SPECIAL REPORT KOSYGIN'S PROPOSALS FOR REORGANIZING SOVIET ECONOMIC MANAGEMENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A005000100002-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 12
• Document Creation Date: December 16, 2016
• Document Release Date: December 20, 2004
• Sequence Number: 2
• Publication Date: October 15, 1965
• Content Type: REPORT

Copy Rio. 5 3
~QS'S~GIN'S P~OP'OSAI,S EbR REORGANIZING SOVIET` .ECONOMIC 1VlAI~T~S,.CxEMENT,
~G~NTF~AL INTELLIGEI~CC~ AGE~I~Y
m ~:
O,FFiCE OF RESE~A'RCH AND R~POR;TS
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KOSYGIN'a F'ROFOSALS FOIL REORGANIZING SOVIET ECONOMIC MANAGEMENT
In a major speech to the plenum of the central
committee on 27 aeptember, Soviet b`remier Kosygin
proposed a shake--up in the administration of industry
and greater autonomy for enterprise managers, but
he offered no revolutionary plan for modernizing
the soviet economy. His proposals (1) abolish
Khrushchev's regional economic councils and restore
the system of industrial ministries first intro-
duced by Stalin in 1932; and (2) increase the use
in industrial enterprises of the so-called "eco-
nomic levers": profit, bonuses, and a newly added
lever--interest charges on the invested capital of
enterprises. One of the most dramatic changes in
store for the management of individual enterprises
lies in the proposal to measure their future per-
formance not by the traditional criterion--gross
value of goods produced whether sold or not--but
by the volume of output actually sold.
Kosygin 's new program falls far short of pro-
posals made by the more radical Soviet economists;
some want a drastic reform of central planning
through mathematical methods, whereas others want
a decentralization of economic management through
the use of simulated market prices. Kosygin's speech
was short on the details and vague as to timing of
the changes, and therefore the probable impact of
the new program on Soviet economic performance is
difficult to judge. The organizational changes,
however, have been approved by the Supreme Soviet,
and the transition to the new system apparently is
to be completed by the end of 1965.
Kosygin 's proposals go far enough to bring
some slight improvements in management, but not
far enough to give the Soviet economy the sharp
increase in over-all performance that it needs.
The chief consequence may be to increase pressure
for further reform or, conversely, for a return to
the system which prevailed before the plenum.
Party First Secretary Brezhnev's strictures at the
plenum against the traditional practice of taking
resources out of agriculture to meet industrial
goals will further compound the problem of improving
Soviet industry.
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COMPARISON OF KOSYGIN'S PROPOSALS
WITH MAJOR RECOMMENDATIONS OF LIBERAL SOVIET ECONOMISTS
LIBERAL ECONOMISTS' PROPOSALS KOSYGIN'S PROPOSALS
Liberal economists advocate:
A. On enterprise assignments
1. That in measuring the performance of an Embodied in Kosygin's pro-
individual enterprise major emphasis be posals.
placed on profits;
2. That interest be charged on invested capital; Also included in Kosygin's
and program.
3. That bidding by enterprises be substituted Not proposed.
for assignment of tasks by central authori-
ties.
B. On prices
1. One group of liberal economists holds the
view that prices should be fixed on the basis
of "full cost" of production, including capital
charges.
2. Another school believes the central authori-
ties should set "simulated market prices"
arrived at by mathematical programming on
computers.
The liberals are also at odds on planning:
Neither school's view was
accepted by Kosygin.
C. On planning
1. One school of thought believes that the use Not proposed.
of mathematical methods and the establish-
ment of a national network of computer cen-
ters would permit central authorities to pre-
pare "optimal" plans covering all products.
2. The other liberals believe that supply plans Kosygin implied this pro-
should be limited to a small number of key posal would be adopted
products. "eventually."
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Administrative Changes
The principal changes in
the administrative structure are
(a) the establishment of 28 min-
istries with responsibility for
management of enterprises and de-
velopment of their respective
branches of industry, and (b) dis-
solution of the national, repub-
lic, and regional economic coun-
cils (Sovnarkhozes). The new
ministries replace 24 state com-
mittees and will be responsible
for the following: planning, plan
implementation, material and
technical supply of subordinate
enterprises, financing, deter-
mination of technical policy, and
management of resources and de-
velopment within their respec-
tive branches.
Eleven of the new minis-
tries--including all of those for
sectors of machine building--are
all-union ministries, and 17 are
union-republic ministries. The
republics are also empowered to
establish ministries of their own
to manage enterprises of purely
local importance such as those
producing consumer goods from
local materials.
Other changes in economic
administration include (a) the
dissolution of the Supreme Coun-
cil of National Economy and the
apparent transfer of its func-
tions to the USSR Council of
Ministers and (b) the establish-
ment of a new State Committee for
Material and Technical Supply to
handle the allocation of producer
goods among ministries.
Kosygin also referred
briefly to two additional changes
that would be made later. First,
direct contracting between in-
dividual enterprises and their
customers and suppliers will be
increased, with centralized al-
locations through the material
and technical supply system be-
ing replaced by freer trading ar-
rangements. Second, many in-
dividual enterprises are ~to be
managed eventually by a network
of branch associations or firms
subordinate to the industrial
ministries.
Central Planning
Kosygin's proposals :for
changes in central planning are
primarily organizational. He
called for a strengthening of the
State Planning Commission (Gos-
plan) to offset the powers of the
new ministries and to forestall
the growth of ministerial autarchy.
He also proposed broader :func-
tions for republic planning com-
missions to coordinate regional
plans and to prevent the develop-
ment of antarchical tendencies on
the republic level.
Kosygin called for more
careful balancing of central
plans and a fuller elaboration
of long-range plans, but he pro-
posed no fundamental changes in
planning methods or procedures.
For example, he did not mention
recent proposals to apply mathe-
matical methods and computers in
planning. He suggested, however,
that as direct contracting be-
tween enterprises is expanded,
the amount of detail in ttie cen-
tral plans should be reduced.
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CHANGES IN THE CENTRAL ASSIGNMENTS TO ENTERPRISES IN THE USSR
1. Each enterprise has been expected to meet
a centrally planned goal for gross value of its
output (whether sold or not).
Enterprise will have to achieve an assigned
gross value of sales.
2. Central authorities have supplied a detailed
list of main products to be turned out by the
enterprise.
Central authorities will still supply a list of main
products, but are to play a reduced role in de-
ciding details and specifications as direct con-
tracting between enterprises increases.
3. Central authorities have assigned to the en?
terprise a quarterly delivery schedule of
products and consignees.
Central authorities will continue to make up
quarterly delivery schedules and specify con-
signees, but the increased use of direct con-
tracting between enterprises will reduce assign-
ments from above.
4. Enterprise performance has been judged on
basis of:
a. Over-all costs of production
b. Labor productivity
c. Total wage bill
d. Number of workers
e. Average wage paid (total wage bill divided
by number of workers and employees).
f. Portion of profit transferred to state
budget.
g. Other indicators, including assignments
governing details on materials used, pro-
ductivity of equipment, and costs of in?
Qualitative indicators in future will be:
a. Total profit
b. Profitability (profit as a percent of fixed and
working capital)
c. Total wage bill
d. Portion of profit transferred to state budget
(to be reduced; specific amount to be based
on amount of funds received from state
budget for working capital and new plant and
equipment).
5. Central authorities have made all decisions
regarding introduction of new technology
(development of new products and new pro?
duction processes).
6. Only a very small portion of an enterprise's
capital investment has been financed from
its own profits, the major share coming from
the state budget as grants.
The portion of capital investment financed from
enterprise profits is to be sharply increased.
The portion coming from the state budget will
be issued as credits that must be repaid.
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Changes in Enterprise ;4anagement
Kosygin's proposals for im-
proving the management of indus-
trial enterprises call for a sharp
reduction in the number of assign-
ments from central authorities,
extend the use of direct contracts
between enterprises, increase the
amounts of bonuses paid to man-
agers and workers from "enterprise
funds," empower the enterprises
to administer part of their own
investment programs, and introduce
an interest charge on invested
capital. Central controls are to
be retained over investment in
enterprises financed from the
state budget, over the introduc-
tion of new technology, aver
prices of products, over wage
rates, and initially over material
and technical supplies. The pro-
posals, which draw on the results
of testing in both heavy industry
and consumer industry enterprises
over the past year, apparently
apply to all. branches of industry
although some variations are im-
Ylied in the details and timing
of their implementation. The pro-
X~osals were presented only in out-
line form; their details are to
be worked out b,y various state
agencies and implemented gradually
between 1966 and 1968.
Under the proposals, each
enterprise is to be given assign-
ments for the main products to
be produced, for the total value
of sales, for the wage bill, and
for the level of profit. Enter-
prises, however, now are freed
from a large number of other de-
tailed assignments--numbering 30
to 4p in some cases--such as num-
ber of workers, average wage paid,
labor productivity, and produc-
tion costs. Targets in tYiese
L cases will be incorporated by
the enterprises into their own
plans and will not be subject to
change by the planning authorities
--as is true at present.
Expansion of Direct Contracts
The use of direct contract-
ing between enterprises will be
increased under the proposals,
"eventually"" replacing the cen-
tral allocations of some producer
goods. No time schedule for this
change is proposed, however. Un-
der this system enterprises make
their own arrangements with cus-
tomers for sale of finished prod-
ucts and with supplies for pur-
chases of materials. Such a sys-
tem now is in operation in about
400 enterprises in light industry.
Kosygin also asked for tighter
discipline in interenterprise
relations, such as more timely
squaring of accounts and stiffer
penalties for failure to fulfill
agreements.
Larger Enterprise Funds
To increase the incentives
of enterprises, Kosygin apparently
believes that the size of the so-
called "enterprise fund"--now
fixed at 4-6 percent of planned
profit at most enterprises--
should be increased, varying di-
rectly with changes in sales
volume, quality of production,
and the level of profits. This
fund would continue to be used,
as at present, to modernize
equipment, to supplement the bon-
uses now being paid to managers
and workers from the wage fund,
and to provide social and cul-
tural facilities and workeY?s'
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housing. Funds from this source
used for plant modernization are
to be augmented by allowing the
enterprise to retain part of its
allowances for depreciation that
formerly were transferred to the
state budget. Expenditures on
modernization from internal de-
preciation funds apparently are
to be completely administered by
the enterprise director.
The supplementary bonuses
from the enterprise fund, which
constitute a form of profit shar-
ing administrated by the enter-
prise, will be divided into two
major components: (1) a series
of payments during the year,-and
(2) one annual payment in an
amount related directly to the
recipient's length of service in
order to discourage labor turn-
over. Kosygin appears to have
proposed no major innovations in
the present central bonus system
for industrial managers. His
only specific reference to this
system is his proposal to make
bonuses for overfulfillment of
a low plan less than those for
fulfillment of a high plan, This
proposal has been a major fea-
ture of a new bonus system that
has been tested in 85 heavy in-
dustry and consumer industry en-
terprises since April 1964.
Capital Charge Proposed
A striking innovation in
the Kosygin reform package is
the proposal for a form of capi-
tal charge. Enterprises will
pay for their fixed and working
capital by a charge against prof-
its, with the result that any
waste of capital will thereby
reduce the share of profit avail-
able for the enterprise fund,
The new method, described as a
"long-term credit system," will
be applied first in going con-
cerns and apparently will be ex-
tended later to newly constructed
plants. Ultimately., such capi-
tal charges are to become the
major source of budget revenues
and will enable the role of the
turnover tax and other revenue
sources to be reduced.
Kosygin stated that new
wholesale prices must be devised
in order to enable "normally op-
erating enterprises to obtain
profits." He clearly recognized
that price reform is crucial to
the increased use of economic
levers by calling for a new re-
vision of prices to be carried
out in 1967 and 1968, a period
roughly coinciding with the im-
plementation of the changes in
enterprise management. His pro-
posal implies that the general
revision of industrial wholesale
prices and transport tariffs
carried out between 1962 -and
7.965 along traditional methods
and scheduled for introduction
on 1 January 1966 is to be post-
poned. He fails, however, to
mention recent proposals by lib-
eral economists to simulate mar-
ket prices by the use of com-
puters or to adopt full-cost
prices which take account of in-
terest on invested capital.
Personnel Changes
An extensive reshuffling of
personnel among the top economic
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THE NEW
SOVIET
MINISTRIES
FERROUS METALLURGY
NONFERROUS METALLURGY
COAL INDUSTRY
CHEMICAL INDUSTRY
PETROLEUM EXTRACTION
PETROLEUM REFINING &
PETROCHEMICAL INDUSTRY
LUMBER, CELLULOSE-PAPER &
WOODWORKING INDUSTRY
CONSTRUCTION MATERIALS INDUSTRY
HEAVY, POWER & TRANSPORT
MACHINE BUILDING
CONSTRUCTION, ROADBUILDING &
COMMUNAL MACHINE BUILDING
TRACTOR & AGRICULTURAL MACHINE
BUILDING
INSTRUMENT MAKING, AUTOMATION &
CONTROL SYSTEMS
MACHINE-TOOL & TOOL MANUFACTURING
INDUSTRY
V. F. Zhigalin'
Ye. S. Noyoseloy
I. F. Sinitsyn`
A. NI. Tarasoy'
A. K. Antonoy`
K. N. Rudney'
K. [. Brekhoy
A. I. Kostousoy
MACHINE BUILDING FOR LIGHT & FOOD INDUSTRIES V.N. D~yenin'
& PRODUCTION OF HOUSEHOLD APPLIANCES
I. P. Kazanets`
P. F. Lomako'
B. F. Bratchenko'
L. A. Kostandoy
V. D. Shasin`
V. S. Fedoroy
N. V. Timofeyey'
I. A. Grishmanoy
N. N. Tarasoy
FOODSTUFFS INDUSTRY
MEAT & DAIRY INDUSTRY
FISH INDUSTRY
POWER & ELECTRIFICATION
GEOLOGY
DOMESTIC TRADE
RECLAMATION & WATER
ECONOMY
ASSEMBLY & SPECIAL
CONSTRUCTION WORK
V. P. Zotoy'
S. F'. Antonoy'
A. A. Ishkoy
P. S. Neporozhniy
A. V. Sidorenko
A.. I. Struyey
Ye. Ye. Alekseyeyskiy
F. B. Yakuboykiy
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agencies accompanied the organi-
zational shake-up. Chief among
the changes affecting the economy
were the replacement of P. F.
Lomako by N. F. Baybakov as chair-
man of Gosplan; the appointment
of V. Ye. Dymshits, former head
of the USSR Sovnarkhoz, as chair-
man of the new State Committee
for Material and Technical Sup-
ply; the elevation of central
committee presidium member and
agricultural policy specialist
D. S. Polyanskiy to first deputy
chairman of the Council of Minis-
ters; and the replacement of K.N.
Rudnev by V. A. Kirillin as chair-
man of the State Committee for
the Coordination of Scientific
Research, which was renamed the
State Committee for Science and
Technology. Lomako and Rudnev
were appointed heads of two of
the new ministries. Kirillin
was a vice president of the Acad-
emy of Science, USSR.
Although most of the heads
of the new ministries had been
chairmen of the abolished state
committees, eight state committee
chairmen lost positions on the
Council of Ministers in the shuf-
fle. Heads of new ministries
now elevated to ministerial rank
include four chairmen of regional
sovnarkhozes and an official of
the RSFSR republic sovnarkhaz.
The fate of most of the key
personnel of the abolished agen-
cies has yet to be announced but
they probably will be absorbed
into the new ministries. Brezh-
nev, in his plenum speech, of-
fered reassurances that ,jobs
would be found for all displaced
personnel, although Kosygin spe-
cifically called for some reduc-
tion in the total number of per-
sons engaged in adminstration.
Kosygin's views on the proper
role of the party as overseer of
the economy appear to be in
marked contrast to those of
Khrushchev. Whereas Khrushchev
felt it necessary for the party
to intervene directly in economic
management, Kosygin appears to
believe that the party should
"stay on the street, but keep
out of the traffic."
Prospects for the
Administrative Changes
Kasygin's speech does not
display enthusiasm for adminis-
trative reshuffling--perhaps be-
cause Khrushchev's successive
rounds of reorganization in in-
dustry and agriculture produced
no visible improvements in per-
formance. The most obvious con-
clusion to be drawn from Khru-
shchev's many experiments i.s that
it does not make much difference
whether industries are organized
by ministry or by region,. whether
planning is done at the republic
of national level, or to what de-
gree the party is instructed to
oversee and second-guess economic
managers. The pervasive problems
of coordination persisted through
all the reorganizations, and the
efficiency of investment contin-
ued to decline.
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There is some evidence that
problems of coordination may have
grown under the sovnarkhoz system.
The harshness of Kosygin's, and
Brezhnev's, attacks on the systen-
attest to this. They have cas-
tigatedtl3e sovnarkhozes for com-
plicating the attainment of uni-
fied central direction of the
economy, for the growth of the
dead weight of bureaucracy, for
the pursuit of local advantage,
for the lag in introducing new
technology suggested by the impo-
tent state committees, for the
decline in the return on invest-
ment, and for the increasing
backlog of uncompleted construc-
tion.
At best, however, the new
leaders can hope for only a few
marginal improvements from the
return to ministries. There may
be closer coordination between
research and development and pro-
ducing enterprises, standardized
models and spare parts may now be
produced nationally, and coordina-
tion of supply with production
plans may be simplified. In spite
of I~osygin's defensive claim that
the reorganization does not mechan-
ically restore the old ministerial
system, many of the old problems
that the 1957 reorganization
sought to overcome--such as branch-
of-industry autarchy, lengthy lines
of communication, and failures of
regional coordination among dif-
ferent branches--may now reappear.
Prospects for Changes in
n erprise anagemen~
Kosygin's objectives are to
spur new technology and to increase
the return on investment while
retaining strong central control
over industry. 141ost Western
observers, and a few Soviet econo-
mists,have concluded that the sys-
tem of central planning is at
fault in producing Soviet economic
ills and must be drastically re-
formed. But Kosygin has intro-
duced nothing new. There is lit-
tle chance that his cautious pro-
posals for improving entE~rprise
management will produce fundamental
gains in economic performance.
The failure to specify rad-
ical improvements in the method of
pricing would seem to nullify much
of tlxe benefit to be gained by
giving enterprise manages?s more
freedom of decision making. It
is difficult to see how rational
decisions can be made with ir-
rational prices. I~osygin's pro-
posals appear to be an extension
of some of the features of rela-
tively liberal experiments conducted
in the USSR, but they lag behind
the proposals that have recently
been introduced in several Lastern
~,uropean Communist countries.
It seems clear that under the
proposals the Soviet manager still
will have relatively little free-
dom of choice.
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