i o n i t i s no longer b e n e f i c i a l f o r e n t e r p r i s e managers to understate t h e i r p r o ductive p o t e n t i a l to the same degree and opt f o r an easy plan which can be o v e r f u l f i l l e d . The normative r a t e s a p p l i e d to net p r o f i t s are r e g r e s s i v e f o r both under and o v e r f u l f i l l m e n t of planned p r o f i t , which creates some i n c e n t i v e f o r r e a l i s t i c out-put planning. The p o t e n t i a l b e n e f i t s t h a t could be d e r i v e d from reducing the i n c e n t i v e deduction norms f o r under and over-f u l f i l l m e n t of the s a l e s ( p r o f i t a b i l i t y ) t a r g e t s are p a r t l y diminished by the methods used to c a l c u l a t e i n c e n t i v e deductions. Taut planning by e n t e r p r i s e managers i s discouraged by the u n c e r t a i n t y of the m a t e r i a l supply system and by the f a c t t h a t deductions to the e n t e r p r i s e i n c e n t i v e funds are dependent on the increase i n the l e v e l of s a l e s ( p r o f i t ) achieved. By g r e a t l y i n c r e a s i n g the planned s a l e s or p r o f i t t a r g e t s f o r any one year, subsequent increa s e s i n these i n d i c e s become 142 correspondingly more d i f f i c u l t ( i . e . , the base f i g u r e used to determine p r o f i t or s a l e s i n c r e a s e s becomes l a r g e r ) . The p r o f i t i n c e n t i v e has a l s o allowed the o s t e n s i b l e d e v o l u t i o n of a u t h o r i t y to the e n t e r p r i s e of the p r e p a r a t i o n of i t s p r o d u c t i o n - f i n a n c i a l p l a n s . In a c t u a l i t y the f i r m ' s degree of freedom i s s e v e r e l y r e s t r i c t e d by the c e n t r a l l y assigned i n d i c e s of planned p r o f i t s and m a t e r i a l s a l l o c a t i o n s and by the f a c t t h a t a l l plans o r i g i n a t i n g at the e n t e r p r i s e l e v e l must be approved by higher a u t h o r i t i e s . The above observations have centered on the more p o s i -t i v e aspects of the reform i n e l i m i n a t i n g a number of i n e f f i -c i e n c i e s t h a t were c h a r a c t e r i s t i c of the pre-reform p e r i o d . In reducing the e f f e c t of a number of these o l d d e f i c i e n c i e s the new system has a l s o created new sources of c o n f l i c t w i t h regard t o the i n c e n t i v e system and the d e s i r e d o b j e c t i v e s of the p l a n t a r g e t s , as w e l l as l e a v i n g s e v e r a l o l d a d m i n i s t r a t i v e f a u l t s untouched. The normative r a t e s a p p l i e d to the f i r m ' s net p r o f i t f o r deductions to the m a t e r i a l i n c e n t i v e and s o c i a l - c u l t u r a l funds are r e l a t e d to the s i z e of the e n t e r p r i s e wage fund f o r the purpose of i n t e r c o n n e c t i n g payments to the i n c e n t i v e funds to the s i z e of the work f o r c e . The problem t h a t a r i s e s i s t h a t there i s a d i s i n c e n t i v e to remove redundant labour from the work f o r c e , even i f i t w i l l i n c r e a s e e n t e r p r i s e p r o f i t a b i l i t y , because the e n t e r p r i s e i s simultaneoulsy reducing the magnitude used to c a l c u l a t e the i n c e n t i v e payments. 1 S i m i l a r l y , w i t h the "'"An a d d i t i o n a l d i s i n c e n t i v e i s t h a t the e n t e r p r i s e i s r e s p o n s i b l e f o r f i n d i n g a l t e r n a t i v e employment. 143 development fund there i s a d i s i n c e n t i v e f o r economizing on c a p i t a l because by doing so the e n t e r p r i s e reduces the magnitude used to base deductions i n t o t h i s fund. The use of percentage i n c r e a s e s i n s a l e s (output sold) as one of the p r i n c i p a l success i n d i c a t o r s w i l l undoubtedly create d i s t o r t i o n s of the product mix t a r g e t s i n favour of high value items ( w i t h i n the l i m i t e d d i s c r e t i o n a r y range granted to the e n t e r p r i s e ) , as w e l l as create a tendency t o use expen-s i v e m a t e r i a l s i n the development of new models o r products. Although the marketed output t a r g e t i s a s i g n i f i c a n t improve-ment over the gross value of output t a r g e t , i n t h a t i t makes producers more responsive to customer requirements, the degree of responsiveness i s somewhat m i t i g a t e d by the planned a l l o c a -t i o n of many m a t e r i a l s u p p l i e s and the prevalence of overt a u t p l a n s , which create a s e l l e r ' s market."'" E f f i c i e n c y i n the u t i l i z a t i o n of c a p i t a l should improve somewhat because of the c a p i t a l charges imposed upon the average annual stock of f i x e d and 'own' working c a p i t a l . I t i s ques-t i o n a b l e whether the average r a t e of 6 percent w i l l provide s u f f i c i e n t i n c e n t i v e s to reduce e n t e r p r i s e c a p i t a l t o a minimum 2 necessary f o r pro d u c t i o n . Aside from the i n c e n t i v e provided "'"The combination of t a u t supply plans and the admini-s t r a t i v e d e s i g n a t i o n of supply sources guarantees a market f o r a l a r g e p r o p o r t i o n of output s a l e s and reduces the b a r g a i n i n g power of consuming e n t e r p r i s e s i n r e j e c t i n g m a r g i n a l l y s u i t a b l e commodities. 2 The a c t u a l c a p i t a l charges faced by an e n t e r p r i s e are determined by t h e i r m i n i s t r y ( i n accordance w i t h t h e i r a b i l i t y co pay under the average gross p r o f i t margins e s t a b l i s h e d f o r the branch of i n d u s t r y during the recent p r i c e reforms). In many i n s t a n c e s , the c a p i t a l charges w i l l be l e s s than the 6 percent average. 1 4 4 by using the l e v e l of c a p i t a l as a b a s i s f o r development fund deductions, requests f o r long-term investment c r e d i t s w i l l un-doubtedly be higher than necessary due to f a c t t h a t c a p i t a l so acquired i s exempt from c a p i t a l charges u n t i l such time as the c r e d i t i s r e p a i d . Therefore during the repayment p e r i o d the e f f e c t on p r o f i t s a v a i l a b l e f o r d i s t r i b u t i o n to i n c e n t i v e funds i s only reduced by i n t e r e s t charges equaling 0.5 p e r c e n t 1 (plus whatever e f f e c t the new investment has on the r a t e of p r o f i t -a b i l i t y ) . Repayment of long-term c r e d i t s are only made from t h a t p o r t i o n of the p r o f i t remaining a f t e r deductions to i n -c e n t i v e funds have been made. Another f a c e t of the investment dilemma f a c i n g the c e n t r a l planners i s the u t i l i z a t i o n of the development funds by the e n t e r p r i s e . O s t e n s i b l y the purpose of the d e c e n t r a l i z e d investment funds was to al l o w firms g reater autonomy and f l e x i b i l i t y i n a d j u s t i n g to the b o t t l e n e c k s mani-f e s t e d i n t h e i r output assignments. In a c t u a l f a c t the develop-ment funds cannot be used f o r autonomous expansions of c a p a c i -t i e s under the present i r r a t i o n a l p r i c e system. For the above reason, and because most resources used i n c o n s t r u c t i o n are c e n t r a l l y a l l o c a t e d , the e n t e r p r i s e cannot command r e a l r e -sources f o r any s u b s t a n t i a l expansion without having i t s plans and estimates approved and i n c l u d e d i n the n a t i o n a l investment plan.^ Thus the increa s e d f l e x i b i l i t y i ntroduced i n t o the i n -vestment procedure through the c r e a t i o n of e n t e r p r i s e develop-2 ment funds i s marginal. "'"Nove, The Sov i e t Economy, p. 200. 2 In c a r r y i n g out i t s ' d e c e n t r a l i z e d 1 investments the e n t e r p r i s e must f i r s t get the p r o j e c t l i s t e d i n the o f f i c i a l 145 In the area of e n t e r p r i s e autonomy the b a s i c t h r u s t of the reform was purportedly to permit the e n t e r p r i s e g r e a t e r freedom i n planning i t s own outputs and f i n a n c i a l t a r g e t s as w e l l as i n c r e a s i n g the scope of d e c e n t r a l i z e d investment. A l -though the e n t e r p r i s e may d r a f t i t s own production and f i n a n c i a l p l a n s , they are formulated w i t h i n the confines of the c e n t r a l l y assigned i n d i c e s f o r gross s a l e s , p r o f i t and p r o f i t a b i l i t y , m a t e r i a l supply, e t c . , and i n the course of g e t t i n g these d r a f t plans approved any r e v i s i o n s deemed necessary by the higher a d m i n i s t r a t i v e l e v e l s are c a r r i e d out before the plans are approved. I t i s t r u e t h a t producers of consumer goods can plan t h e i r own assortment mix on the b a s i s of orders from r e t a i l e r s but there again the a c t u a l freedom i s c i r c u m s c r i b e d by the m a t e r i a l a l l o c a t i o n s made to these f i r m s . The 1965 reforms d i d not s i g n i f i c a n t l y a l t e r the system of m a t e r i a l supply a l l o c a t i o n , and u n t i l such time as the system i s a b o l i s h e d i n favour of f r e e wholesale t r a d e , where p r i c e s r e f l e c t s c a r c i t y v a l u e s , there can be no meaningful d e c e n t r a l i -z a t i o n of d e c i s i o n making to the e n t e r p r i s e l e v e l . A g r i c u l t u r e A g r i c u l t u r e lends i t s e l f the l e a s t of a l l types of economic a c t i v i t i e s to the S o v i e t form of q u a n t i t a t i v e planning. Q u a n t i t a t i v e planning i s most e f f e c t i v e i n a s t a b l e , c o n t r o l l e d l i s t of p r o j e c t s to be undertaken, and o b t a i n the necessary cost estimates and b l u e p r i n t s . On p r e s e n t a t i o n of these forms to Stroibank, the e n t e r p r i s e i s allowed to u t i l i z e the approved sums i n i t s development fund. environment where economic a c t i v i t i e s are d i r e c t e d toward the production of r e l a t i v e l y homogeneous outputs. Under these c o n d i t i o n s i n c r e a s e d output can be assured by p r o p o r t i o n a l i n c r e a s e s i n i n p u t s , w h i l e the r e l a t i v e e f f i c i e n c y of the pro-d u c t i o n process can be improved through s c r u t i n i z i n g and sub-s t i t u t i n g i d e n t i f i a b l e i n p u t s . A g r i c u l t u r e does not lend i t s e l f w e l l to t h i s type of a l l o c a t i o n mechanics. The y i e l d s of crops are l a r g e l y dependent on a p r o p i t i o u s c l i m a t e , and the i n f i n i t e v a r i e t i e s and p e c u l i a r i t i e s of l o c a l s o i l c o n d i t i o n s g r e a t l y r e s t r i c t the r a t i o n a l f e a s i b i l i t y of c e n t r a l l y t a r g e t i n g i n p u t -output c o e f f i c i e n t s and/or c u l t i v a t i o n p a tterns f o r a v a s t number of producing u n i t s . U n t i l e a r l y 1955 the c o l l e c t i v e farm u n i t s had v i r t u a l l y no c o n t r o l over the planning of a c t i v i t i e s t h a t were to be undertaken by the farms. The c e n t r a l government determined gross output and procurement quotas f o r a l l major crops and l i v e s t o c k production. The gross output t a r g e t s were i n t u r n disaggregated and a l l o c a t e d to t e r r i t o r i a l d i v i s i o n s where the process was repeated, and a l l o c a t i o n s were given to r e g i o n a l , and i n t u r n to l o c a l a g r i c u l t u r a l organs. The l o c a l a u t h o r i t i e s would then use these c e n t r a l l y set i n d i c e s to formulate d e t a i l e d output plans f o r each of t h e i r subordinate c o l l e c t i v e farms, s p e c i f y i n g acreages under v a r i o u s crops, the types and numbers of animals to be r a i s e d , the sequence of crop r o t a t i o n s , and such l i k e . These output plans which were assigned to the i n -d i v i d u a l farms were not only based on u n r e a l i s t i c c e n t r a l l y set i n d i c e s but t h e i r d e t a i l e d s p e c i f i c a t i o n was the product of c o n s u l t a t i o n s between s e v e r a l l o c a l a d m i n i s t r a t i v e and 147 o p e r a t i o n a l agencies, none of which were t o t a l l y acquainted with the i d i o s y n c r a c i e s of the i n d i v i d u a l producing u n i t s . I t i s i n the c e n t r a l i z e d determination of gross output and procurement t a r g e t s t h a t one of the major sources of i n -e f f i c i e n c y i n S o v i e t a g r i c u l t u r e a r i s e s . The c e n t r a l a u t h o r i -t i e s o f t e n assume the farms to be capable of producing a wide v a r i e t y of crops w i t h reasonable e f f i c i e n c y . Consequently, they o f t e n a s s i g n f i f t e e n or twenty output and/or procurement t a r g e t s f o r d i f f e r e n t commodities to each farm, 1 w i t h l i t t l e regard to the region the farm i s s i t u a t e d i n and the l o c a l c o n d i t i o n s of c l i m a t e and s o i l which e x i s t there. The consequences of the above d i r e c t i v e s r e s u l t e d i n a s e r i o u s l a c k of s p e c i a l i z a t i o n i n a g r i c u l t u r a l production and o f t e n f o r c e d farms to c a r r y out production on a very small and r e l a t i v e l y uneconomical s c a l e . The p r i n c i p a l reasons f o r t h i s gross m i s a l l o c a t i o n of resources was m i s - i n f o r m a t i o n about r e g i o n a l c o n d i t i o n s on the p a r t of the c e n t r a l planners and the low l e v e l of a g r i c u l t u r a l produc-t i o n , v i s - a - v i s the high demands of the urban p o p u l a t i o n , which made the government u n w i l l i n g to s a c r i f i c e i t s much needed purchases from r e l a t i v e l y u n s u i t a b l e areas. To some degree the low l e v e l of a g r i c u l t u r a l production was undoubtedly due to the lack of r a t i o n a l s p e c i a l i z a t i o n . As to which f a c t o r was the cause and which was the consequence of the above s i t u a t i o n , and to what extent the v i a b i l i t y of the t r a n s p o r t a t i o n system "'"Morris B o r n s t e i n , "The S o v i e t Debate on A g r i c u l t u r a l P r i c e and Procurement Reform", S o v i e t S t u d i e s , Vol.XXI (January, 1969), p.17. Within the l i m i t s of t h e i r imperfect knowledge, and the n a t i o n a l demand f o r v a r i o u s commodities, the c e n t r a l planners do attempt to account f o r the r e g i o n a l s u i t a b i l i t y i n t h e i r assignment of output t a r g e t s . 1 4 8 a f f e c t e d the degree of n o n - s p e c i a l i z a t i o n , one may only specu-l a t e . Aside from the above d e f i c i e n c i e s , the c e n t r a l i z e d pro-d u c t i o n and procurement t a r g e t s were i r r a t i o n a l i n t h e i r expec-t a t i o n s regarding the productive c a p a b i l i t i e s of the farming u n i t s ; i n p a r t t h i s was due to the S o v i e t i n c l i n a t i o n toward c o n s t r u c t i n g i m p l a u s i b l e p l a n s , and i n p a r t to the r a t h e r o p t o m i s t i c assumptions regarding c l i m a t i c a l c o n d i t i o n s . In t h e i r determination of gross output and procurement t a r g e t s , the c e n t r a l planners had no a l t e r n a t i v e other than to set these i n d i c e s under the assumption of favourable c l i m a t i c a l c o n d i -t i o n s . To do otherwise, f o r example, using average harvest f i g u r e s as a b a s i s f o r t h e i r procurement t a r g e t s would have r e s u l t e d i n an even g r e a t e r shortage of a g r i c u l t u r a l commodities i n s t a t e r e t a i l s t o r e s , and massive unplanned flows i n the r e -d i s t r i b u t i o n of u r b a n - r u r a l income through the c o l l e c t i v e farm markets i n the event of an above-average harvest. On the other hand, the o p t o m i s t i c t a r g e t s meant th a t l i t t l e , i f any, of the farms' gross harvest could be s o l d at the higher d e l i v e r y p r i c e s (which would have in c r e a s e d the i n c e n t i v e to produce). The f a c t t h a t by the end of 19 5 3 the c o l l e c t i v e farms owed the government almost t w e n t y - f i v e m i l l i o n tons of g r a i n over and above t h e i r d e l i v e r y o b l i g a t i o n s f o r t h a t year i s i n d i c a t i v e of the h i g h l y ''"Although the government's propensity toward g i v i n g l i m i t e d r e c o g n i t i o n to the advantages of s p e c i a l i z a t i o n i n i t s a l l o c a t i o n of c o n t r o l f i g u r e s has been decreasing i n the l a s t two decades, the most famous example of the above defect occurred during the l a t e 1950's. Khrushchev ordered corn to be grown i n many areas t h a t were w e l l north of the geographic l i m -i t s f o r corn c u l t i v a t i o n . 149 a r b i t r a r y e x p e c t a t i o n s h e l d by the government v i s - a - v i s the p r o d u c t i v e c a p a c i t y o f the a g r i c u l t u r a l s e c t o r . 1 To a c e r t a i n degree the consequences o f i r r a t i o n a l c e n t r a l i z e d t a r g e t i n g , w i t h r e g a r d t o i n t r a - r e g i o n a l s p e c i a l i -z a t i o n was m i t i g a t e d , o r a t l e a s t e v e n ly d i s t r i b u t e d , i n the d i s a g g r e g a t i o n and a l l o c a t i o n o f the c o n t r o l f i g u r e s t o the i n d i v i d u a l farms through the r e g i o n a l and l o c a l a g r i c u l t u r a l a g e n c i e s . Gross r e g i o n a l i n d i c e s would be a l l o c a t e d by the r e g i o n a l a u t h o r i t i e s , and i n t u r n by the l o c a l a u t h o r i t i e s t o t h e i r r e s p e c t i v e farms a f t e r some c o n s i d e r a t i o n had been g i v e n to the s i z e o f sown areas, a v a i l a b l e human and m a t e r i a l i n p u t s , and the s o i l f e r t i l i t y o f the i n d i v i d u a l farms. The d e t a i l e d s p e c i f i c a t i o n o f p r o d u c t i o n p l a n s f o r i n d i v i d u a l farms was undertaken w i t h i n the co n t e x t o f the p r e -s c r i b e d c e n t r a l l y s e t i n d i c e s . Nominal r e s p o n s i b i l i t y f o r p l a n c o n s t r u c t i o n l a y a t the r a i o n l e v e l , where c o n s o l i d a t e d produc-t i o n p l a n s were e s t a b l i s h e d f o r each farm on the a d v i c e o f p r o -p o s a l s submitted by t h e i r agronomic s e r v i c e s and by the i n d e -pendent MTS organs. N e i t h e r o f these agencies were thor o u g h l y f a m i l i a r w i t h the v a r i e d s o i l c o n d i t i o n s t h a t e x i s t e d on t h e i r v a r i o u s s u b o r d i n a t e farms and w i t h i n the i n d i v i d u a l farming u n i t s , y e t they were j o i n t l y r e s p o n s i b l e f o r det e r m i n i n g and e n f o r c i n g s e e d i n g and h a r v e s t i n g dates as w e l l as sowing and r o t a t i o n p a t t e r n s f o r the farms under t h e i r j u r i s d i c t i o n . While the problem o f dua l c o n t r o l over the o p e r a t i o n a l a c t i v i t i e s o f the farm was e l i m i n a t e d i n 1953 by a b o l i s h i n g the r a i o n ^Karcz and Timoshenko, " S o v i e t A g r i c u l t u r a l P o l i c i e s " , p.138. 150 agronomic agencies and s h i f t i n g the bulk o f t h e i r r e s p o n s i b i l i -t i e s t o the MTS, the reform a l s o e l i m i n a t e d the moderating i n f l u e n c e e x e r t e d by t h i s body over the MTS o p e r a t i o n a l p l a n n i n g , thus i n c r e a s i n g the c o n f l i c t o f i n t e r e s t between the MTS and the farm management. Farm managers d e s i r e d to maximize farm revenues w i t h i n the c o n t e x t of t h e i r procurement t a r g e t s , w h i l e the MTS, which c o n t r o l l e d the t i m i n g and u t i l i z a t i o n o f a l l major a g r i c u l t u r a l machinery, was i n t e r e s t e d i n o v e r f u l f i l l i n g the p r i n c i p a l q u a n t i t a t i v e i n d i c a t o r s by which i t s performance was e v a l u a t e d . MTS work was measured i n the number o f stan d a r d p l o u g h i n g u n i t s ; a l l types of p l o u g h i n g , harrowing, h a r v e s t i n g , and o t h e r mechanized o p e r a t i o n s were conv e r t e d i n t o t h i s s t a n -dard work u n i t . Since the r e a l c o n v e r s i o n r a t i o s o f these v a r i o u s a c t i v i t i e s c a r r i e d out by the MTS v a r i e d from the ap-proved r a t i o s by which i t was e v a l u a t e d , they would c a r r y out work which was p r o f i t a b l e t o themselves, but which by o b j e c t i v e standards was w a s t e f u l , and q u a l i t y was o f t e n s a c r i f i c e d f o r q u a n t i t y . During the e a r l y p a r t of 1955 the government d e c i d e d to a b o l i s h the numerous c o n t r o l f i g u r e s t h a t were c e n t r a l l y d e t e r -mined to guide the r e g i o n a l a u t h o r i t i e s i n t h e i r c o n s t r u c t i o n o f output p l a n s f o r t h e i r s u b o r d i n a t e farms. H e n c e f o r t h the c e n t r a l a u t h o r i t i e s would c a l c u l a t e o n l y gross procurement quotas f o r the c o l l e c t i v e farm s e c t o r . The quotas would then be d i s a g g r e g a t e d and a l l o c a t e d t o the r a i o n organs and through them to t h e i r s u b o r d i n a t e farms, based on c o n s i d e r a t i o n s of the s i z e of sown areas and number of animals, the f e r t i l i t y of the s o i l s , past d e l i v e r y r e c o r d s , and o t h e r r e l e v a n t data on t h e i r farm u n i t s . The c o l l e c t i v e farm would then c o n s t r u c t i t s own p r o d u c t i o n and f i n a n c i a l p lans w i t h i n the con t e x t o f t h e i r procurement t a r g e t s . The d e v o l u t i o n o f p l a n f o r m u l a t i o n t o the i n d i v i d u a l farm u n i t s d i d not r e s u l t i n a s i g n i f i c a n t i n c r e a s e i n autonomy f o r the i n d i v i d u a l c o l l e c t i v e farms. The h i g h p r o -curement t a r g e t s t h a t were a s s i g n e d e f f e c t i v e l y determined the farms c r o p p i n g p a t t e r n s and l i v e s t o c k a c t i v i t i e s , and the p l a n s were formulated by the farm under the 'guidance' o f the MTS and were s u b j e c t to ap p r o v a l by t h e i r r e s p e c t i v e r a i o n e x e c u t i v e committees. I t was not u n t i l 19 58 t h a t the c o l l e c t i v e farms a c h i e v e d any s i g n i f i c a n t degree o f c o n t r o l over t h e i r i n t e r n a l o p e r a t i o n s . In t h a t y e a r the MTS was d i s s o l v e d and t h e i r e q u i p -ment was s o l d t o the c o l l e c t i v e farms; i n a d d i t i o n the p r o c u r e -ment quotas were s u b s t a n t i a l l y reduced. The combined e f f e c t o f these reforms was t o g i v e the i n d i v i d u a l farms autonomy i n the type and t i m i n g o f mechanized farm o p e r a t i o n s , i n the areas o f s o i l improvement and h a r v e s t i n g , as w e l l as to a l l o w the farm more d i s c r e t i o n i n t h e i r u t i l i z a t i o n o f l a n d and l i v e s t o c k a c t i v i t i e s over and above the now reduced quota d e l i v e r y t a r g e t s . 1 The massive number o f amalgamations of c o l l e c t i v e farms t h a t took p l a c e between 1950 and 1965, e s p e c i a l l y d u r i n g the f i r s t f i v e years o f t h i s p e r i o d , were mainly c a r r i e d out t o s i m p l i f y the a d m i n i s t r a t i v e problems o f p l a n n i n g and c o n t r o l l i n g """In many i n s t a n c e s i n c r e a s e d autonomy over c r o p p i n g p a t t e r n s and l i v e s t o c k a c t i v i t i e s was not achieved due to the co n t i n u e d p e r s i s t a n c e o f many l o c a l a u t h o r i t i e s to t a r g e t t o t a l o u t p u t s . Brezhnev, i n a 1965 speech, promised t h a t t h i s p r a c -t i c e would be stopped. 152 the implementation o f the p l a n s . Along w i t h the s i m p l i f i c a t i o n o f the p l a n n i n g p r o c e s s e s , the c o l l e c t i v e farm amalgamations f a c i l i t a t e d g r e a t e r c o n t r o l o f p l a n implementation through a r e d i s t r i b u t i o n o f P a r t y f o r c e s and improved the f i n a n c i a l con-d i t i o n o f many weaker farms through t h e i r amalgamation w i t h f i n a n c i a l l y s t r o n g e r farms. I t was these l a t t e r two f a c t o r s , as w e l l as the improved supply o f a g r i c u l t u r a l equipment, t h a t c o n t r i b u t e d t o f a c i l i t a t i n g the d i s s o l u t i o n o f the MTS a t the end o f 1957. The o v e r r i d i n g disadvantage o f the amalgamations o f c o l l e c t i v e farms and t h e i r l a t e r c o n v e r s i o n i n t o s t a t e farms, o r p a r t s o f p r e - e x i s t i n g s t a t e farms, was t h a t t h e i r huge s i z e now made them i n t e r n a l l y unmanageable. The dogmatic b e l i e f o f the S o v i e t p l a n n e r s t h a t i n c r e a s i n g the s c a l e o f o p e r a t i o n s was tantamount t o i n c r e a s i n g the e f f i c i e n c y o f o p e r a t i o n s had i n many cases r e s u l t e d i n the r e v e r s e e f f e c t . American s t u d i e s on optimum farm s i z e i n d i c a t e t h a t S o v i e t farms are s e v e r a l times too l a r g e f o r e f f i c i e n t o p e r a t i o n . 1 The problems o f p l a n n i n g and c o n t r o l l i n g the implementa-t i o n o f pl a n s on s t a t e farms were p a r a l l e l to many o f the prob-lems t h a t have been examined f o r the c o l l e c t i v e farms. The c e n t r a l i z e d d e t e r m i n a t i o n o f purchase t a r g e t s l i m i t e d p o t e n t i a l s p e c i a l i z a t i o n o f p r o d u c t i o n by e f f e c t i v e l y d e t e r m i n i n g the c r o p p i n g p a t t e r n s . Although the s t a t e farms d i d not s u f f e r from the d u a l s u p e r v i s i o n t h a t was e x e r t e d over t h e i r c o l l e c t i v e 1R.D. L a i r d , "New Trends and Old Remedies", i n The  S o v i e t Economy: A C o l l e c t i o n o f Western and S o v i e t Views, ed. oy Harry S h a f f e r , p.136. L a i r d ' s p o s i t i o n i s s u b s t a n t i a t e d by Lazar V o l i n i n h i s a r t i c l e " S o v i e t A g r i c u l t u r e under Khrushchev," p.19. 1 5 3 counterparts up to 1 9 5 7 , they s u f f e r e d from i n t e r n a l management problems due to t h e i r huge s c a l e of operations and e x c e s s i v e s u p e r v i s i o n by P a r t y and l o c a l o f f i c i a l s i n t h e i r attempt to c o n t r o l the implementation of p l a n s , the over-zealous super-v i s i o n a f t e r i n t e r f e r i n g w i t h farm operations."'" One problem t h a t was unique to s t a t e farms was the d i s a g g r e g a t i o n of con-t r o l f i g u r e s regarding s t a t e purchases. The same problems arose as i n i n d u s t r y w i t h the t e n t a t i v e d i s t r i b u t i o n of output assignments. State farm managers would attempt to d e f l a t e the output c a p a b i l i t i e s i n an attempt to o b t a i n output t a r g e t s which could be e a s i l y a t t a i n e d , thereby ensuring t h e i r m a t e r i a l r e -wards f o r p l a n f u l f i l l m e n t . Although t h i s problem w i l l be reduced by the conversion of the s t a t e farms to a p r o f i t a b i l i t y r e l a t e d i n c e n t i v e scheme, i t was a s i g n i f i c a n t source of i n -e f f i c i e n c y f o r these farms i n the past. The d e f i c i e n c i e s i n a g r i c u l t u r a l p lanning and plan f o r m u l a t i o n not only l e d to the i n e f f i c i e n c i e s examined above; they created other problems i n t h a t the e r r o r s i n p l a n n i n g r a m i f i e d through the a l l o c a t i v e system. The i n v a r i a b l y o p t i m i s -t i c e x p ectations regarding a g r i c u l t u r a l output a l s o served to d i s t o r t other plans which were f u n c t i o n a l l y r e l a t e d to a g r i c u l -2 t u r a l p r o duction. Thus the d e v i a t i o n s of ex post r e s u l t s from ex ante expectations created corresponding d i s t o r t i o n s i n the "'"Many examples are c i t e d by Alec Nove i n h i s a r t i c l e " I n c e n t i v e s f o r Peasants and A d m i n i s t r a t o r s " , i n Was S t a l i n  R e a l l y Necessary? Some Problems of P o l i t i c a l Economy, ed. by A l e c Nove, pp.188-204. 2 Expectations regarding a g r i c u l t u r a l output have been more subdued and r e a l i s t i c under the new l e a d e r s h i p than was c h a r a c t e r i s t i c of the S t a l i n and Khrushchev eras. 154 ex post r e s u l t s of the budgetary i n f l o w s from a g r i c u l t u r a l t u r n -over t a x e s , the output plans of food processing i n d u s t r i e s and t e x t i l e manufacturers, the income and expenditure balances of the p o p u l a t i o n , and the numerous other plans which were l i n k e d to the above-mentioned plans. One may only speculate as to the i n e f f i c i e n c i e s t h a t r e s u l t e d from the above d e v i a t i o n s from ex ante plans created from the impos s i b l e task of a c c u r a t e l y f o r e -c a s t i n g a g r i c u l t u r a l p r oduction i n an environment which i s l a r g e l y beyond the c o n t r o l of the c e n t r a l planners. The a g r i c u l t u r a l p r i c e system  and worker i n c e n t i v e s The reforms t h a t have taken place i n the So v i e t a g r i -c u l t u r a l p r i c e system and t h e i r farm i n c e n t i v e schemes are un-doubtedly the most s i g n i f i c a n t of the reforms undertaken i n the a g r i c u l t u r a l s e c t o r . An examination of the tre n d of these r e -forms r e v e a l s a d i s t i n c t and s i g n i f i c a n t s h i f t away from the q u a n t i t a t i v e 'command' form of a l l o c a t i o n toward the a c q u i s i t i o n of d e s i r e d outputs through p r o v i d i n g appropriate p r i c e i n c e n -t i v e s . I t was p r e v i o u s l y noted t h a t the a g r i c u l t u r a l p r i c e system attempted to achieve two c o n f l i c t i n g o b j e c t i v e s : namely, to keep the a g r i c u l t u r a l terms of trade as low as p o s s i b l e i n order to make the peasantry bear the brunt of f i n a n c i n g the high l e v e l of investments needed f o r i n d u s t r i a l i z a t i o n and, simultaneously, to provide s u f f i c i e n t i n c e n t i v e s f o r the pro-d u c t i o n of necessary a g r i c u l t u r a l commodities. During the S t a l i n i s t era the p r i c e system was p r i m a r i l y d i r e c t e d toward a c h i e v i n g the former o b j e c t i v e , w h i l e high l e v e l s of compulsory d e l i v e r i e s , r e i n f o r c e d by p h y s i c a l t h r e a t s and o u t r i g h t con-f i s c a t i o n , were u t i l i z e d t o achieve the l a t t e r o b j e c t i v e . F o l l o w i n g S t a l i n ' s death t h e r e were a s e r i e s o f p r i c e r e v i s i o n s d i r e c t e d towards i n c r e a s i n g c o l l e c t i v e farm revenues and thus the value of t h e i r l a b o u r day payments. During 19 5 3 purchase and d e l i v e r y p r i c e s o f g r a i n s , v e g e t a b l e s and potatoes were markedly i n c r e a s e d , the most s p e c t a c u l a r r e v i s i o n b e i n g an 2 i n c r e a s e i n the purchase p r i c e o f g r a i n o f some 900 p e r c e n t . The i n c e n t i v e e f f e c t s of these p r i c e r e v i s i o n s are i n d i c a t e d by the f o l l o w i n g f i g u r e s : i n 19 52 the share o f s t a t e purchases to t o t a l procurements was 6.5 p e r c e n t f o r m i l k , 6.8 p e r c e n t f o r meat and no purchases were made o f o t h e r commodities; i n 1953 purchases to t o t a l procurements rose to approximately 20 p e r c e n t f o r g r a i n and eggs, about 30 p e r c e n t f o r meat, m i l k , and p o t a -3 t o e s , and over 4 0 p e r c e n t f o r v e g e t a b l e s . An e x c e p t i o n to t h i s g e n e r a l p r i n c i p l e was e v i d e n t i n the i n c e n t i v e o r i e n t e d p r i c e s p a i d f o r t e c h n i c a l c r o p s , f o r ex-ample, c o t t o n , f l a x and sugar b e e t s . In 1952 government ex-p e n d i t u r e s f o r procurements o f the above crops e q u a l l e d 48.7 p e r c e n t o f t h e i r t o t a l procurement b i l l f o r c o l l e c t i v e farms and p r i v a t e household p l o t s . (Karcz and Timoshenko, " S o v i e t A g r i -c u l t u r a l P o l i c y " , p.135.) A p a r t i a l e x p l a n a t i o n o f t h i s phenom-enon i s t h a t the c o l l e c t i v e farms which grew these crops con-t r a c t e d t o s e l l a l l t h e i r output to the government, thus l e a v i n g no marketable s u r p l u s t h a t c o u l d be s o l d i n the c o l l e c t i v e farm markets to supplement t h e i r incomes. A l s o , these crops p r o v i d e d the raw m a t e r i a l base f o r some o f the outputs o f l i g h t i n d u s t r y , which made t h e i r adequate supply n e c e s s a r y . The d i s p r o p o r t i o n -ate i n c e n t i v e s o f f e r e d f o r t e c h n i c a l crops were l e s s e n e d i n the f o l l o w i n g years through r e l a t i v e i n c r e a s e s i n the p r i c e of o t h e r a g r i c u l t u r a l commodities. 2 Karcz and Timoshenko, " S o v i e t A g r i c u l t u r a l P o l i c y " , p.135. """"Ibid. A l l of the i n c r e a s e s i n s t a t e purchases cannot be a t t r i b u t e d t o the i n c r e a s e d p r i c e i n c e n t i v e s . P r o d u c t i o n was r e l a t i v e l y low i n 1952 and i n the process of r e c o v e r i n g from the war. Furthermore, the compulsory d e l i v e r y t a r g e t s f o r p r i v a t e p l o t s were reduced i n 1953 which f r e e d more of the output f o r government purchases and c o l l e c t i v e farm market s a l e s . 156 By 1957 the o v e r a l l p r i c e index o f a l l government p r o -curements equaled 266 i n r e l a t i o n to 1952 taken as 100. 1 Up to t h i s date the p r i c e i n c r e a s e s d i r e c t l y a f f e c t e d p r o d u c t i o n i n -c e n t i v e s by c r e a t i n g a c o r r e s p o n d i n g , though not p r o p o r t i o n a l i n c r e a s e i n l a b o u r day d i s t r i b u t i o n s . A f t e r 1957 the c o l l e c t i v e farms had t o u t i l i z e a l a r g e p o r t i o n o f t h e i r i n c r e a s e d revenues to f i n a n c e t h e i r purchases o f MTS equipment. The p r i c e i n c r e a s e s t h a t took p l a c e i n 1958, 1962, and 1963 were l a r g e l y absorbed t o -ward t h i s end. Although the burden of f i n a n c i n g the equipment purchases reduced the net d i s t r i b u t i o n of income to farm workers, t h i s decrease was p a r t i a l l y o f f s e t by the e l i m i n a t i o n o f com-p u l s o r y d e l i v e r i e s on p r i v a t e p l o t s i n 1958. N e v e r t h e l e s s , the net income of c o l l e c t i v e farmers was below i t s 1957 l e v e l f o r 2 most years between 19 58 and 1965 . In the l a t t e r year the government c a n c e l l e d the o u t s t a n d i n g debts owing on MTS machin-er y , thus e l i m i n a t i n g t h i s d r a i n on gross revenues and p r e p a r i n g the way f o r farms to f i n a n c e the minimum guaranteed wages t h a t were i n t r o d u c e d i n the f o l l o w i n g y e a r . Although the v a r i o u s i n c r e a s e s i n the a g r i c u l t u r a l p r i c e l e v e l d i d serve to g r e a t l y improve the pre-1953 balance between compulsion and p r i c e i n c e n t i v e s f o r o b t a i n i n g a g r i c u l t u r a l commodities, th e r e were s e r i o u s d e f i c i e n c i e s i n the p r i c e system, s p e c i f i c a l l y i n the r e l a t i v e p r i c e s t r u c t u r e , which c r e a t e d c o r -r esponding d e f i c i e n c i e s i n the s t r u c t u r e o f p r i c e i n c e n t i v e s . •""Ibid. 2 A l e c Nove, " I n c e n t i v e s f o r Peasants and A d m i n i s t r a -t o r s " , i n Was S t a l i n R e a l l y Necessary? Some Problems of S o v i e t P o l i t i c a l Economy", ed. by A l e c Nove, p^ 188. ' ~" "~ 157 The f o l l o w i n g t a b l e i n d i c a t e s the magnitude of the d i s t o r t i o n s i n the r e l a t i v e p r i c e s t r u c t u r e i n I960, 1963 and 1965. TABLE XIV RATIOS OF AVERAGE PRICE TO AVERAGE COSTS OF SELECTED AGRICULTURAL COMMODITIES IN 1960, 1963, and 1966* Commodity R a t i o o f 1960 R a t i o of 1963 R a t i o of 1965 p r i c e s to 1960 p r i c e s to 1961- p r i c e s to 1963-c o s t s i n 1963 c o s t s i n 1965 c o s t s i n p e r c e n t . p e r c e n t . p e r c e n t . G r a i n 155 191 184 ( e x c l u d i n g corn) Potatoes 147 167 153 Sugar beets 164 161 140 Raw c o t t o n - 164 157 M i l k 86 83 98 C a t t l e 65 81 109 Sheep 98 99 113 P i g s 67 76 104 Wool 143 149 134 Eggs 65 - 83 P o u l t r y - - 118 Vegetables — — 99 Adapted from the f o l l o w i n g t a b l e s : B o r n s t e i n , " S o v i e t P r i c e Theory", p.240; B o r n s t e i n , " A g r i c u l t u r a l P r i c e and Pro-curement Reform", p.5; and Nove " I n c e n t i v e s f o r Peasants and A d m i n i s t r a t o r s " , p.201. Cost c a l c u l a t i o n s i n c l u d e m a t e r i a l i n p u t s , d e p r e c i a t i o n , and l a b o u r c o s t s v a l u e d a t s t a t e farm l a b o u r norms and wage r a t e s . The above t a b l e , even w i t h the l a b o u r c o s t p o r t i o n o f p r o d u c t i o n c o s t s b e i n g v a l u e d a t s t a t e farm r a t e s and norms, does r e f l e c t the wide v a r i a t i o n s i n p r o f i t a b i l i t y , and thus i n c e n t i v e s , i n the p r o d u c t i o n o f v a r i o u s c r o p s . Supposedly the farms were to o f f s e t t h e i r l o s s e s a t t a c h e d to the p r o d u c t i o n o f m i l k , meat and o t h e r commodities produced at a l o s s , through the p r o f i t s o b t a i n e d from the p r o d u c t i o n o f g r a i n and o t h e r p r o f i t a b l e c r o p s . In the case o f farms where l o c a l c o n d i t i o n s 158 v/ere not f a v o u r a b l e to the p r o d u c t i o n o f these p r o f i t a b l e com-m o d i t i e s , the i n c e n t i v e t o produce s a l e a b l e q u a n t i t i e s over and above the minimum demanded by t h e i r quotas was minimal o r o f t e n n o n - e x i s t a n t . 1 The m i s a l l o c a t i v e e f f e c t s o f government purchase p r i c e s i n d e t e r m i n i n g over-quota marketable output, as w e l l as t h e i r d i s c r i m i n a t i n g e f f e c t a g a i n s t farms t h a t were u n s u i t e d t o the p r o d u c t i o n o f h i g h p r o f i t commodities, were reduced i n the p r i c e r e v i s i o n s undertaken i n mid-1970. The C o u n c i l o f M i n i s t e r s , U.S.S.R., passed a r e s o l u t i o n t o i n c r e a s e 2 the p r i c e s p a i d f o r m i l k , cream, c a t t l e and wool. At the same time bonus p r i c e s e q u a l i n g 150 p e r c e n t o f the p r i c e s p a i d f o r quota d e l i v e r i e s were i n t r o d u c e d f o r over-quota d e l i v e r i e s o f 3 l i v e s t o c k , p o u l t r y , m i l k , wool and eggs. Table XIV o n l y g i v e s an i n d i c a t i o n o f the average r a t e s o f p r o f i t a b i l i t y f o r d i f f e r e n t commodities f o r the cou n t r y as a whole, and t h e r e f o r e does not r e f l e c t the t r u e v a r i a t i o n s i n p r i c e i n c e n t i v e s f a c e d by i n d i v i d u a l c o l l e c t i v e farms. A g r i c u l -t u r a l purchase p r i c e s are z o n a l l y d i f f e r e n t i a t e d and are o s t e n -s i b l y based on the average c o s t s o f p r o d u c t i o n o f the r e s p e c t i v e commodities w i t h i n a g i v e n p r i c e zone. In a c t u a l f a c t , b e f o r e '''In areas where over-quota d e l i v e r i e s c o u l d be d i s p o s e d of i n c o l l e c t i v e farm markets the farms would o r g a n i z e t h e i r over-quota p r o d u c t i o n i n such a way as to maximize t h e i r revenue, g i v e n the expected p r i c e s on c o l l e c t i v e farm markets. 2 "On I n c r e a s i n g M a t e r i a l I n c e n t i v e s on C o l l e c t i v e and S t a t e Farms t o Increase the Output of Animal Husbandry P r o d u c t s " , Pravda, J u l y 18, 1970. T r a n s l a t e d i n the C u r r e n t D i g e s t o f the  S o v i e t P r e s s , V o l . X X I I , No. 30, 1970, pp.1-2. The r e p o r t e d p r i c e i n c r e a s e f o r wool equaled 20 per c e n t ; no o t h e r f i g u r e s were c i t e d . 3 I b i d . , p.2. 159 the 1965 p r i c e r e v i s i o n s , the average p r o d u c t i o n c o s t s i n the h i g h e s t p r i c e zones, r e l a t i v e t o the lowest p r i c e zones, were 180 p e r c e n t to 900 per c e n t h i g h e r , depending on the crop con-s i d e r e d , w h i l e the c o r r e s p o n d i n g v a r i a t i o n i n p r i c e s ranged from 30 p e r c e n t t o 55 p e r c e n t . 1 The consequences o f the inad e -quate v a r i a t i o n i n zo n a l p r i c e s l e a d t o gross i n e q u a l i t i e s i n i n t e r - z o n e c o l l e c t i v e farm revenues and r e s u l t e d i n an i n e q u i t -a b l e d i s t r i b u t i o n o f income among c o l l e c t i v e farms, which had co r r e s p o n d i n g d i s t o r t i v e e f f e c t s on i n t e r - z o n a l p r o d u c t i o n i n -c e n t i v e s . On an i n t r a - z o n e b a s i s , the i n c l u s i o n o f wide areas o f l a n d w i t h d i f f e r i n g n a t u r a l advantages l e a d to s i m i l a r i n t r a -zone i n c o m e - i n c e n t i v e v a r i a t i o n s which were not based on i n t e r -farm d i f f e r e n c e s i n p r o d u c t i v i t y but which r e s u l t e d from the i n e q u i t a b l e d i s t r i b u t i o n o f n a t u r a l advantages among farms 2 w i t h i n a g i v e n p r i c e r e g i o n . The 1965 p r i c e r eform i n c r e a s e d i n t e r - z o n a l p r i c e d i f f e r e n t i a l s , which reduced the l e v e l o f i n t e r - z o n a l income v a r i a t i o n s , but z o n a l p r i c e boundaries have remained c o n s t a n t and 'average c o s t s ' are s t i l l the bases o f zo n a l p r i c e s . The above o b s e r v a t i o n s on the a g r i c u l t u r a l p r i c e s t r u c -t u r e i n d i c a t e t h a t p r i c e s have l a r g e l y r e p l a c e d compulsion as 1 B o r n s t e i n , " A g r i c u l t u r a l P r i c e and Procurement Reform", p. 6. 2 P r e v i o u s t o 1958 the d i f f e r e n t i a l incomes a r i s i n g from n a t u r a l c o n d i t i o n s were l e s s e n e d by the MTS payments i n k i n d which were u s u a l l y e x t r a c t e d as a p r o p o r t i o n o f the gross har-v e s t . A f t e r 1958 the d i f f e r e n t i a t i o n i n zo n a l p r i c e s was i n -cr e a s e d and the z o n a l p r i c e boundaries were m o d i f i e d s l i g h t l y but these reforms were s t i l l i n s u f f i c i e n t t o e x t r a c t the d i f f e r e n t i a l l a n d r e n t a l payments r e q u i r e d t o achieve income and i n c e n t i v e e q u i t i e s . 160 the instrument f o r e f f e c t i n g quota d e l i v e r i e s and t h a t p r i c e s do, i n some cas e s , p r o v i d e the n ecessary i n c e n t i v e s f o r o v e r -quota d e l i v e r i e s to the government. N e v e r t h e l e s s , these p r i c e i n c e n t i v e s , where, they do o p e r a t e , are o n l y a c c i d e n t l y r e l a t e d to l o c a l or n a t i o n a l requirements. So l o n g as government pur-chase p r i c e s are s e t below e q u i l i b r i u m l e v e l s and c o l l e c t i v e farm markets p r o v i d e an o u t l e t f o r over-quota o u t p u t s , i t w i l l be these f r e e market p r i c e s , not the government purchase p r i c e s , t h a t w i l l determine the p r o p o r t i o n s o f over-quota p r o d u c t i o n o f a g r i c u l t u r a l commodities.""" The problems of inadequate p r i c e i n c e n t i v e s d i s c u s s e d above were r e f l e c t e d i n the pre-1966 system o f l a b o u r remuner-a t i o n t h a t e x i s t e d f o r c o l l e c t i v e farms. Under the l a b o u r day system o f remuneration, wage payments were made from the net income i n cash and k i n d t h a t remained f o r d i s t r i b u t i o n a f t e r a l l farm o b l i g a t i o n s had been met. The r e s i d u a l nature o f wage pay-ments meant t h a t the v a l u e of l a b o u r day c o n t r i b u t i o n s made by i n d i v i d u a l workers were unknown to them u n t i l year-end c a l c u l a -t i o n s were made. Labour day c r e d i t s were a l s o s u b j e c t to wide The f o l l o w i n g examples i n d i c a t e the d i s c r e p a n c y between government p r i c e s and c o l l e c t i v e farm market p r i c e s . The 1953-1954 compulsory d e l i v e r y p r i c e s f o r potatoes was t e n r u b l e s per q u i n t a l , compared to 194 r u b l e s i n the Moscow c o l l e c t i v e farm market. The u n i f i e d p r i c e was i n c r e a s e d i n 1958 to f o r t y r u b l e s , w h i l e the 1957 f r e e market p r i c e was 118 r u b l e s per q u i n t a l . The 1953-54 compulsory d e l i v e r y p r i c e f o r m i l k was f i f t y - f i v e r u b l e s per q u i n t a l compared to the f r e e market p r i c e of 39 4 r u b l e s . The u n i f i e d 1958 p r i c e was i n c r e a s e d to 115 r u b l e s per q u i n t a l w h i l e the 1957 f r e e market p r i c e was 307 r u b l e s . S i m i -l a r l y f o r eggs, the 1953-54 compulsory p r i c e was twenty r u b l e s per- q u i n t a l , the f r e e market p r i c e was 239 r u b l e s . The 1958 u n i f i e d p r i c e was r a i s e d to s i x t y r u b l e s , w h i l e the 1957 f r e e market p r i c e was 226 r u b l e s . (Spulber, The S o v i e t Economy, p.89, n.12.) 161 v a r i a t i o n s i n v a l u e from year to year i n t h a t they were an ex-aggerated r e f l e c t i o n o f the success o f the h a r v e s t . I f the h a r v e s t was poor, the v a s t m a j o r i t y , i f not a l l of the farm's o u t p u t s , would be s o l d under the compulsory d e l i v e r y (or quota) o b l i g a t i o n s and would r e c e i v e the c o r r e s p o n d i n g l y low p r i c e s p a i d f o r these purchases. A l t e r n a t i v e l y , i f the h a r v e s t was good, amounts i n excess of the r e q u i r e d government d e l i v e r i e s c o u l d be s o l d on the c o l l e c t i v e farm m a r k e t s . 1 A s i d e from the i n c e n t i v e problems c r e a t e d by the g e n e r a l l y low l e v e l o f remun-e r a t i o n , the f l u c t u a t i n g value o f the work u n i t s , and the un-c e r t a i n t y o f these payments u n t i l year-end d i s t r i b u t i o n s were made, the method o f remuneration d i d l i t t l e t o f o s t e r i n c r e a s e d p r o d u c t i v i t y o r q u a l i t y o f the work. Workers had l i t t l e i n t e r -e s t i n i n c r e a s i n g the p r o d u c t i v i t y o r the q u a l i t y o f t h e i r l a b o u r c o n t r i b u t i o n s because any i n c r e a s e d product t h a t r e s u l t e d from the ' e x t r a ' e x e r t i o n s would not accrue to them p e r s o n a l l y but would be d i s s i p a t e d among a l l the farm members. I t was f o r these reasons t h a t the household p l o t p r o v i d e d an a t t r a c t i v e a l t e r n a t i v e to working on the c o l l e c t i v e farm. P r i v a t e household p l o t s occupy approximately 3-3.5 p e r -cent o f the sown l a n d area of c o l l e c t i v e farms and p r i v a t e p l o t s 2 taken t o g e t h e r , y e t they were r e s p o n s i b l e f o r the f o l l o w i n g ''"Up to 1958, premium purchase p r i c e s f o r above-plan d e l i v e r i e s were p a i d by the government, which would have c r e a t e d the s i t u a t i o n d e s c r i b e d above. Between 1958 and 1964 u n i f i e d purchase p r i c e s were p a i d f o r a l l d e l i v e r i e s made to the gov-ernment, but they were c o n s i d e r a b l y below the c o r r e s p o n d i n g f r e e market p r i c e s . Premium p r i c e s have been i n c r e a s i n g l y used s i n c e 1965, but the amplitude of wage f l u c t u a t i o n s has been reduced by the guaranteed minimum wage p a i d f o r work done. 2 Gruchy, Comparitive Economic Systems, p.744. 162 r e l a t i v e shares o f t o t a l a g r i c u l t u r a l output i n 1965. TABLE XV RELATIVE SHARES OF STATE FARMS, COLLECTIVE FARMS AND PRIVATE PLOTS IN THE TOTAL AGRICULTURAL OUTPUT OF SELECTED COMMODITIES IN 1965* Commodity S t a t e Farm C o l l e c t i v e farm P r i v a t e G r a i n 37 61 2 Cot t o n 20 80 0 Sugar beets 9 91 0 Potatoes 15 22 63 Vege t a b l e s 34 25 41 Meat 30 30 40 M i l k 26 35 39 Eggs 20 13 67 Wool 39 41 20 * Source: S p u l b e r , The S o v i e t Economy, p.87. The above t a b l e i n d i c a t e s the massive m i s a l l o c a t i o n o f l a b o u r r e s o u r c e s t h a t occurs between the c o l l e c t i v e farm and . the p r i v a t e p l o t s due to the d i s p r o p o r t i o n a t e i n c e n t i v e s t h a t e x i s t f o r the l a t t e r a l t e r n a t i v e . Bergson s t a t e s t h a t i n 1960 over 25 p e r c e n t o f c o l l e c t i v e farm members l a b o u r time was de-voted t o t h e i r p r i v a t e p l o t s . 1 D e s p i t e any i n e q u a l i t i e s t h e r e may be i n c a p i t a l investments per h e c t a r e of l a n d , the m a r g i n a l p h y s i c a l product of l a b o u r i n p r i v a t e c u l t i v a t i o n must be very much lower than on c o l l e c t i v e farms w i t h such d i s p r o p o r t i o n a t e 2 l a b o u r i n p u t s per h e c t a r e of l a n d b e i n g a p p l i e d . The reason Bergson, The Economics of S o v i e t P l a n n i n g , p.223. 2 Nancy Nimitz e s t i m a t e s t h a t i n 196 3 the p r i v a t e s e c t o r share o f t o t a l a g r i c u l t u r a l l a b o u r was 42.1 pe r c e n t and i t s p r o d u c t i v i t y o n l y 71 p e r c e n t o f l a b o u r i n the p u b l i c s e c t o r . (Nancy N i m i t z , "Farm Employment i n the S o v i e t Union 1928-1963", i n S o v i e t and East European A g r i c u l t u r e , ed. by J e r r y K a r cz, pp.178-181.) 163 f o r such i n t e n s i v e c u l t i v a t i o n of p r i v a t e p l o t s i s t h a t the m a r g i n a l revenue product of p r i v a t e p l o t s i s h i g h e r than the m a r g i n a l revenue product f o r l a b o u r i n p u t s to the c o l l e c t i v e farms, g i v e n the f a c t t h a t a l l o f the output from p r i v a t e p l o t s may be p e r s o n a l l y consumed or s o l d at the h i g h c o l l e c t i v e farm market p r i c e s . 1 The 1966 reform o f the c o l l e c t i v e farm system o f l a b o u r remuneration t h a t i n t r o d u c e d minimum guaranteed s t a t e farm wages f o r work done should have l e s s e n e d the d i s p r o p o r t i o n a t e i n c e n -t i v e s toward p r i v a t e c u l t i v a t i o n , although p r o d u c t i o n f i g u r e s f o r 1967 do not i n d i c a t e a s t r o n g t r e n d i n t h i s d i r e c t i o n . R e l a t i v e percentage shares of p r i v a t e p r o d u c t i o n to t o t a l p r o -d u c t i o n i n t h a t year equaled 39 p e r c e n t f o r both meat and mil k 2 and 6 5 p e r c e n t f o r eggs, which r e p r e s e n t e d a drop i n the r e l a -t i v e share s i n c e 1965 o f 1 p e r c e n t f o r meat, n i l f o r m i l k , and 2 p e r c e n t f o r eggs. A d d i t i o n a l n e g a t i v e evidence i s p r o v i d e d by the c o n t i n u e d mandatory l a b o u r requirements s t i p u l a t e d by the c o l l e c t i v e farms. In a sample study o f c o l l e c t i v e farms undertaken i n 1969, over 62 p e r c e n t o f the t o t a l sample had e s t a b l i s h e d minimum l a b o u r c o n t r i b u t i o n s f o r t h e i r male members 3 i n excess o f 200 man-days. The c o n t i n u i n g h i g h l e v e l s of ''"Once the c o l l e c t i v e farm has met i t s quota d e l i v e r i e s , the m a r g i n a l gross income of above-quota p r o d u c t i o n i s f a c e d w i t h a h i g h l e v e l of deductions b e f o r e i t i s d i s t r i b u t e d among the members ( r e l a t i v e t o the tax l e v y f a c e d by the m a r g i n a l gross income of p r i v a t e c u l t i v a t i o n ) . 2 C l a r k e , " S o v i e t A g r i c u l t u r a l Reforms Since Khrushchev", p.169. 3 U. Gaevskaia, " C e r t a i n F i n d i n g s of a Study on the U t i l -i z a t i o n of Labour Resources on C o l l e c t i v e Farms", Problems of  Economics, V o l . X I I ( A p r i l , 1970), p.57. 164 outputs from p r i v a t e p l o t s and mandatory l a b o u r c o n t r i b u t i o n requirements would tend t o i n d i c a t e t h a t p r i v a t e c u l t i v a t i o n s t i l l remains a t t r a c t i v e r e l a t i v e t o c o l l e c t i v e farm work. The 1966 wage reform was a major v i c t o r y f o r the c o l -l e c t i v e farm peasants. By r e c e i v i n g minimum monthly payments f o r work done, v a l u e d a t s t a t e farm wage r a t e s , the c o l l e c t i v e farm peasant w i l l no l o n g e r have t o bear the brunt o f h a r v e s t f l u c t u a t i o n s and the u n c e r t a i n t y over the value o f h i s l a b o u r c o n t r i b u t i o n s . The h i g h minimum wage r a t e s s h o u l d a l s o do much to reduce the i n e q u a l i t i e s i n remuneration f o r s i m i l a r work done t h a t e x i s t e d among d i f f e r e n t farms under the ' r e s i d u a l ' l a b o u r day system. Undoubtedly the h i g h minimum wage r a t e s w i l l f o r c e many c o l l e c t i v e farms i n t o debt as they w i l l not be a b l e to absorb the i n c r e a s e d l a b o u r c o s t s under the p r e - e x i s t i n g z o n a l p r i c e s and i n t r a - z o n e c o s t v a r i a t i o n s . I t i s probable t h a t the i n c r e a s i n g l e v e l o f bank c r e d i t s r e q u i r e d by many farms t o f i n a n c e t h e i r mandatory l a b o u r c o s t s w i l l f o r c e the government to r a t i o n -a l i z e t h e i r z o n a l p r i c e s t r u c t u r e and zo n a l p r i c e boundaries. The new i n c e n t i v e scheme which has been formulated f o r s t a t e farms t h a t have been c o n v e r t e d t o the system o f f i n a n c i a l s e l f - s u f f i c i e n c y s hould do much t o improve t h e i r e f f i c i e n c y . Under the p r e - r e f o r m system, p r i c e s s e r v e d p r i m a r i l y as account-i n g d e v i c e s and the farm manager had minor concern f o r c o s t s , as h i s fundamental concern was to f u l f i l l h i s output t a r g e t s which were the main c r i t e r i a by which he was e v a l u a t e d . S p e c i f i c a l l y , farm managers and a d m i n i s t r a t i v e p e r s o n n e l were p a i d bonuses f o r o v e r f u l f i l l i n g t h e i r output t a r g e t s , w i t h a l l o c a t i o n s f o r bon-uses b e i n g made from o v e r - p l a n p r o f i t s . T h e r e f o r e i t was to the 165 manager's advantage to attempt to d e f l a t e planned outputs and to i n f l a t e planned c o s t s as much as p o s s i b l e so as to ac h i e v e a low l e v e l o f planned p r o f i t . By d e f l a t i n g the former v a r i -a b l e s , he c o u l d i n c r e a s e the p r o b a b i l i t y o f a c h i e v i n g h i s out-put t a r g e t s , and by i n f l a t i n g h i s c o s t s as much as p o s s i b l e r e l a t i v e t o h i s planned o u t p u t s , he c o u l d maximize h i s p o s s i -b i l i t y o f o b t a i n i n g a bonus. To a l a r g e e x t e n t these t e n d e n c i e s were m i t i g a t e d by the s u p e r i o r a d m i n i s t r a t i v e organs b e f o r e they approved the p r o d u c t i o n - f i n a n c i a l plans o f the i n d i v i d u a l farms. But, g i v e n the f a c t t h a t h i s planned outputs ( i . e . , revenues) and c o s t s were m o d i f i e d and approved, the farm manager was s t i l l encouraged toward ext r a v a g a n t e x p e n d i t u r e s t o minimize the r i s k o f u n d e r f u l f i l l i n g h i s output t a r g e t s , s i n c e the p e n a l t i e s f o r not meeting these t a r g e t s were low r e l a t i v e to the bonuses awarded f o r o v e r f u l f i l l i n g h i s planned p r o f i t t a r g e t . 1 The p r o v i s i o n s o f the new i n c e n t i v e scheme r e p r e s e n t a s i g n i f i c a n t improvement. A l l o c a t i o n s to i n c e n t i v e funds f o r managerial p e r s o n n e l and workers are made from d e d u c t i o n s Before 1965 farm managers were p e n a l i z e d 1 p e r c e n t o f t h e i r b a s i c pay f o r each 1 p e r c e n t o f u n d e r f u l f i l l m e n t o f each o f t h e i r p r i n c i p a l output t a r g e t s , t o a maximum o f 30 p e r c e n t o f b a s i c pay. In 1965 t h e i r b a s i c pay was guaranteed, and managerial p e r s o n n e l were t o r e c e i v e bonuses of 10 p e r c e n t o f t h e i r b a s i c s a l a r y f o r each 1 per c e n t o f o v e r f u l f i l l m e n t o f t h e i r s a l e s p l a n , p r o v i d e d t h a t the e s t a b l i s h e d t a r g e t s f o r meat and g r a i n , o r i n the case o f s p e c i a l t y farms, t h e i r p r i n -c i p a l o u t p u t s , were f u l f i l l e d . Bonuses f o r c o s t r e d u c t i o n s are c o n d i t i o n a l on a c h i e v i n g the annual s a l e s p l a n s and c o s t o f product t a r g e t s , and are a l l o c a t e d to managerial p e r s o n n e l a t r a t e s to a c e i l i n g o f 5 perc e n t o f the o v e r - p l a n p r o f i t s . ("On the S a l a r i e s o f Managerial P e r s o n n e l and S p e c i a l i s t s o f S t a t e Farms and o t h e r S t a t e A g r i c u l t u r a l E n t e r p r i s e s " , Pravda, A p r i l 22, 1965. T r a n s l a t e d i n the Current D i g e s t .of the S o v i e t P r e s s , V ol.XVII, N o . l , 1965, p.10.) 166 applied against the net p r o f i t of the farm, with lower deduction norms being applied against over-plan p r o f i t s . The s t i p u l a t i o n that lower rates of incentive deductions w i l l be applied to over-plan p r o f i t s provides some encouragement to farm managers to more f u l l y account for the productive capacity of his farm and his expected costs i n determining his production and finan-c i a l plans; to under or over-estimate these respective variables would decrease his p o t e n t i a l bonus."'" Nevertheless, the f a c t that a l l o c a t i o n s to incentive funds are s t i l l applicable to over-plan p r o f i t s provides an incentive to increase revenues and economize on expenditures beyond t h e i r planned l e v e l s i f at a l l possible. The new incentive scheme does ex h i b i t c e r t a i n weak-nesses: v i z . , the d i s t o r t i o n s created by the 'new' p r i c e struc-ture facing the state farms, and the r e l a t i o n s h i p between the size of bonus a l l o c a t i o n s and the farms' wage funds. The farms that have been converted to the system of f i n a n c i a l s e l f -s u f f i c i e n c y are paid f o r t h e i r outputs at the government purchase o prices paid to c o l l e c t i v e farms; thus t h e i r p r o f i t a b i l i t y de-pends on t h e i r l o c a t i o n , on the commodities they produce, and the prices paid for these commodities i n t h e i r respective p r i c e zones. Under the new incentive scheme deductions to the mater-i a l - i n c e n t i v e fund, which i s the source of a l l money bonuses, are l i m i t e d to a maximum equal to 12 percent of the annual wage "'"Deductions to the incentive funds for over-plan p r o f i t s are calculated at 50 percent of the rates used for planned p r o f i t s . 167 fund. Undoubtedly t h i s p r o v i s i o n was made to p r o v i d e a c e i l i n g on wage payments f o r monetary c o n t r o l purposes (and to m i t i g a t e e x c e s s i v e v a r i a t i o n s i n the l e v e l of remuneration among s t a t e farms), but i t may a l s o p r o v i d e an e f f e c t i v e d i s i n c e n t i v e toward i n c r e a s i n g e f f i c i e n c y on p r o f i t a b l e farms. Once the maximum l e v e l of a l l o c a t i o n s to the m a t e r i a l - i n c e n t i v e fund has been a t t a i n e d , the m a t e r i a l i n t e r e s t o f farm managers i n i n c r e a s i n g the e f f i c i e n c y of o p e r a t i o n s i s g r e a t l y r e d u c e d . 1 A l t e r n a t i v e l y , i n the case o f farms t h a t can i n c r e a s e t h e i r m a t e r i a l - i n c e n t i v e fund through i n c r e a s i n g t h e i r p r o f i t s , i t i s not l i k e l y t h a t managers w i l l over-emphasize a r e d u c t i o n i n l a b o u r e x p e n d i t u r e s or the i n t r o d u c t i o n of l a b o u r - s a v i n g t e c h n i q u e s as a means t o -ward t h i s end; by r e d u c i n g l a b o u r e x p e n d i t u r e s he i s s i m u l t a n -e o u s l y r e d u c i n g the base which determines the maximum deductions allowed f o r the payment of money bonuses. E v a l u a t i o n o f Trade E v a l u a t i o n of r e t a i l t r a d e The o b j e c t i v e c r i t e r i a used to e v a l u a t e S o v i e t r e t a i l t r a d e must take i n t o c o n s i d e r a t i o n the aims or g o a l s t h a t the c e n t r a l a u t h o r i t i e s are t r y i n g to achieve through t h e i r r e t a i l -i n g system. The crux of the S o v i e t macroeconomic a l l o c a t i o n system i s t h a t the p o l i t i c a l l e a d e r s e x c l u s i v e l y and a r b i t r a r i l y d e c i d e on the b a s i c p r o p o r t i o n s i n the economy. Throughout the h i s t o r y of the S o v i e t s t a t e the p a r t y l e a d e r s have c o n s i s t e n t l y """Their m a t e r i a l i n t e r e s t i s l i m i t e d to bonuses i n k i n d d e r i v e d through the s o c i a l - c u l t u r a l and housing fund. 168 followed a p o l i c y of u t i l i z i n g a large part of the national i n -come for investment purposes, thereby leaving a r e l a t i v e l y small portion of the national income for consumption purposes. The a b o l i t i o n of consumer sovereignty was and i s an e s s e n t i a l pre-r e q u i s i t e for the e f f e c t i v e implementation of an a l l o c a t i o n p o l i c y which diverges from the preferences of consumers. The problems facing the consumer goods sector may be phrased i n the following way: out of a given volume of resources that have been decided by the Party leaders, which goods must be produced, and at what prices must they be sold, i n order to c l e a r the market of a l l goods, recover the purchasing power made available by the state through the payment of wages and transfer payments, and optimize consumer s a t i s f a c t i o n . Throughout the S t a l i n i s t era the central a u t h o r i t i e s paid l i t t l e attention to the above c r i t e r i a i n that the over-r i d i n g political-economic p r i o r i t y was to maximize the output and growth of the heavy industry sector of the economy. The a l l o c a t i o n of economic resources for consumption was l a r g e l y viewed as a necessity to ensure the subsistance of the labour force; i d e o l o g i c a l appeals, physical coercion, and t e r r o r i s t t a c t i c s were the p r i n c i p a l methods u t i l i z e d to obtain acceptable l e v e l s of productivity from the labour force and ensure the p o l i t i c a l submission of the population as a whole. During t h i s period the central authorities d e l i b e r a t e l y fixed r e t a i l prices below market cl e a r i n g l e v e l s by allowing monetary demand to ex-ceed the supply of consumer goods at the current prices."'" Under "'"The excessive purchasing power of the general public was kept within t o l e r a b l e l i m i t s by the compulsory purchases of 169 t h e s e c i r c u m s t a n c e s a s e l l e r ' s market p r e v a i l e d where the s c a r c e consumer goods were i m m e d i a t e l y p u r c h a s e d once t h e y en-t e r e d t h e r e t a i l shops, r e g a r d l e s s o f t h e i r q u a l i t y o r l i m i t e d a p p r o p r i a t e n e s s . The h i g h u n s a t i s f i e d demand f o r v i r t u a l l y a l l consumer goods o f f e r e d on t h e market d u r i n g t h i s p e r i o d n u l l i -f i e d , o r a t l e a s t c o n c e a l e d , any e r r o r s made i n p l a n n i n g t h e a s s o r t m e n t o f goods o f f e r e d f o r s a l e as w e l l as t h e p r i c e s s e t f o r t h e s e goods. D u r i n g th e e a r l y 1950's, and e s p e c i a l l y a f t e r t h e d e a t h o f S t a l i n , t h e p o s i t i o n o f S o v i e t consumers began t o change r a p i d l y . The f r e e m e d i c a l s e r v i c e s and low r e n t a l communal h o u s i n g p o l i c i e s , and e s p e c i a l l y t h e r e a l income p o l i c y p u r s u e d by t h e government, had r a i s e d t h e consumption l e v e l o f t h e p o p u l a t i o n w e l l above the s u b s i s t e n c e minimum and had i n c r e a s e d t h e l e v e l o f d i s c r e t i o n a r y income i n t h e hands o f t h e p o p u l a t i o n . A p a r t i a l e x p l a n a t i o n o f t h e r a p i d improvement i n t h e consump-t i o n l e v e l o f t h e p o p u l a c e d u r i n g t h i s p e r i o d was t h e i n c r e a s i n g i n e f f e c t i v e n e s s o f i d e o l o g i c a l a p p e a l s i n p r o m o t i n g m o t i v a t i o n f o r t h e work f o r c e . The d e s i r e t o i n c r e a s e t h e p r o d u c t i v i t y o f l a b o u r as a means f o r p r o m o t i n g economic growth had r e s u l t e d i n a g r a d u a l s h i f t t o ward m o t i v a t i n g t h e l a b o u r f o r c e by a p p e a l i n g t o t h e i r m a t e r i a l i n t e r e s t s . The consequent i n c r e a s e i n c o n -sumer s e l e c t i v i t y as a r e s u l t o f t h e i r i n c r e a s e d d i s c r e t i o n a r y income r e s u l t e d i n market g l u t s o f c e r t a i n s o f t goods b e g i n n i n g i n 1957, w h i c h were f o l l o w e d by market s a t u r a t i o n s o f v a r i o u s consumer d u r a b l e s . The f o l l o w i n g t a b l e i n d i c a t e s t h e e x t e n t o f government bonds. t h e u n s o l d q u a n t i t i e s o f s o f t g o o d s . 170 TABLE X V I R E T A I L SALES AND INVENTORIES OF SOFT GOODS FOR SELECTED YEARS, 1950 - 1966* ( i n b i l l i o n s o f r u b l e s ) 1950 1958 1960 1963 1965 1966 S a l e s 9.5 18.7 21.8 23.3 26.0 28.2 I n v e n t o r y 2.3 5.8 8.3 11.7 11.8 11.4 I n v e n t o r y a s a p e r c e n t o f s a l e s 24.0 31.0 38.0 50.0 45.0 40.0 * S o u r c e : W i l l e m K e i z e r , The S o v i e t Q u e s t f o r E c o n o m i c R a t i o n a l i t y , p.79 • The a b o v e t a b l e i n d i c a t e s t h e c u m u l a t i v e d e f i c i e n c i e s t h a t h a v e r e s u l t e d f r o m f a u l t y f o r e c a s t i n g o f f u t u r e demand a n d t h e r i g i d p l a n n i n g s y s t e m w h i c h p e r p e t u a t e d e r r o r s i n t h e a s s o r t m e n t , s t y l i n g , a n d p r i c i n g o f c o n s u m e r g o o d s . Numerous i m p r o v e m e n t s i n demand f o r e c a s t s h a v e b e e n made i n r e c e n t y e a r s t o s u p p l e m e n t t h e r e l a t i v e l y c r u d e b u d g e t s t u d i e s t h a t w e r e u s e d t o f o r e c a s t demand p r i o r t o 1955. I n 19 57, 'new p r o d u c t 1 s t o r e s w e r e i n t r o d u c e d t o t e s t t h e m a r k e t a c c e p t a b i l i t y o f n e w l y c r e a t e d g o o d s . 1 S i n c e t h a t t i m e S o v i e t p l a n n e r s h a v e made i n c r e a s i n g u s e o f c a l c u l a t i o n s o f i n c o m e a n d p r i c e e l a s t i c i t y c o e f f i c i e n t s w h i c h a r e now c a l c u l a t e d f o r i n -d i v i d u a l g r o u p s o f c o m m o d i t i e s , a s w e l l a s s t u d i e s o f c o n s u m e r p r e f e r e n c e s a n d i n d i f f e r e n c e a n a l y s i s , i n an a t t e m p t t o i m p r o v e demand f o r e c a s t s . D u r i n g t h e l a t e 1950's t h e c e n t r a l a u t h o r i t i e s b e g a n t o """Jere F e l k e r , S o v i e t E c o n o m i c C o n t r o v e r s i e s , n. 6, p.135. a p p r e c i a t e the f a c t t h a t the l a g g i n g consumer s a l e s were a l s o due to the r a t h e r a u s t e r e assortment and s t y l e s o f goods o f f e r e d and s e v e r a l m o d i f i c a t i o n s were taken to improve the f l e x i b i l i t y o f the p l a n n i n g system to the c a p r i c i o u s t a s t e s o f consumers. U n t i l 1960 the p r o d u c t i o n , s u p p l y , and assortment p l a n s f o r the forthcoming year had been formulated l a r g e l y on the b a s i s o f the p r e v i o u s year's o r d e r s from the trade o r g a n i z a t i o n s and the expected p r o d u c t i o n c a p a c i t i e s f o r e c a s t e d f o r the forthcoming year. Changes i n demand f o r v a r i o u s c a t e g o r i e s o f goods, and the assortment d e s i r e d w i t h i n these commodity groups t h a t had o c c u r r e d i n the c u r r e n t y e a r , were g i v e n o n l y v e r y l i m i t e d r e c o g n i t i o n i n the p r o d u c t i o n , supply and assortment p l a n s formulated f o r the forthcoming y e a r . B e g i n n i n g i n 1960, the d e t a i l e d assortment p l a n s f o r the p r o d u c i n g e n t e r p r i s e s were to be f i n a l i z e d on the b a s i s o f c u r r e n t o r d e r s r e c e i v e d from the t r a d i n g o r g a n i z a t i o n s . 1 The l i m i t e d success o f the above-mentioned i n n o v a t i o n s i n f o r m u l a t i n g the p r o d u c t i o n and assortment p l a n s , as w e l l as the wider use of such merchandize-moving techniques as consumer c r e d i t f o r d u r a b l e goods i n abundant supply and the wider a p p l i c a t i o n o f i n f o r m a t i v e a d v e r t i z i n g , can be a s c e r t a i n e d from the f o l l o w i n g t a b l e . Table XVII shows t h a t between 1961 and 196 7 the growth i n t o t a l d i s p o s a b l e money income was 5 3 p e r c e n t , compared w i t h 2 an i n c r e a s e of 131 p e r c e n t i n money h e l d i n savings accounts. "''Ibid. , p. 146 . 2 The i n c r e a s e d r e p r e s s e d i n f l a t i o n t h a t o c c u r r e d d u r i n g t h i s p e r i o d i s s u b s t a n t i a t e d by the widening d i s c r e p a n c y between 172 P a r t o f t h e r a p i d i n c r e a s e i n s a v i n g s can be a t t r i b u t e d t o t h e i n c r e a s i n g a f f l u e n c e o f t h e S o v i e t p o p u l a t i o n , b u t u n d o u b t e d l y the major cause f o r t h e r a p i d i n c r e a s e i n t h e i r d i s p o s a b l e i n c o m e - s a v i n g s r a t i o can be a t t r i b u t e d t o t h e r e f u s a l o f con-sumers t o buy unwanted o r u n s u i t a b l e c o m m o d i t i e s . A p a r t i a l e x p l a n a t i o n f o r t h e i n c r e a s i n g l a c k o f c o n f o r m i t y between goods o f f e r e d f o r s a l e and t h e d e s i r e s o f t h e consumers can be ex-p l a i n e d by t h e l a c k o f r e s p o n s i v e n e s s o f t h e p r o d u c e r s t o r e t a i l t r a d e o r d e r s , due t o t h e i r i n c e n t i v e system and t h e r i g i d i t y imposed upon t h e p r o d u c e r s by t h e m a t e r i a l s u p p l y system. TABLE X V I I PERSONAL DISPOSABLE MONEY INCOME AND SAVINGS ACCOUNTS, 1960 - 1967* ( b i l l i o n s o f r u b l e s ) 1961 1962 1963 1964 1965 1966 1967 T o t a l d i s p o s a b l e money income 87.8 95.0 98.8 104.4 116.5 125.7 134.0 T o t a l s a v i n g s i n a c c o u n t s 11.7 12.7 14.0 15.7 18.7 22.9 27.0 P e r c e n t a g e o f a d d i t i o n a l i n -come saved 9.3 14.0 34.4 30.4 24.7 45.7 49.4 * S o u r c e : K e i z e r , The S o v i e t Quest, p.81. P r e v i o u s t o 1967, when t h e new i n c e n t i v e system was i n t r o d u c e d i n t o l i g h t i n d u s t r y , t h e key i n d i c e s by w h i c h p r o -d u c i n g e n t e r p r i s e s were e v a l u a t e d was t h e i r g r o s s v a l u e o f o u t -p u t and c o s t r e d u c t i o n t a r g e t s . P r i o r t o 1958 t h e g r o s s v a l u e o f o u t p u t t a r g e t was g i v e n paramount i m p o r t a n c e . Under b o t h s t a t e r e t a i l p r i c e s and c o l l e c t i v e farm p r i c e s a t t h i s t i m e ; see T a b l e X I , p.96. 173 s i t u a t i o n s the producer had an i n c e n t i v e to d i s t o r t h i s a s s i g n e d assortments i n such a way as to maximize the f u l f i l l m e n t of h i s a s s i g n e d t a r g e t s . Thus goods were f r e q u e n t l y produced which maximized the f u l f i l l m e n t of the t a r g e t e d i n d i c e s o f the pro-ducer but which d i d not conform to the assortments or q u a l i t y d e s i r e d by the consumer. The implementation o f the 1965 r e -forms , which based performance i n c e n t i v e s on the v a l u e o f goods s o l d and p r o f i t a b i l i t y i n d i c e s , s h o u l d go f a r i n i n c r e a s i n g the r e s p o n s i v e n e s s of producers to the m a n i f e s t e d d e s i r e s o f the consumers (as expressed through the o r d e r s from the r e t a i l t r a d e o r g a n i z a t i o n s ) , p r o v i d i n g the t r a d e o r g a n i z a t i o n s e x e r c i s e t h e i r r i g h t s o f r e j e c t i n g u n s u i t a b l e goods. The c e n t r a l problem l e f t untouched by the 19 6 5 reforms i s the r i g i d i t y imposed on the producer through h i s m a t e r i a l supply a l l o c a t i o n s . The p r o d u c i n g e n t e r p r i s e s r e c e i v e a l l o c a t i o n s o f m a t e r i a l s i n accordance w i t h t h e i r approved supply p l a n which has been fo r m u l a t e d on the b a s i s o f t h e i r i n d i v i d u a l i n p u t c o e f f i c i e n t s and gross a s s o r t -ments a s s i g n e d ; the p r o d u c i n g e n t e r p r i s e can t h e r e f o r e o n l y f u l f i l l the d e t a i l e d assortment o r d e r s w i t h i n the l i m i t s allowed by t h e i r p r e - a s s i g n e d m a t e r i a l a l l o c a t i o n s . Matching the assortment and q u a l i t y o f consumer goods o f f e r e d w i t h the demands and e x p e c t a t i o n s of the populace i s o f c r u c i a l importance f o r the economy as a whole. The d i s t i n c t s h i f t towards an i n c e n t i v e p o l i c y o f m a t e r i a l i n t e r e s t as the primary method u t i l i z e d to encourage h i g h e r p r o d u c t i v i t y on the p a r t of the l a b o u r f o r c e w i l l be i n e f f e c t i v e i f the e x t r a r e a l income cannot purchase d e s i r e d consumer commodities. A s i d e from the i n c e n t i v e problem, planned r e t a i l s a l e s must be a c h i e v e d i n 174 o r d e r to a t t a i n f i n a n c i a l e q u i l i b r i u m . The primary source o f investment funds are revenues from e n t e r p r i s e p r o f i t s and t u r n -over taxes, and these revenues are i n f a c t o n l y r e a l i z e d on the completion of s a l e s . The problem o f the r i g i d i t y o f the mater-i a l supply system i n r e d u c i n g the response o f producers to con-sumer demands i s i n s o l v a b l e under the p r e s e n t a l l o c a t i o n mechanics o p e r a t i v e i n the S o v i e t economy. The a d m i n i s t r a t i v e a l l o c a t i o n o f many m a t e r i a l s u p p l i e s w i l l c o n t i n u e to be a r e a l i t y as l o n g as the d e s i r e s o f the P a r t y l e a d e r s h i p d i v e r g e from consumer p r e f e r e n c e s r e g a r d i n g the a l l o c a t i o n o f the na-t i o n ' s r e s o u r c e s between investment and consumption. E v a l u a t i o n o f f o r e i g n t r a d e Any economy which u t i l i z e s q u a n t i t a t i v e p l a n n i n g and a d m i n i s t r a t i v e a l l o c a t i o n o f m a t e r i a l s and equipment as t h e i r primary methods o f a l l o c a t i n g domestic r e s o u r c e s among a l t e r n a -t i v e uses cannot permit e x t e r n a l economic f o r c e s to i n f l u e n c e the composition and d i s t r i b u t i o n o f t h e i r r e s o u r c e s , except i n a c o n t r o l l e d manner. The monopolization, o f f o r e i g n t r a d e by the government i s a b s o l u t e l y e s s e n t i a l under the mechanics o f a l l o c a t i o n p r e s e n t l y u t i l i z e d i n the S o v i e t Union; u n c o n t r o l l e d f o r e i g n t r a d e i s d i a m e t r i c a l l y opposed t o the concept o f cen-t r a l i z e d r e s o u r c e a l l o c a t i o n . By r e s t r i c t i n g f o r e i g n t r a d e a c t i v i t i e s t o a r e l a t i v e l y few o r g a n i z a t i o n s , and by i n c o r p o r a t -i n g f o r e i g n t r a d e p l a n n i n g i n the n a t i o n a l economic p l a n s , the c e n t r a l a u t h o r i t i e s can s u c c e s s f u l l y i s o l a t e the domestic econ-omy from the e x t e r n a l world and u t i l i z e t r a d e flows t o h e l p implement the d e s i r e d p a t t e r n o f r e s o u r c e u t i l i z a t i o n . 175 The l a c k of a r a t i o n a l p r i c e system, based on r e l a t i v e s c a r c i t y r a t i o s , makes c a l c u l a t i o n s o f comparative c o s t s an u n s u i t a b l e c r i t e r i a t o use as a b a s i s o f t r a d e . T h i s d e f i c i e n c y i n the i n t e r n a l p r i c e s t r u c t u r e i s w e l l r e c o g n i z e d by the cen-t r a l p l a n n e r s , and s i n c e r e l a t i v e p r i c e s are not i n d i c a t i v e o f r e l a t i v e u t i l i t i e s , they use s u b j e c t i v e , u n q u a n t i f i a b l e e s t i -mates o f r e l a t i v e u t i l i t i e s as a b a s i s f o r t r a d e . O b v i o u s l y the s u b j e c t i v e e s t i m a t i o n o f v a l u e s does r e s u l t i n sub-optimal u t i l i z a t i o n of r e s o u r c e s , as i t does i n the case o f r e s o u r c e s produced and consumed i n t e r n a l l y , but t h i s becomes an unavoid-a b l e r e s u l t when q u a n t i t a t i v e p l a n n i n g i s u t i l i z e d as the p r i n c i p a l method o f a l l o c a t i o n i n the economy. The m e t h o d o l o g i c a l p r a c t i c e s used i n f o r m u l a t i n g the f o r e i g n t r a d e p l a n are weak i n s e v e r a l r e s p e c t s , which i n c r e a s e the d i f f i c u l t y of a c h i e v i n g c o n s i s t e n t n a t i o n a l economic p l a n s . The f i n a n c i a l e q u i v a l e n t o f the e x p o r t p l a n i s d e r i v e d b e f o r e the a c t u a l s a l e s are n e g o t i a t e d and t h e r e f o r e has to be based on e s t i m a t e s o f the p r i c e s t h a t can be o b t a i n e d from export s a l e s . Planned export revenues then p r o v i d e the f i n a n c i a l con-s t r a i n t on the volume o f planned imports. In the case where export revenues are below the planned l e v e l i t n e c e s s i t a t e s many ad hoc changes to the annual p l a n . In some cases exports may be i n c r e a s e d , but the more fr e q u e n t r e s u l t of underplan revenues i s t o reduce the l e v e l of imports p l a n n e d . 1 Since these imports ^Trade c r e d i t s may be extended to cover unplanned imbal-ances, e s p e c i a l l y i n i n t r a - b l o c t r a d e , but with the non-c o n v e r t i b i l i t y o f the r u b l e , the t r a d e w i t h c o n v e r t i b l e c u r r e n c y areas o f t e n has to be reduced i f the l e v e l o f a p p r o p r i a t e f o r e i g n exchange i s below what was planned. 176 were to be u t i l i z e d as f a c t o r i n p u t s i n the supply p l a n , the r e d u c t i o n i n imports planned w i l l have v a r i o u s e f f e c t s on ov e r -a l l p l a n f u l f i l l m e n t , depending on which stage o f the p r o d u c t i o n process the now n o n - e x i s t e n t imports were to be u t i l i z e d . F u r t h e r i n c o n s i s t e n c i e s i n the n a t i o n a l economic p l a n r e s u l t from changes made to planned e x p o r t s . The f o r e i g n t r a d e p l a n i s r a t i f i e d b e f o r e the s a l e s o f the ex p o r t commodities are n e g o t i a t e d . P r e v i o u s t o t h i s time, e n t e r p r i s e s p r o d u c i n g export goods have been a s s i g n e d output and assortment p l a n s , and have o r d e r e d the necessary m a t e r i a l s t o f u l f i l l these p l a n s . During the s a l e n e g o t i a t i o n s the purchasers o f t e n s t i p u l a t e d i f f e r e n t assortments and/or s p e c i f i c a t i o n s than were a n t i c i p a t e d i n the export p l a n . T h e r e f o r e the t r a d e o r g a n i z a t i o n s have the author-i t y t o change the q u a n t i t y , and s p e c i f i c a t i o n s o f the export o r d e r s a t the e n t e r p r i s e l e v e l . U n f o r t u n a t e l y , the corr e s p o n d -i n g a u t h o r i t y t o change i n p u t a l l o c a t i o n s does not r e s t w i t h the t r a d e a s s o c i a t i o n s and nece s s a r y i n p u t changes are f r e q u e n t -l y not made. Thus the consequences o f i n c o n s i s t e n t e n t e r p r i s e p l a n s r e s u l t i n the i n a b i l i t y o f the e n t e r p r i s e t o meet i t s new exp o r t plans o r , i n the case o f c a n c e l l e d o r d e r s , the accumula-t i o n o f unnecessary i n v e n t o r i e s . I t i s l i k e l y t h a t the problems a s s o c i a t e d w i t h i n c o n s i s t e n t p l a n s w i l l i n c r e a s e over time as the changes r e q u i r e d i n ex p o r t p r o d u c t i o n p l a n s are a f u n c t i o n o f the complexity o f the e x p o r t s . The r e c e n t t r e n d and expressed o b j e c t i v e o f S o v i e t export p o l i c y i s t o i n c r e a s e the p r o p o r t i o n o f manufactured goods r e l a t i v e t o t o t a l e x port volume. The n o n - c o n v e r t i b i l i t y o f the r u b l e n e c e s s i t a t e d p l a n -n i n g the trade flows w i t h most o f i t s t r a d i n g p a r t n e r s , w i t h 177 the e x c e p t i o n o f c o u n t r i e s h a v i n g c o n v e r t i b l e c u r r e n c i e s , so as to a c h i e v e an e q u i l i b r i u m b a l a n c e o f payments between each country."'" B i l a t e r a l b a l a n c i n g of t r a d e has the advantage o f e n s u r i n g a balance of payments w i t h t r a d i n g p a r t n e r s but l i m i t s the t r a d e between c o u n t r i e s to the l e v e l o f whatever imports o r e x p o r t s are d e s i r e d , i . e . , although the S o v i e t Union may d e s i r e to import l a r g e q u a n t i t i e s o f commodities from another c o u n t r y , the value of the imports i s l i m i t e d t o the v a l u e o f exports 2 a c c e p t a b l e t o t h a t country and the converse. The c r e a t i o n o f the I n t e r n a t i o n a l Bank f o r Economic C o o p e r a t i o n was an attempt to overcome the i n h e r e n t r e s t r i c t i v e n e s s o f b a l a n c e d b i l a t e r a l t r a d e , a t l e a s t w i t h t r a d e among E a s t e r n - b l o c n a t i o n s . The new system o f f i n a n c i a l s e t t l e m e n t s was a d e f i n i t e improvement over the o l d system o f b i l a t e r a l b a l a n c i n g and swing c r e d i t s p r e v i o u s l y used i n i n t r a - b l o c t r a d e . Most o f the s e r i o u s d e f i c i e n c i e s o f the o l d system, namely those i n v o l v i n g the h i g h l e v e l o f c r e d i t needed and the low v e l o c i t y of t r a d e funds, were overcome. However, the p r i n c i p a l d e f i c i e n c y o f the o l d system, the l a c k o f m u l t i l a t e r a l t r a d e s e t t l e m e n t s , was o n l y r e c t i f i e d t o a l i m i t e d degree.. A l l t r a d e flows i n the E a s t e r n - b l o c c o u n t r i e s are planned, and the d i f f i c u l t i e s o f planned m u l t i l a t e r a l t r a d e are "'"An o v e r a l l balance of t r a d e w i t h c o n v e r t i b l e c u r r e n c y c o u n t r i e s was n e c e s s a r y , but a s u r p l u s t r a d e balance w i t h B r i t a i n c o u l d be used to e q u a l i z e a d e f i c i t balance w i t h Canada and so on. 2 Re-exporting unwanted imports i s a l s o a p o s s i b l e means of a c h i e v i n g a balance of t r a d e . Thus the S o v i e t s r e - e x p o r t , f o r example, Chinese t i n and E g y p t i a n c o t t o n , to a l l o w these c o u n t r i e s t o f i n a n c e t h e i r imports from the S o v i e t Union. (Alec Nove and Desmond D o n e l l y , Trade With Communist C o u n t r i e s , p. 3 4 . ) 178 c o n s i d e r a b l e . A h y p o t h e t i c a l example w i l l e l u c i d a t e the d i f -f i c u l t i e s . 1 Suppose country A t r a d e s w i t h c o u n t r i e s B, C and D. A runs a s u r p l u s w i t h B. T h i s means t h a t A(B) go i n t o n e g o t i a -t i o n s w i t h C and D and r e q u i r e a net d e f i c i t ( s u r p l u s ) equal t o the s u r p l u s ( d e f i c i t ) w i t h A ( B ) . There i s no p a r t i c u l a r reason why C and D should want to run a combined net d e f i c i t w i t h A e x a c t l y s u f f i c i e n t t o o f f s e t A*s s u r p l u s w i t h B. Members w i l l be l o a t h e to accept a s u r p l u s ( d e f i c i t ) w i t h another member be-cause o f the subsequent d i f f i c u l t y of buying ( s e l l i n g ) more than can be s o l d to (bought from) o t h e r c o u n t r i e s . The a c t u a l t r a d i n g procedures f o l l o w e d by the S o v i e t Union and a l l o t h e r member c o u n t r i e s o f the IBEC have been to e n t e r i n t o b i l a t e r a l n e g o t i a t i o n s w i t h each of the member coun-t r i e s . On the completion o f these n e g o t i a t i o n s g e n e r a l n e g o t i a -t i o n s are h e l d where members t r y to o f f s e t s u r p l u s e s or d e f i c i t s w i t h each o t h e r by t a k i n g i n t o account c r e d i t s and d e b i t s w i t h o t h e r c o u n t r i e s . These same procedures were p o s s i b l e b e f o r e the c r e a t i o n o f the IBEC and were undertaken, although on a s m a l l e r s c a l e . The above examination shows t h a t the g r e a t e s t t e c h n i c a l problems o f S o v i e t t r a d e are the l a c k o f a r a t i o n a l i n t e r n a l p r i c e system and the i n c o n v e r t i b i l i t y o f t h e i r domestic c u r r e n c y . The former problems e l i m i n a t e s the p o s s i b i l i t y of r a t i o n a l c a l -c u l a t i o n of the b e n e f i t s o f t r a d e w h i l e the l a t t e r problem n e c e s s i t a t e s the b i l a t e r a l b a l a n c i n g o f a l a r g e p r o p o r t i o n of "'"The example g i v e n c l o s e l y f o l l o w s t h a t g i v e n by Frank Holzman i n " F o r e i g n Trade Behaviour i n C e n t r a l l y Planned Economies", i n I n d u s t r i a l i z a t i o n i n Two Systems, ed. by Henry Rosovsky, p.249. 179 t r a d e flows. These problems as w e l l as the diseconomies a s s o c -i a t e d w i t h i n c o n s i s t e n t f o r e i g n t r a d e p l a n s a l l a r i s e out of the i n f l e x i b i l i t y i n h e r e n t i n the S o v i e t form o f a l l o c a t i o n . C o n c l u s i o n : the Problem o f C e n t r a l P l a n n i n g  and the Market i n R u s s i a The r a t i o n a l e t h a t l i e s behind the form o f a l l o c a t i o n u t i l i z e d i n the S o v i e t economy i s t h a t the s o c i a l , p o l i t i c a l and economic goals of the Communist P a r t y d i f f e r from those o f the populace. The o v e r a l l o b j e c t i v e s of the s t a t e , and the demands t h a t these o b j e c t i v e s make on the n a t i o n ' s r e s o u r c e s , exceed the l e v e l t h a t would v o l u n t a r i l y be p l a c e d i n the hands o f the s t a t e by the populace. Hence the p o l i t i c a l regime has c o n s t r u c t e d an a l l o c a t i o n mechanism t h a t i s p r i m a r i l y d i r e c t e d towards s a t i s f y i n g the o b j e c t i v e s of the s t a t e . The r e s u l t i n g a l l o c a t i o n mechanism o f q u a n t i t a t i v e p l a n n i n g and a d m i n i s t r a t i v e a l l o c a t i o n has f a c i l i t a t e d s t a t e c o n t r o l over the d i s p o s a l o f the n a t i o n ' s r e s o u r c e s to s a t i s f y i t s own gross demand f o r r e -s o u r c e s , as w e l l as p e r m i t t i n g these r e s o u r c e s to be u t i l i z e d i n the expressed assortment of goods and s e r v i c e s d e s i r e d by the s t a t e . The p r e c e d i n g examination o f the reforms undertaken i n i n d u s t r y , a g r i c u l t u r e , and t r a d e i n d i c a t e t h a t the a l l o c a t i v e mechanics p r e s e n t l y u t i l i z e d i n the S o v i e t economy are essen-t i a l l y the same as those used throughout the S t a l i n i s t e r a . The essence of S o v i e t a l l o c a t i o n has remained i n the realm o f quan-t i t a t i v e p l a n n i n g . Economic r e s o u r c e s are a l l o c a t e d and d i s t r i -buted by means of an i m p e r a t i v e n a t i o n a l economic p l a n ; 180 a d m i n i s t r a t i v e methods are s t i l l the overwhelmingly predominant f o r c e i n the d i r e c t i o n and c o n t r o l o f the n a t i o n ' s economic p r o c e s s e s . The s u c c e s s i v e reforms and m o d i f i c a t i o n s made to the economic system, p r i o r to 1965, c e n t e r e d on r e o r g a n i z a t i o n s o f the e c o n o m i c - a d m i n i s t r a t i v e bureaucracy. Repeated attempts were made to c o r r e c t the m a n i f e s t e d d e f i c i e n c i e s o f the a l l o c a t i o n system w i t h i n the framework o f the p r e - e x i s t i n g p l a n n i n g methods and d i d not i n f a c t p r e s e n t the adopti o n o f r e a l a l t e r n a t i v e s , perhaps w i t h the q u a l i f i e d e x c e p t i o n o f a g r i c u l t u r e . S i n c e the death o f S t a l i n , s u c c e s s i v e i n c r e a s e s i n a g r i c u l t u r a l purchase p r i c e s , and m o d i f i c a t i o n s o f the r e l a t i v e p r i c e s o f a g r i c u l t u r a l commodities have been made i n attempts to more c l o s e l y a l i g n the p r o d u c t i o n - p r i c e i n c e n t i v e s o f f e r e d w i t h the q u a n t i t a t i v e demands o f the government, v i z . , a g r i -c u l t u r a l o u t puts. T a r g e t d e l i v e r y quotas f o r the p r i n c i p a l a g r i c u l t u r a l commodities are s t i l l a s s i g n e d to e n f o r c e the de-s i r e d p r o d u c t i o n o f a g r i c u l t u r a l c r o p s , and w i l l c o ntinue t o be u n t i l such time as the s t a t e purchase p r i c e s are s u f f i c i e n t t o induce the nece s s a r y ' f r e e ' d e l i v e r i e s o f a g r i c u l t u r a l outputs to s a t i s f y the demands of the p o p u l a c e . 1 Many d e f i c i e n c i e s i n S o v i e t a l l o c a t i o n t h a t have r e -s u l t e d i n c r e a t i n g s u b - o p t i o n a l use o f r e s o u r c e s have been "''There i s l i t t l e l i k e l i h o o d o f the c e n t r a l government s w i t c h i n g from quasi-compulsory d e l i v e r i e s to p r i c e i n c e n t i v e s i n the near f u t u r e . The t u r n o v e r taxes a p p l i e d t o a g r i c u l t u r a l products s o l d through the s t a t e r e t a i l o u t l e t s p r o v i d e a s i g -n i f i c a n t p r o p o r t i o n o f budgetary revenues. To r e l y on p r i c e i n c e n t i v e s the government would be r e q u i r e d to s u b s t a n t i a l l y i n c r e a s e t h e i r purchase p r i c e s . 181 pointed out i n the above examination of the So v i e t economic system. A number of these i n e f f i c i e n c i e s have been p a r t i a l l y (and i n some cases s u b s t a n t i a l l y ) reduced by the m o d i f i c a t i o n s made to the a l l o c a t i o n system i n the past two decades. Some other remaining i n e f f i c i e n c i e s , f o r example the coherent s p e c i -f i c a t i o n of output p l a n s , i n s u f f i c i e n t s p e c i a l i z a t i o n of pro-d u c t i o n , and production shutdowns due to the l a t e a r r i v a l of input s u p p l i e s may p o s s i b l y be reduced i n the fu t u r e by improved data processing techniques and by co n v e r t i n g to wholesale trade i n producer goods. 1 The 1965 reforms s i g n i f i c a n t l y reduced the r e l a t i v e scope of the c e n t r a l i z e d d i r e c t i v e s i n gu i d i n g resource a l l o c a -t i o n by s u b s t i t u t i n g 'economic l e v e r s ' , i . e . , p r o f i t s , c a p i t a l charges, and i n c e n t i v e funds to help r e g u l a t e and c o n t r o l the economy. Nevertheless, the dominance of c e n t r a l i z e d d i r e c t i v e s was not diminished; the r o l e of the 'economic l e v e r s ' was to promote adherence to the p h y s i c a l (and f i n a n c i a l ) v a r i a b l e s t a r g e t e d by the c e n t r a l a u t h o r i t i e s . The inc r e a s e d r e l i a n c e on 'economic l e v e r s ' was the l a s t of the many m o d i f i c a t i o n s t h a t have been made i n the Sov i e t guidance system i n an attempt t o o b t a i n r a t i o n a l i t y at the microeconomic l e v e l . The pre-reform guidance system had r e l i e d overwhelmingly on a d m i n i s t r a t i v e c o n t r o l s and c e n t r a l l y e s t a b l i s h e d input and output norms i n an ''"Kosygin has announced the c e n t r a l government's i n t e n -t i o n s to convert to wholesale trade i n producer goods. (Kosygin, D i r e c t i v e s of the Five-Year Economic Development Plan of the U.S.S.R. f o r 1971-1975, p.59.) Formal approval by s u p e r i o r a d m i n i s t r a t i v e a u t h o r i t i e s was r e q u i r e d f o r over 99 percent of the wholesale trade i n producer goods c a r r i e d out i n l a t e 1969. (Schroeder, "Soviet Economic Reform at an Impasse", pp.39-40. 182 attempt to obtain the elusive goal of e f f i c i e n c y at the micro-economic l e v e l . The r e s u l t i n g vast array of physical and f i n a n c i a l targets s t i f l e d i n i t i a t i v e at the enterprise l e v e l . The lack of coherency i n the targeted d i r e c t i v e s , as well as i n the incentive scheme used to encourage the f u l f i l l m e n t of these targets, did not stimulate the e f f i c i e n t carrying out of the objectives of the national plan. Innovation was s t i f l e d , s p e c i a l i z a t i o n was i n s u f f i c i e n t , and production was directed toward f u l f i l l i n g the p r i n c i p a l incentive-related plan targets, regardless of the 'economic costs' involved. The modifications made to the implementation of the annual plans, through u t i l i z i n g the 'economic levers' noted above, were an attempt to induce an 'automatic' response toward greater e f f i c i e n c y at the enterprise l e v e l by r e l a t i n g enter-p r i s e bonus schemes to t h e i r p r o f i t s . The use of the 'economic l e v e r s 1 has created a corresponding increase i n the d i r e c t i v e role of i n d u s t r i a l wholesale prices at the micro l e v e l to e f f e c t the preferences of the c e n t r a l a u t h o r i t i e s . Consequently, i n -d u s t r i a l wholesale prices have been manipulated to encourage various diverse objectives: some prices are varied to encourage the s u b s t i t u t i o n of scarce inputs, others are varied to stimu-la t e improvement of product q u a l i t y , induce the implementation of new technology, or the introduction of new products. In essence, the objectives of the 'economic levers' i s to d u p l i -cate, i n selected spheres of action, the autonomous, r a t i o n a l decision making that i s c h a r a c t e r i s t i c of competitive market economies. The success of the 'economic levers' in stimulating e f f i c i e n c y , while simultaneously encouraging the f u l f i l l m e n t of 183 the o b j e c t i v e s of the economic p l a n , has been l e s s than complete. Since the onset of the new microeconomic guidance system, the number of items i n the assortment plans has d i s p l a y e d a tendency to i n c r e a s e . 1 R e i n f o r c i n g t h i s i n d i c a t i o n of a l a c k of coher-ency i n the microeconomic guidance system i s the f a c t t h a t the number of persons employed i n s t a t e a d m i n i s t r a t i o n has incr e a s e d 2 38 percent between 1964 and 1970. The above-noted tendencies toward i n c r e a s i n g the l e v e l of a d m i n i s t r a t i v e guidance manifests the c e n t r a l problem inherent i n the S o v i e t form of a l l o c a t i o n , the l a c k of an economically s u b s t a n t i a t e d c r i t e r i o n of value which would a l l o w d e c e n t r a l i z e d , autonomous d e c i s i o n making, d i r e c t e d toward f u l f i l l i n g the ex-p e c t a t i o n s of the Pa r t y l e a d e r s h i p . The l a c k of coherency i n the S o v i e t p r i c e system, and the f a c t t h a t p r i c e s do not attempt to i n d i c a t e s c a r c i t y - u t i l i t y r a t i o s has two negative conse-quences: 1) the l a c k of an economically s u b s t a n t i a t e d c r i t e r i o n of value e l i m i n a t e s the p o s s i b i l i t y of making optimum choices to achieve d e f i n e d ends, i . e . , r a t i o n a l s u b s t i t u t i o n i s i m p o s s i b l e ; 2) i t n e c e s s i t a t e s preponderant a d m i n i s t r a t i v e guidance to d i -r e c t productive a c t i v i t i e s . I f the c e n t r a l plans are to possess any degree of economic r a t i o n a l i t y , they must be con s t r u c t e d w i t h the a i d of s c a r c i t y p r i c e s , based upon planner preferences. The task of c o n s t r u c t i n g such a p r i c e system without the a i d of a competitive market has proven to be i m p o s s i b l e . 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" S o v i e t Economic 'Reforms': A Study i n C o n t r a d i c -t i o n s " . S o v i e t S t u d i e s , Vol.XX (January, 1968), 1-22. . "The 1966-1967 S o v i e t I n d u s t r i a l P r i c e Reform: A Study i n C o m p l i c a t i o n s " . S o v i e t S t u d i e s , Vol.XXI (September, 1969), 462-477. Sp e c h l e r , M a r t i n . " D e c e n t r a l i z i n g the S o v i e t Economy: L e g a l R e g u l a t i o n of P r i c e and Q u a l i t y " . S o v i e t S t u d i e s , Vol.XXII (October, 1970), 222-254. S t u a r t , Robert. "Managerial I n c e n t i v e s i n C o l l e c t i v e A g r i c u l -t u r e d u r i n g the Khrushchev E r a " . S o v i e t S t u d i e s , Vol.XXII ( A p r i l , 1971), 539-556. Swearer, Howard. " A d m i n i s t r a t i o n o f L o c a l I n d u s t r y A f t e r the 1957 I n d u s t r i a l R e o r g a n i z a t i o n " . S o v i e t S t u d i e s , V o l . X I I (September, 1960), 217-230. 1 9 5 V a s i l ' e v N. "The D i s t r i b u t i o n o f A g r i c u l t u r a l E n t e r p r i s e s and the Increased S p e c i a l i z a t i o n o f A g r i c u l t u r e " . Problems  o f Economics, Vol.XI ( A p r i l , 1969), 37-47. Venzher, V l a d i m i r . " S u b s i d i a r y P l o t s - An A d d i t i o n a l Source o f A g r i c u l t u r a l P r oducts". Problems o f Economics, Vol.V (December, 1962), 30-40. V o l i n , L a z a r . " S o v i e t A g r i c u l t u r e Under Khrushchev". Papers and Proceedings of the 71st Annual Meeting o f the American Economic A s s o c i a t i o n . American Economic  Review, Vol.XLIX (May, 1959), 15-33. Zauberman, A l f r e d . "New Winds i n S o v i e t P l a n n i n g " . S o v i e t  S t u d i e s , V o l . X I I ( J u l y , 1960) , 1-13. Other Sources C o n s u l t e d N i m i t z , Nancy. "Consumption C o o p e r a t i o n i n R u r a l Areas o f the U.S.S.R.: A Comment". Rand paper (P-3674). Santa Monica: Rand C o r p o r a t i o n , 1967. Ronimois, Hans. "On S o v i e t Monetary, and on Some Problems R e l a t e d t o Monetary C i r c u l a t i o n i n the U.S.S.R." Paper p r e s e n t e d a t U n i v e r s i t y o f Stockholm, 1945. 196 APPENDIX I OUTLINE OF THE SCHEDULES FOR PREPARING ANNUAL PLANS AND BUDGETS* J F M A M J J A S 0 N D ii \ 4 1 i r 51 \ A •\ • 11 2 4 3 k J :6 \ '\ •\ •\ 10 v / .» "A \ 't 1 t 1 • ' t i 5 1 1 1 J \ \9 9 •\ j ,\ •\ • \ 'A \ i 1 1 1 r 1 1 12 Agencies Supreme S o v i e t C o u n c i l of M i n i s t e r s , U.S.S.R., Par t y C e n t r a l Committee Gosplan U.S.S.R, M i n i s t r y of Finance, U.S.S.R. State Committees and agencies U.S.S.R. m i n i s t r i e s and agencies Republican governments Republican m i n i s t r i e s , (sovnarkhozy) O b l a s t , kray, A.S.S.R. governments Rayon and other l o c a l governments E n t e r p r i s e s and other primary u n i t s Economic plans F i n a n c i a l plans Budgets Source: System, p.51. U.S. Bureau of the Census, The S o v i e t F i n a n c i a l 1 9 7 KEY 1 . P r e l i m i n a r y d r a f t s of " m a t e r i a l balances" f o r c r i t i c a l com-m o d i t i e s , summary national-income type balances (not i n c l u d -i n g the c o n s o l i d a t e d f i n a n c i a l p l a n ) , and " c o n t r o l f i g u r e s . " 2. P r e l i m i n a r y t a r g e t s and l i m i t s f o r output and consumption of c r i t i c a l commodities, c a p i t a l investment, l a b o r produc-t i v i t y , c ost r e d u c t i o n , e t c . 3 . D r a f t s of economic plans i n expanded form. Copies are a l s o sent to the C o u n c i l of M i n i s t e r s U.S.S.R. (not shown). 4. D r a f t of the aggregated "State Plan f o r the N a t i o n a l Economy of the U.S.S.R." 5. P r e l i m i n a r y d r a f t s of summary f i n a n c i a l plans of economic agencies and estimates ( i . e . , agency budgets) of budget-supported agencies. 6. P r e l i m i n a r y d r a f t s of the c o n s o l i d a t e d s t a t e budgets of u n i o n - r e p u b l i c s , w i t h d r a f t summary f i n a n c i a l plans and e s t -imates (5) attached. Copies are a l s o sent to Gosplan U.S. S.R. and the C o u n c i l of M i n i s t e r s U.S.S.R. (not shown). 7 . D r a f t of the c o n s o l i d a t e d "State Budget of the U.S.S.R.," w i t h d r a f t s of summary f i n a n c i a l plans and estimates of a l l - u n i o n agencies attached. 8 . Dissemination of t a r g e t s and l i m i t s i n the d r a f t n a t i o n a l economic plan. I n i t i a l , i n t e r m e d i a t e , and t e r m i n a t i n g dates are obscure, and probably vary f o r d i f f e r e n t types of i n d i c -a t o r s . Not shown i s an upward flow of d e t a i l e d s p e c i f i c a -t i o n s f o r a l l o c a t e d m a t e r i a l s and products from consumers up to planning or " p l a n - r e a l i z a t i o n " agencies (e.g., soyuz-g l a v k i of Sovnarkhoz U.S.S.R.) and subsequent downward flow of production and d e l i v e r y a u t h o r i z a t i o n i n f i n a l d e t a i l . 9. Dissemination of budgets, f i n a n c i a l p l a n s , and estimates through the network of finance organs. The t i m i n g of t h i s flow i s obscure. Approved summary budgets and plans r e t u r n -i n g from the s u p e r i o r l e v e l are timed to meet p r e l i m i n a r y and summary d r a f t s coming up from the i n f e r i o r l e v e l . F i n -a n c i a l plans and estimates are approved at each l e v e l a f t e r r e c e i p t of approved budgets from above. 1 0 . R a t i f i e d budgets. 1 1 . R a t i f i e d n a t i o n a l economic pl a n s . 198 12. D e t a i l e d " t e c h n i c a l - p r o d u c t i o n - f i n a n c i a l p l a n s , " or t h e i r e q u i v a l e n t , drawn up and r a t i f i e d at the e n t e r p r i s e l e v e l . Reference copies are sent up to the next a d m i n i s t r a t i v e l e v e l f o r c o n t r o l purposes (not shown). 

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