JPRS ID: 9159 USSR REPORT ECONOMIC AFFAIRS

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28 JUNE 1988
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(EOUO 10/80) 1 OF i

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JPRS L/9159
20 June 1980
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USSR Report
ECONOMIC AFFAIRS
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REGIONAL DEVELOPMENT
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USSR REPORT
ECONOMIC AFFAIRS
(FOLIO 10/80)
CONTENTS
INVESTMENT, PRICES, BUDGET AND FINANCE
Economists Study Data on Capital Investment Efficiency
(I. Perepechin; VOPROSY EKONOMIKI, Mar 80) 1
Impact of Quality Improvement on Price Considered
(A. Akhmeduyev; VOPROSY EKONOMIKI, Mar 80) 13
INDUSTRIAL DEVELOPMENT AND PERFORMANCE
Component Standardization as Element in Production Efficiency
(A. Gusarov, A. Stoynik; VOPROSY EKONOMIKI, Mar 80) 27
Better Incentives Needed for Industry
(T. Ergashev; VOPROSY EKONOMIKI, Apr 80) 39
Impact of Production Factors on Union Republic Growth
(Ye. Silayev, A. Baramidze; VOPROSY EKONOMIKI,
Apr 80) 47
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INVESTMENT, PRICES, BUDGET AND FINANCE
ECONOMISTS STUDY DATA ON CAPITAL INVESTMENT EFFICIENCY
Moscow VOPROSY EKONOMIKI in Russian No 3, Mar 80 pp 112 -121
[Article by I. Perepechin: "Statistical Study of the Actual Efficiency of
Capital Investments
[Text] Increasing the economic efficiency of capital investments is one of
the principal tasks in capital construction. At the same time the poten-
tial that exists for increasing the efficiency of capital investments is
not being sufficiently utilized. In the current_5 -year period the growth
rates of capital investments have exceeded the growth rates of the national
income. In the first 4 years of the 10th Five -Year Plan the growth of the
national income, which reflects the return on capital investments, was even
somewhat lower than the growth achieved in the 1971 -1974 period. The gap
has widened between the volume of fixed capital put into service and the
capital investments because the volume of unfinished construction has
grown. It is of paramount importance to raising the efficiency of capital
investments that a study be made of the actual results of capital construc-
tion and of factors that have a bearing on those results. "It must be seen
as a major oversight," writes T. Khachaturov, member of the academy, "that
we do not compile operational budgets (ispolnitel'nyye surety), nor do we
analyze the actual efficiency of capital investments. Without this it is
not possible to monitor the results of construction.
Evaluation of the actual results of capital construction is needed above
all for monitoring the level of efficiency anticipated in project plans.
When plans are being drafted, efficiency indicators are not uncommonly em-
bellished: estimated project cost and current production cost are on the
low side and the volume of output and labor productivity are put on the
high side. In other words, an appearance of high efficiency of the project
being drafted is created but is not borne out in practice. Yet it is a ba-
sic condition necessary to the high quality of project planning indicators
that they be realistic. To discover whether a project is realistic or not,
we need to know the actual efficiency of capital investments and to compare
it with the projected efficiency.
VOPROSY EKONOMIKI, No 7, 1979, p 130.
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An equally important problem in studying the actual efficiency of capital
investments at individual enterprises and facilities is to discover the
factors affecting the level of efficiency, especially those which tend to
lower it. Vigorous pressure needs to be exerted on the level of efficiency,
it needs to be managed. Up to now this kind of management has been done in
the stage when project plans are being drafted through selection of the
most efficient of several interchangeable technical alternatives, but this
in our view is not enough. Systematic and objective analysis of the actual
efficiency of capital investments for specific enterprises and facilities,
above all for those most important to the national economy, is a prerequi-
site to the high efficiency of capital outlays.
The actual results of capital construction have been studied repeatedly.
We should note the research of B. Vaynshteyn, conducted back in 1961 for
the building fabrications industry; the methods developed by A. Probst;
specific sections in the monographs of T. Khachaturov, B. Plyshevskiy, and
others. In the first place, however, such research has in most cases been
done mainly at the macroeconomic level (the national economy, the sectors
of the economy, and so on); second, when it has dealt with individual en-
terprises and facilities, the analysis was more exploratory than system-
atic and regular in nature. The specific methods recommendations on proce-
dure for studying the actual efficiency of capital investments at both the
macroeconomic and microeconomic levels, published by USSR Stroybank in 1975,
should be put among exploratory work of this kind. It is beyond doubt that
statistical agencies, which have the right to institute the necessary re-
porting and to obtain a sufficiently large set of actual figures reflecting
efficiency, have the greatest opportunities in this area.
The surveys conducted by USSR CSA on actual efficiency of capital invest-
ments for individual enterprises and facilities have yielded a number of
interesting results. For example, at industrial enterprises and facilities
put into operation in 1975 the profit earned in 3.9 years of their opera-
tion has averaged 55 percent of the capital investments, which means that
approximately half of the outlays have been repaid. If the average annual
profit stays at the same level in the future, then the payoff period as a
whole for the enterprises and facilities studied would be 7.2 years.
It is very important to compare the actual figures with those in the de-
sign. For example, in 1978, when the period allowed for attainment of
rated capacity expired for all the enterprises and facilities, profit was
17 percent of the respective capital investments, but according to the de-
signs of these enterprises and facilities it should have averaged 31 per-
cent. This occurred not only because of shortcomings in operation of the
enterprises that were built, but also because of important oversights in
project planning. It is not uncommon for the design figures already ap-
proved to be revised unfavorably. For the enterprises and facilities put
into operation in 1975 as a whole, the estimated construction cost rose 18
percent as a result of these revisions subsequently allowed. Moreover, the
annual volume of output envisaged by the design was raised only 14 percent_
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when the project plans were reapproved, and the annual profit only 8 per-
cent. Project plans are revised not only because the estimated construc-
tion cost has been set too low (in order to ensure speedy approval), but
also because construction time is long, averaging nearly twice as much as
the standard time allowed.
Statistical data allow us to discover certain potential for raising effi-
ciency. This potential consists above all of more extensive utilization
of the advantages of expansion and reconstruction of existing enterprises
as compared to new construction. The profit per ruble of capital invest-
ments for expansion and reconstruction average nearly threefold greater
than for new construction. The time from commencement of construction to
the very end of the payoff period averages half as long for expansion and
reconstruction of enterprises as for new construction, that is, the outlays
are repaid twice as fast.
Nevertheless, as shown by the materials of the statistical surveys con-
ducted, payoff periods cannot be viewed as the summary indicator of effi-
ciency, nor can its level and dynamic behavior be equated with those of the
efficiency of capital investments. Enterprises in industries which are not
capital intensive are repaid more quickly, as are enterprises with rela-
tively large expenditures of live labor and comparatively low labor produc-
tivity. But to term such enterprises the most efficient would hardly be
legitimate (in spite of the rapid payoff).
The shortcomings of the payoff period as an indicator come down to the fol-
lowing. First, the payoff period does not fully reflect differences in ab-
solute magnitude either of capital investments or of profit. Second, it
does not detect differences in the rate of profit within the payoff period.
Third and finally, the payoff period does not reflect that yield which will
take place after the payoff period.
We will illustrate these shortcomings with the following hypothetical exam-
ple:
Capital investments, in thousands of rubles 1,000 3,000 3,000 3,000
Profit by years of operation, in thousands
of rubles
I 200 500 100 100
II 350 700 800 800
III 450 800 1,000 1,000
IV 500 1,000 1,100 1,100
V 500 1,200 1,200 1,400
VI 500 1,200 1,200 1,600
Total profit minus capital investments, in
thousands of rubles 1,500 2,400 2,400 3,000
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Enterprise
I II III IV

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The actual payoff period of the first enterprise is 3 years (200 350
450 1,000), and of the three others 4 years (500 700 800 1,000
100 800 1,000 1,100 3,000). However, in spite of the shorter pay-
off period, the first enterprise is less efficient than the other three.
This is quite evident from the overall result for the 6 years of operation:
total profit (from commencement of operation) exceeded capital investments
for the first enterprise by 1.5 million rubles, for the second and third by
2.4 million rubles, and for the fourth by 3 million rubles. In other
words, by building an enterprise whose payoff period was 1 year longer, the
national economy was to receive an additional 900,000 to 1.5 million rubles
over the 6 -year period (over and above all construction costs), and, more-
over, with each subsequent year the difference to the advantage of the en-
terprise with the longer payoff period will increase.
It does not follow from this, of course, that a longer payoff period is al-
ways more advantageous. If the profit and capital investments of the sec-
ond enterprise had been one -third as great, then by the end of the sixth
year the national economy would have received from the second enterprise
not more profit, but less profit than from the first (700,000 rubles less).
This shows the effect of the absolute size of the results and the outlays
on economic assessment. But the payoff period, as we see from the example,
does not reflect this. In spite of the different payoff periods, the
fourth and second enterprises are more efficient than the third.
So, payoff periods have essential shortcomings if they are to be regarded
as definitive and summary indicators of efficiency. But it by no means
follows that payoff periods are not necessary at all. They are not defini-
tive indicators, but they are very important ones that play a large role in
comprehensive evaluation of efficiency.
The payoff period is one of the two components of the complete investment
cycle, the component which reflects the maximum length of the turnover of
capital investments. The other part of this cycle is construction time.
If, for example, the payoff period is 3 years, and construction time 4,
then the entire investment cycle will be 7 years.
Figures on the length of the complete investment cycle are indispensable in
planning both capital investments themselves and also the sources from
which they are to be financed. If we look upon capital construction as a
borrowing process, then the length of the complete investment cycle will
show the duration of the indebtedness of the enterprise (builder) to the
national economy. Shortening the period of indebtedness still does not in
and of itself signify a higher efficiency of capital investments, but other
things being equal, it undoubtedly helps. This is in fact the role of that
indicator, which, though an auxiliary role, is a very important one.
We must also dwell on the shortcomings of the payoff period as an indica-
tor, which are more theoretical than practical in nature. The actual
length of the payoff period can be ascertained only after a more or less
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lengthy period following completion of construction. That is the principal
shortcoming of the payoff period from the standpoint of its practical use.
In many cases it is difficult to determine the payoff period because the
process of capital investments is continuous: hardly does one project for
reconstruction or expansion of an enterprise end (and sometimes it is not
even finished) than the next one begins. This is especially typical of en-
terprises in machinebuilding, where as a rule capital investments are re-
paid rather quickly. But in view of the undifferentiated character of the
results (the growth of profit), it is a problem to compute the quantitative
magnitude of the payoff period.
Thus payoff periods, taken as periods of time, display a number of theoreti-
cal and practical shortcomings which have been fully revealed in the study
of this indicator by USSR CSA. For that reason they need to be supple-
mented (supplemented, but not replaced) by indicators of efficiency that
are more meaningful and more necessary in practice.
In our opinion statistical observation of the actual efficiency of capital
investments ought not to be discrete, but continuous. This means that we
should not wait until the end of the payoff period. We need to analyze the
actual results of capital construction continuously, beginning with the
first year of operation. Only in this way is it possible to detect in good
time the factors that have an impact on the level of efficiency and to take
steps to raise it. For this purpose efficiency coefficients are quite
suitable on the scale of one enterprise or facility taken separately. Af-
ter they are put into operation, one can compute them annually and compare
them with the design coefficients and standard coefficients and discover
the reasons for discrepancy between these indicators. Strictly speaking
the return on capital investments continues so long as the enterprise ex-
ists. It is moreover distinguished by instability; it can move downward or
upward in a broad range.
The USSR CSA chose the payoff period as an indicator of the actual effi-
ciency of capital investments out of a desire to distinguish the idea of
the efficiency of capital investments from the efficiency of utilization of
fixed productive capital. We can speak of the efficiency of capital in-
vestments in this sense only up to the point when they have been repaid.
This is supposedly followed by a period which has nothing in common with
capital investments -a period in which it is no longer the efficiency of
capital investments, but the efficiency of fixed capital.
It seems to us that this approach is an oversimplification. Capital in-
vestments are future fixed capital, and fixed capital are past capital in-
vestments. There is no fundamental difference between these indicators.
Of course, the entire magnitude of capital outlays is not reflected in the
value of capital. But in principle capital investments and fixed capital
are, if not identical, at least similar concepts. It is hardly legitimate
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to set them in opposition to one another. The actual efficiency of capital
investments comes about, in our view, under the impact of two factors:
first, potential efficiency which the newly created capital assets (com-
pleted capital investments) possess, and second, the efficiency of utiliza-
tion of this fixed capital.
Potential efficiency is incorporated in the design of the enterprise and in
its construction. The more successful the design features adopted in proj-
ect planning and the faster construction is completed, the higher the po-
tential efficiency, that is, the greater the capability of the fixed capi-
tal to yield a beneficial return. But this is only a possibility, one
which yet has to be realized.
Efficiency of utilization of fixed capital depends on the organization of
production, the skill of personnel and many other factors. It is the level
of utilization of fixed capital that governs the actual return on the capi-
tal investments made, but the size of that return is also determined by the
potential efficiency of the capital assets. If the utilization of fixed
capital is the same, the actual efficiency of capital investments increases
directly with the potential efficiency of the capital assets. Capital in-
vestments in capital assets which have a high potential efficiency, but
which are utilized poorly, may yield a smaller return than capital invest-
ments in fixed assets with a low potential efficiency if they are ably uti-
lized.
Fluctuations in the efficiency coefficients show changes in the actual ef-
ficiency of capital investments. Their dynamic behavior makes it possible
to assess the dynamic behavior of efficiency and to actively influence it.
At present determination of actual efficiency coefficients is part of the
program of statistical surveys. At the same time the payoff periods of
capital investments have, of course, been retained. In addition to the
usual formula of the coefficients (annual profit divided by capital invest-
ments), two modifications of it are used: reimbursement coefficients and
averaged coefficients.
Both modifications differ from the usual coefficient in the calculation of
the numerator. The numerator of the reimbursement coefficient is not the
profit of the given year, but total profit from commencement of operation.
A Aside from its independent significance, this indicator is used in calcu-
lating the payoff period. Up until the end of the payoff period the reim-
bursement coefficient is less than unity, thereafter it is greater than
unity. Instead of the profit of the given year, the averaged coefficient
has in the numerator the average annual profit from commencement of opera-
tion. The denominators of all these coefficients are the same (total capi-
tal investments made). Efficiency coefficients, reimbursement coefficients
and averaged coefficients answer different questions and complement one an-
other. But at present only the customary efficiency coefficients are com-
parable with project plans and standards.
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Technical difficulties do not allow annual computation of values for these
indicators. Enterprises put into operation are first surveyed after 3 full
years of operation. Those of them which have not repaid the investment in
that time are surveyed again after 6 years. Enterprises which have been
surveyed twice, but which still have not paid off the investment, are sur-
veyed for the third time after 9 years of operation. Then the surveys are
terminated; that is, actual payoff periods are not calculated for enter-
prises which pay off after more than 9 years of operation or which do not
pay off at all. As a rule such enterprises are inefficient, since they did
not pay off in the allowed period (taking into account the period allowed
for attainment of rated capacity and the average standard efficiency coef-
ficient at 0.12, the normal payoff period is about 9 years). In each sur-
vey efficiency coefficients and their modifications are calculated for all
the previous years (that is, they show dynamic behavior from year to year).
At the present time the program for statistical surveys also includes a
question concerning the reasons why the actual indicators used for calcu-
lating efficiency coefficients (capital investments, volume of output, pro-
duction cost and profit) differ from the respective data anticipated in the
design. In our opinion these materials have great practical value, since
they make it possible to take responsive steps to improve utilization of
fixed capital and consequently to raise the actual efficiency of capital
investments expended to build those capital assets.
At the same time cases are found when actual efficiency coefficients devi-
ate from the projected level not because of poor utilization of fixed capi-
tal, but because the design figures were unrealistic. This may be detected
in the very first years of operation, that is, at a point which as a rule
is long before the end of the actual payoff period. And if an active ef-
fort to raise the level of efficiency at the given specific enterprise is
unfortunately impossible in this particular case, sufficiently early detec-
tion of the defects in the design can be used for administrative and finan-
cial pressure on the work of project planning organizations. To be spe-
cific, it would be advisable to set up a system of material incentives for
project planners as a function of two factors: the level of anticipated
efficiency and the extent to which that efficiency is realistic (we are, of
course, not equating the latter with the actual yield, which also depends
on the efficiency of operation of the capital assets).
Use of efficiency coefficients to characterize the dynamic pattern of effi-
ciency of a single enterprise is in our view legitimate because the volume
of capital investments is in this case stable as a rule. In other words,
the denominator of the coefficient remains unchanged, while the numerator
varies, so that the higher the numerator (profit), the higher the eff i-
ciency coefficient and the higher the return on the capital investments.
But aside from analyzing efficiency for a single enterprise, there is an
equally important task of comparing the level of actual efficiency of capi-
tal investments at different enterprises. Here again, in our opinion, it
is not sufficient to use efficiency coefficients.
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Indicators of the overall efficiency of capital investments, a group to
which the efficiency coefficient, as is well known, belongs, are not suit-
able for comparative evaluations in all those cases when the volumes of
capital investments are unequal in the decisions being compared (it does
not matter whether they are intended or have already been made). The rea-
son is that efficiency coefficients reflect the yield per unit of capital
investments regardless of the absolute number of those units. But for the
national economy the difference in the absolute value of the outlays (and
consequently of the results as well) has great importance.
We will illustrate this with the following example. There are three enter-
prises with equal actual efficiency coefficients, but with different abso-
lute quantities (in thousands of rubles) from which these coefficients are
derived:
1,000 0.2; 1,200 0.2; 1,500 0.2.
5,000 6,000 7,500
The yield per unit of capital investments of these enterprises is the same-
20 kopecks of annual profit per ruble of capital investments. But are these
enterprises actually of equal benefit to the national economy? If the capi-
tal investments in these enterprises are efficient (their yield is higher
than the standard, which, say, is 0.15), then the enterprise with capital
investments amounting to 7.5 million rubles is the most efficient. If the
capital investments in these enterprises are inefficient (if their yield is
below the standard, which, say, is 0.25), then the higher the efficiency of
the capital investments, the better. Cunsequently, the enterprise with cap-
ital investments amounting to 5 million rubles is better in relative terms.
And only if the efficiency of capital investments at all these enterprises
is at the level of the standard can we assume that they are equally effi-
cient.
But in all cases the efficiency coefficients (actual) are identical, and
reflect neither growth nor drop in efficiency of capital investments (not
to mention the unlikely third situation). But if that is the case, then
cases are quite possible in which an enterprise whose coefficient is not so
high has higher efficiency, and vice versa.
The inadequacy of the efficiency coefficients for comparative assessments
of different enterprises does not mean that they are not at all necessary
in comparative analysis. Efficiency coefficients, in our view, make it
possible to ascertain one of the two factors in efficiency specific (in-
tensive) efficiency, which has a bearing on the final results.
Is it possible in studying the actual efficiency of capital investments to
use the level of imputed costs for comparative evaluations? In our opinion
imputed costs properly reflect the comparative efficiency of capital in-
vestments only under the condition of equal volumes of output. This condi-
tion is typical of calculations of efficiency made in the project planning
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stage, when one runs down different combinations of one -time and current
outlays for a strictly fixed volume of production (capacity) given in ad-
vance. That is why the use of sound imputed costs is altogether legitimate
in justifications of project plans.
The situation is quite different with actual indicators of enterprises that
have been built, whose output volumes are always different. In this situa-
tion errors crop up when imputed costs (computed, naturally, per unit out-
put) are used. The difference is that where efficiency coefficients do not
take into account the relative advantage of increasing or decreasing the
size of the capital investments, the imputed costs do not reflect the rela-
tive advantage of decreasing or increasing the volume of production. We
will give an example. Suppose we are comparing two enterprises which have
been built. At one of them the capital investments amounted to 2 million
rubles, and the volume of production 3 million rubles, and the production
cost 2.46 million rubles; at the other enterprise capital investments were
also 2 million rubles, the volume of production is 4 million rubles, and
the production cost 3.36 million rubles. The standard efficiency coeffi-
cient is 0.12. Imputed costs per unit output will be equal at these enter-
prises:
(2.46 0.12 x 2)/3 0.9; (3.36 0.12 x 2)/4 0.9.
Supposedly we should conclude that these enterprises are equally efficient
because they have the same imputed costs. As a matter of fact, their total
costs (one -time and current) per unit output are equal -90 kopecks per ru-
ble. But in actuality the second enterprise is more efficient than the
first. Given the same capital investments (2 million rubles at each), an-
nual profit at the second enterprise is 640,000 rubles (4 3.36 0.64),
while at the first it is only 540,000 rubles (3 2.46 0.54). For that
reason the domain in which imputed costs per unit of output can be used in
analyzing the actual efficiency of capital investments is still more lim-
ited than that of the efficiency coefficients. As a rule the latter are
quite suitable for a summary assessment confined to a single enterprise.
Yet imputed costs cannot be used even for that purpose. Their level re-
flects only the degree to which the volume of costs to produce one unit of
output affects the overall assessment of efficiency. Cases are quite pos-
sible in which an enterprise with higher imputed costs, but with a larger
scale of production, will have higher efficiency than an enterprise with
lower imputed costs, but a negligible volume of production.
Both efficiency coefficients and imputed costs are specific or unit indica-
tors. Their difference is only the correlative in question. In the case
of efficiency coefficients this is the capital investments, while in the
case of imputed costs it is the volume of output. Accordingly the absolute
supplement" (necessary to fully characterize economic efficiency) is dif-
ferent: in the case of efficiency coefficients it is the volume of capital
investments, and in the case of imputed costs it is the volume of produc-
tion.
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It has been discovered in a study of actual results of construction that
the domain in which efficiency coefficients can be applied is still broader
than that of imputed costs, since capital investments may be stable (con-
fined to one enterprise), while the volume of production is very variable
(the reverse is the case in justifications of project plans: fixed volume
of production and variable within certain limits-- volutile of capital in-
vestments).
We should note that the role of the absolute factor is increasing con-
stantly. At the 25th CPSU Congress emphasis was put on the importance of
precisely the absolute figures in economic development. For that reason
assessments made on the basis of efficiency coefficients and imputed costs
(going outside those narrow limits in which these indicators are suitable)
will lag further and further behind the real growth of the economic effi-
ciency of social production, capital investments and new technology. This
is felt first of all in analyzing and assessing the actual results of con-
struction.
In our opinion absolute figures on efficiency, reflecting the full yield
on capital investments, should replace (or, more accurately, supplement)
the specific or unit indicators. It should also be borne in mind that un-
der the decree of the CPSU Central Committee and USSR Council of Ministers
dated 12 July 1979 the principal indicator of production for both planning
and norm- setting purposes is to be the growth of net output in comparable
prices. Indicators reflecting the efficiency of capital investments, in
our view, should therefore reflect directly the growth of net output result-
ing from outlays for construction. The net result, taken as the difference
between the result obtained and the respective outlays (one -time and cur-
rent), made comparable, could, for example, be used as the principal indi-
cator (both for sectors and industries, ministries, and so on, as well as
for individual enterprises and projects).
The net result can be described in the following notation:
E (D Do) ([D /F] [D0/F0])F0 (Ch Ch0)(Z/Ch) Ye H H
KYepL A
in which D is the net output in the given year; D is the net output in the
base year (in calculations at the macroeconomic level the base year is the
previous year; in calculations at the microeconomic level the base year is
the year preceding the beginning of construction, and in the case of new
construction the indicators of the base year are equal to zero); F is fixed
productive capital in the given year; F is fixed productive capital in the
base year; ([D /F] [D /F is the growth of net output by virtue of im-
proved utilization of fixed productive capital; Ch is the average annual
size of the work force in the given year; Ch is the average annual size of
the work force in the base year; Z is the wage fund in the given year;
(Ch Ch /Ch) is the growth of net output by virtue of higher expendi-
tures of labor (measured approximately in terms of the size of the labor
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force); K is capital investments for productive purposes made in the period
since the end of the base year and up until the end of the given year; H
is unfinished construction at the end of the given year; H is unfinished
construction at the end of the base year; Ye is a coefficient for taking
into account the different times at which the capital investments were made
(at the present time Yep 0.08); L is the size of the construction lag in
years; A v is the value of depreciation of fixed capital retired during the
period in which the capital investments (K) were made; Ye is the standard
efficiency coefficient of capital investments (subject to revision on the
basis of the tasks of evaluating efficiency on the basis of net output; un-
til such revision is made, ordinary standards for evaluation of overall ef-
ficiency of capital investments, cleared with USSR Gosplan, can be used).
The net effect can be calculated and totaled for any number of years.
Its content corresponds to the principle formulated back at the 22d CPSU
Congress to the effect that efficiency comes down to achieving the maximum
result at minimum cost, or, more accurately, to attaining the maximum gap
between the results and the costs. In actuality the net result increases,
first, when there is a growth in the volume of production (taking into ac-
count a rise in product quality), and second, when current outlays to pro-
duce it drop (production cost), and third, when the capital investments are
reduced. All three of these factors do not necessarily change in the same
direction, but their optimum combination yields the maximum size of the net
result, the maximum gain.
This indicator is also suitable because it combines the functions of indi-
cators of overall and comparative efficiency. As we know, indicators of
overall efficiency are intended to answer the question (by comparison to a
standard) of whether capital investments are efficient or inefficient,
while indicators of comparative efficiency are to discover where efficiency
is higher and where it is lower. The net result gives answers to both
questions. If it is greater than zero, capital investments are efficient.
The higher the positive value of the net result (or the lower its negative
value), the higher the efficiency. The standard efficiency coefficient is
incorporated in this indicator, because without it it is not possible to
put one -time outlays (capital investments) and current costs (production
cost) into comparable form. Without a standard coefficient, it would ob-
viously be altogether difficult to make any sort of summary evaluations of
efficiency.
The net result fully accounts for the absolute (extensive) factor of effi-
ciency. By contrast with the efficiency coefficients and imputed costs
(per unit output), the net result detects the entire difference in the ab-
solute value of capital investments and the absolute volume of output and
makes it possible to correctly evaluate the actual results of capital con-
struction.
Actual data obtained as a result of statistical surveys afford the possi-
bility of calculating the value of the net result of different enterprises
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and of comparing them with one another. A comparison of changes in the net
result with changes in efficiency coefficients makes it possible to analyze
the influence of particular factors on the actual yield of capital invest-
ments.
At the present time statistical study of the actual efficiency of capital
investments for individual enterprises and facilities is entering a new
stage. Its principal peculiarity is that it is making this field of sta-
tistics more relevant and bringing it closer to practical problems, trans-
forming it into a decisionmaking tool, an instrument for managing the ac-
tual efficiency of capital investments. Though the methods used will first
have to be improved.
COPYRIGHT: Izdatel'stvo "Pravda," "Voprosy ekonomiki," 1980
7045
CSO: 1820
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INVESTMENT, PRICES, BUDGET AND FINANCE
IMPACT OF QUALITY IMPROVEMENT ON PRICE CONSIDERED
Moscow VOPROSY EKONOMIKI in Russian No 3, Mar 80 pp 16 -23
[Article by A. Akhmeduyev: "Product Quality and the Improve-
ment of Prices")
[Text] In recent years the process of improving the quality of
industrial output has accelerated considerably. Throughout
industry as a whole, output in the highest quality category
accounted for 1.5 times as great a proportion of total pro-
duction volume in 1978 as it did in 1975. The state Seal of
Quality was awarded to 20,900 different items in 1976,
29,100 in 1977, and 38,700 in 1978, and at the beginning of
1979, 62,400 items bore the Seal of Quality.* However, the
problem of improving product quality is still urgent. The
number of products and volume of output bearing the Seal of
Quality have mainly been increasing on the basis of items
previously put into production. Thus, in 1976 -1978 the Seal
of Quality was awarded to 88,700 different items, while
10,300 new types of products were put into production.
The CPSU Central Committee and USSR Council of Ministers'
decree "On Improving Planning and Strengthening the Economic
Mechanism's Influence in Enhancing the Efficiency of Pro-
duction and Quality of Work" provides measures for increasing
the role of economic levers and incentives in expanding the
production of high quality products and bringing about a
systematic updating of the product assortment. This will be
See the statistical collections, "The USSR National Economy
in 1977," Izdatel'stvo Statistika, 1978, p 100; and "The USSR
in Statistics in 1978," Izdatel'stvo Statistika, 1979, p 74.
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fostered in many respects by the further improvement of price
formation, including the reflection of products' quality in
their prices.
As a rule, the improvement of product quality requires addi-
tional outlays of material, technical and labor resources.
Therefore, taking product quality into account in the whole-
sale prices of new products stems first of all from the need
to compensate producer enterprises fully for outlays connect-
ed with the improvement of product quality. In a number of
cases an increase in outlays (and, consequently, in prices)
for the production of higher quality products over outlays
(and prices) for the products that they replace is econom-
ically substantiated. But, as noted in the decisions of the
25th CPSU Congress, an extremely important principle in
establishing wholesale prices for new items, especially ma-
chines and equipment, is the lowering of price per unit of
useful effect.
In providing for the compensation of additional outlays con
nected with the improvement of quality, prices should give
producers an economic interest in the production of high-
quality products and give users an economic interest in their
use. In order to increase the interest of both in high
quality products, the economic effect must be optimally dis-
tributed between them, and part of this effect must be re-
flected in wholesale prices. The following basic guidelines
for the reflection of product quality in products' wholesale
prices can be identified: (1) the establishment of a definite
connection between the consumer properties of a product and
outlays for its production, as well as between consumer prop-
erties and the absolute amount of normative profits; (2)
the incorporation of above normative profits in prices in a
differentiated fashion, depending on products' socioeconomic
effectiveness.
The unit -cost of products is an extremely important component
of and the basis for calculating the lower-limit price.
Production and marketing costs come to as much as 86% within
the structure of enterprises' wholesale prices. In a number
of cases, improvements in product quality depend on improve-
ments in the quality of raw materials and other materials,
manufactured components, etc. This is reflected to a certain
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extent in the unit -cost of finished products. Improving
the quality of manufactured items often results in raising
pay per unit of expended Libor, since highly skilled man-
power is required in order to do so. Through the average
branch unit -cost, increased outlays are taken into account in
the prices of new, higher quality items.
However, the amount of outlays and the complexity of a product
and of the technological process required to produce it are
not directly related to the level of the product's consumer
properties. An absolute increase in outlays and improvement
in the quality of the means of production do not, in and of
themselves, guarantee an improvement in the quality of the
product produced. This pertains not only to outlays of mate-
rial and technical resources, but also to basic wages and
supplementary wages paid out when an item meets technical
conditions and standards.
In the practice of price formation, outlays are often regarded
apart from their connection with the quality and consumer
properties of products and their economic effectiveness.
Therefore, the price of a product does not significantly re-
flect the social evaluation of its quality through its unit
cost, and the level of the lower -limit price bears little re-
lationship to the social evaluation of a product's useful
properties.
Normative profits in prices (as percentages of unit -cost) re-
flect the technical and economic level of products only to the
extent that unit -cost reflects product quality. As already
noted, this is utterly insufficient. Since wage outlays are
weakly linked to the technical and economic level of products,
product quality also has no significant effect on profits,
which are determined in accordance with normative percentages
of unit -cost, net the value of material outlays. In calcu-
lating profitability (relative to production assets), the
amount of normative profits incorporated in prices is prac-
tically unrelated to the quality of products produced. Con-
sequently, such a component of the lower -limit price as the
normative size of profits does not adequately reflect product
quality.
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Wholesale prices usually are not revised when products become
obsolete; therefore, these prices do not adequately take into
account the quality of products during the period of their
series production, in addition to the moment that these prices
are approved. As is known, 1955 prices were in effect for
12 years, and 1967 prices for most items are not scheduled to
be revised until 1982. Experience has shown that such prices
become divorced from value, provide unjustifiably high or low
profitability, fail to reflect product quality and real econ-
omic processes, weaken the measuring and incentive funct ion of
prices, and make it more difficult to evaluate and provide
incentives for the performance of enterprises and associ-
ations. Therefore, increasing the influence of prices on
.product quality and technical progress is related more closely
to the planning of prices and the substantiation of their
level in accordance with the extent to which products become
obsolete.
Under the conditions of accelerating scientific and technical
progress, time periods for the updating of products are re-
duced; a significant number of these products (especially
in the machine building branches) become obsolete in a short
time. For example, when new prices for machine- building out-
put took effect on 1 January, 1973, it turned out that in
comparison to the makeup of output included on the price lists
that had taken.effect on 1 July, 1967, the products list had
been updated by 45%, on the average, and by 60% to 80% in
certain machine building branches. Obsolescence tends to
accelerate. One can fully agree with the view that "the time
it takes for products to become obsolete will be shortened in
the future, and in principle this tendency may encompass an
increasingly wide range of items.*
This circumstance makes it especially urgent to solve the
problem of taking product obsolescence into account in plan-
ning prices for the machinery industry, whose products pre-
determine the technical level of production in the economy.
At present, the increase in the productivity of new machinery
in comparison to that which it replaces amounts to 5% to 20%
A. Koshuta and L. Rozenova, "The Obsolescence of the Means
of Labor and Price Formation," VOPROSY EKONOMIKI, No 9, 1975,
p 65.
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throughout the machinery industry as a whole.* The CPSU
Central Committee and USSR Council of Ministers' decree "On
the Further Development of Machine Building in 1978 1980"
provides for increasing the productivity of machine building
output in 1985 by a factor of 1.5 to 2 over the 1975 level and
lengthening its operating life prior to complete overhaul.
The need to take the obsolescence factor into account in set-
ting prices for products is dictated by the objective con-
ditions of the development of production. Let us examine,
from these positions, the formula for the lower -limit price,
which determines, in practice, the level of a new product's
wholesale price:
P11 �U (1 N1), or PaU +NC, (1)
where U is a new product's unit -cost that is taken as the
basis of its wholesale price; Ni and N are the normative
profitability that is established for a given branch in
accordance with unit -cost and the value of production assets;
and C is the capital- output ratio of a new product, taking
into account the additional capital investments required to
produce it. AS a rule, the lower -limit price (P taken
as a second -stage price (with normative profitability),is
not revised for a long period (up to 10 years or more). Mean-
while, both individual and average branch unit -costs (U)
decline every year, and what's more, decline substantially,
under the impact of various factors. This is evident from
the data cited below from a study of the dynamics of the
unit-cost of the products of enterprises in various machine-
-building branches:
*See PLANOVOYE KHOZYAISTVO, No 7, 1979, p 108.
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Name of product
Unit -cost of product as a percentage
of its unit -cost in first year
of series production
1st 2nd 3rd 4th 5th 6th
Screw cutting lathe 100 90.2 89.1 87.7 85.8
Digitally programmed
screw cutting lathe 100 87.5 85.7 82.1 83.5
Gear milling machine 100 88.7 85.3 83.5 79.5
Universal tool grinder 100 94 85.1 76.4 66.1 63.7
Iskra -III computer 100 85.4 46.1 38.2 35.3 27.2
Passenger car 100 93.0 72.9 63.9 61.1 61.6
Tractor A 100 77.2 66.4 62.8 58.7
8 100 52.6 43.2 39.7 34.8 32.6
C 100 51.1 43.7 40.1 36.1 32.5
D 100 0 46.4 38.0 34.7 33.1 30.4
Single- bucket excavator 100 84.4 83.3 80.4 82.2
As the total production volume of a new product rises and the
technical level of production increases, the capital- output
ratio per unit decreases. Both factors (U and C) that are
related to the production of the product are dynamic and over
a period of time deviate significantly from the magnitudes
initially built into the lower -limit price. As the production
process is smoothed out and the volumes and duration of a
product's production increase, the cost of production declines;
usually the stable price deviates from this cost in an up-
ward direction. This often results in increasing the relative
cost of products that have previously been put into series
production and have grown obsolete, and in causing them to
realize a high profitability.
The profitability of such products sometimes exceeds several
times the normative rate, whereas the profitability of high
quality new products is presently limited to double the nor-
mative rate, together with the incentive markup. The ex-
cessively high level of prices for old output improves a
number of the manufacturers' principal performance indices.
In these conditions enterprises often have no interest in
taking insufficiently effective or simply obsolete products
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out of production, since the economic measures aimed at
accelerating the development and putting into production of
new products are not proving to be effective enough.
With the development of the production of any given product
and the increasing satisfaction of the economy's needs for
it, the appearance of similar or substitute products and
materials, and the rise in the requirements and demands that
are made on the product as to quality, etc., the product's
economic effect declines even though its technical parameters
remain unchanged. In these conditions, if the existing whole-
sale price is not revised for a long time, the relative cost
of the product gradually increases, and its price per unit of
useful effect rises. This is why, in our view, it is entirely
correct to reduce existing prices to the extent that products
become obsolete and their economic effectiveness declines,
even if the outlays for a product's production remain on the
original level.
The provision that the CPSU Central Committee and USSR Council
of Ministers' decree makes concerning the maintenance of
stable wholesale prices in industry over the course of a
five -year plan period is important for strengthening the in-
fluence of prices as incentives for production efficiency and
product quality. It must be noted first of all that the
stability of wholesale prices does not mean "freezing" them
on some constant level, e.g., the level of prices existing as
of the beginning of the five -year plan period. Stability
requires that existing prices benevised and that fixed five
year prices be planned and approved prior to the next five
year period in light of objective factors affecting the level
and dynamics of prices over the course of the plan period.
Evidently, it is a good idea to plan stable wholesale prices
for no less than the upcoming five years by setting graduated
prices. Graduated prices do not contradict but presuppose
price stability. The system of graduated prices provides for
the planned regulation of the wholesale price level for the
plan period, taking into account proposed changes in the
quality of products, their economic effectiveness, and outlays
for their production. According to the Guidelines for
Determining Wholesale Prices for New Technical Industrial
Products, the incentive -stage wholesale price may be replaced
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by a second -stage price within a stipulated period. At the
same time that the first -stage price for a new product is
set, second- and third -stage prices may also be set, to take
effect after specific time periods. When a general or
partial revision of existing wholesale prices is carried out
a graduated price may also be set for products previously put
into series production, with an indication of the time periods
during which each price stage will be in effect. Consequent-
ly, most products in series production will, over a period
of time, have a series of graduated prices, which will be
successively revised (usually reduced) after predetermined
periods.
As has been proposed in the economics press, five -year plans
should be drawn up in terms of planned prices, which will
guarantee the plans' stability. Price adjustments not pro-
v ided in the plan should not lead to the amendment of produc-
tion plans, since this would weaken the influence of prices
and plan indices as incentives for increasing production
efficiency and product quality. Thus, the stability of both
prices and plan indices will be ensured for the five -year
period. The approval of graduated prices for a five -year
period makes it possible, on the one hand, to solve the prob-
lem of the stability and flexibility of wholesale prices,
and on the other, to reflect product quality in prices by
differentiating profitability in accordance with the socio-
economic effectiveness of products and the social evaluation
of their consumer properties.
As the experience of a number of ministries has shown, the
introduction of a system of graduated prices and incentive
markups in wholesale prices, the improvement of the planning
of product quality indices and of the evaluation of the ful-
fillment of these indices, and the use of markups in combi-
nation with other measures to improve the management of pro-
duction and scientific and technical progress have made it
possible to increase enterprises' interest in improving pro-
duct quality and developing new, highly effective products
and putting them into production. For example, in the elec-
trical equipment industry, where incentive price markups
have been used since 1969, the level of product quality has
risen substantially, the process of updating products has been
accelerated, and the economic effectiveness of new products
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has risen. Products in the highest quality category rose
from 4.2% of total production volume in 1968 to 42.7% in
1978, and over the same period the proportion of products in
the second quality category dropped from 23.1% to 1%. In
1978 the number of new products in the branch was approx-
imately three times as high as it was in 1968, and the econ-
omic effect obtained from the production and use of these
products in the national economy was nearly 10 times as high.
In 1969 -1978 the average annual rate of increase in products
in the highest quality category was 35%, whereas the average
branchwide rate of increase in total production volume was
8%.
Positive results have also been achieved in other industrial
branches. Thus, in the Ministry of Heavy and Transport
Machine Building, the proportion of output in the highest
quality category increased by a factor of 4.3 from 1973
through 1978 and reached 28.5% of total production volume;
the economic effect obtained from products bearing the Seal
of Quality increased by a factor of more than 12; and the
total amount of incentive price markups received for product
effectiveness and quality rose by a factor of more than 5.
An analysis of the establishment of incentive wholesale -price
markups shows that graduated prides are an important direction
for the further improvement of prices and the enhancement of
their incentive function. However, the principle of graduated
prices is far from being fully implemented, as a result of the
fact that enterprises and ministries avoid the application of
price markdowns (frequently by delaying certification or
systematically postponing the deadlines for taking obsolete
items out of production). This is precisely why wholesale
price markdowns have not received widespread practical appli-
cation, although at a number of enterprises output in the
second quality category makes up a significant proportion of
total output volume.
The decree on improving planning and the economic mechanism
provides for increasing the influence of prices as incentives
for systematically updating products lists and removing
obsolete items from production. Wholesale -price markdowns
amounting to 50% of profits are established for products in
the second quality category, and after the expiration of
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deadlines for taking products out of production, these mark-
downs rise to 100% of profits. In our view, in order to im-
plement this measure the procedures according to which manu-
facturing ministries submit proposals for reducing previously
approved prices ought to be changed. It would be a good idea
for certification commissions to make decisions on the dead-
lines for making first and second wholesale -price markdowns
on products at the same time that they assign them to the
second quality category.
The reduction in the wholesale prices (the application of
markdowns) of products in the second quality category mainly
affects the size of profits and the level of profitability.
Evidently, prices also should be reduced through a reduction
in the production outlays that are taken as a basis for cal-
culating wholesale prices. In our view, such an approach is
fundamentally important. In the first place, the wholesale
price of an obsolete product would be reduced even if it was
unprofitable for an enterprise. In the second place, this
would make it possible strictly to regulate and restrict
outlays for the production of obsolete products. Thus, if
production of an obsolete product continued, its price could
be used to regulate outlays for its production, instead of
the other way around.
Moreover, enterprises have an interest in maintaining a high
level of prices by means of increased profitability, which
makes it possible for them to weaken the negative effect of
p�e markdowns on their performance indices, since when
profitability is high a 10% or greater reduction in wholesale
prices allows them to maintain profitability at half the nor-
mative rate. This may be eliminated by reducing price by the
method of adjusting unit -cost in accordance with the actual
level and correspondingly reducing unit -cost in accordance
with the extent of a product's obsolescence. In this con-
nection, a price may be reduced by limiting profitability and
correspondingly adjusting the outlays that are taken as a
basis for calculating price.
A first -stage wholesale price with an incentive markup over
the lower -limit price amounting to 2O% to 100% of normative
profitability is established for highly effective new pro-
ducts and products in the highest quality category. The
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decree on improving planning provides for an incentive markup
of 50% to 125% of normative profitability, but no more than
70% of annual economic effect. The amount of the markup will
be increased 1.5 -fold if the production of new, highly
effective products and products bearing the state Seal of
quality is based on developments that have been accepted as
discoveries or inventions according to established procedures.
This will make substantial changes in the markup system and
make it possible for the technical and economic level of new
products to be reflected more fully in prices.
The CPSU Central Committee and USSR Council of Ministers'
decree sets the period for which an incentive markup is in
effect at up to four years, and up to five years for especial-
ly complicated products. When a product is recertified and
awarded the state Seal. of Quality a second time, the incentive
markup is maintained at the same level on the condition that
the technical and economic parameters of the product in
question have been improved. However, if the technical and
economic parameters have not been improved when a product is
awarded the state Seal of Quality for the second time, the
amount of the markup and the period for which it is in effect
are halved. The implementation of this measure will help
give enterprises a greater interest in maintaining high pro-
duct quality during the period that products are in series
production.
Until the present time, wholesale -price markups have usually
been set for periods of up to three years. Following the
expiration of this period, they are removed, even though
products bear the state Seal of Quality. This has violated
the principle of taking product quality into account in
prices. Moreover, wholesale prices do not reflect the relative
appraisal of a new product's quality, since the factor of
consumer properties is not taken into account in lower -limit
prices.
The maintenance of incentive price markups on items in the
highest quality category for the entire period, i.e., until
they are transferred to the first category and second -stage
prices are established for them, will unquestionably play a
positive role in increasing the production of high quality
products. In our view, it would also be a good idea to
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continue to maintain a certain price markup if a product meets
the requirements of the highest quality category and is
awarded the Seal of Quality in subsequent (third, etc.)
certifications. This procedure would make it possible to im-
plement more consistently the principle of taking product
quality into account in prices and would give enterprises a
greater interest both in developing and putting into pro-
duction high quality products and in maintaining product
quality at an up -to -date level during the period of series
production.
The establishment of a direct link between the amount of
incentive markups and economic effectiveness is an important
condition for correctly reflecting quality in the price of
items. The size of the distributed economic effect is taken
as constant over the entire period in which the first stage,
incentive price is in effect. Evidently, this procedure
ought to be revised in connection with the increase that the
new decree stipulates in the period for which markups are
in effect.
The amount of a new product's distributed effect (Ed) is
determined according to the formula:
Ed Pul (P11 Osp) (1 K
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where P is the upper limit price; P11 is the lower -limit
price, Osp represents planned (on the basis of estimated)
outlays of enterprises connected with preparing for and
starting up the production of a new product; and K is the
coefficient of the minimum increase in a new product's upper
limit price above the sum of its lower -limit price plus out-
lays for preparing for and starting up its series production.
An analysis of this formula shows that the factors determining
the lower -limit price (P11) change substantially as an item
is put into production and continues to be produced; con-
sequently, P11 should also change. The factors affecting the
upper -limit price (P are equally dynamic, and this price
also changes, if one calculates according to figures for the
second, third and subsequent years in which a product is pro-
duced and used. Consequently, as a new product is put into
production and continues to be produced, not only the

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absolute amount of the distributed economic effect (Ed)
changes, but the ratio of the upper -limit price (P to the
sum of the lower -limit price plus outlays for pu the
product into production (P11 O also changes.
All this is of fundamental importance and, in our view,
indicates the necessity and possibility of changing the amount
of markups in accordance with the dynamics of economic effect
over the period in which the first -stage price is in effect,
or of establishing several price stages, with the amount of
incentive markups changing in a planned fashion in accor-
dance with the reduction in economic effect.
The extent to which the economic effect should be reflected
in prices in the form of incentive markups is an urgent
question. The existing scale of markups is set up in such
a way that the better a new product's consumer properties are
in comparison to the one it replaces and the greater Pul
P11 O the lower the share of economic effect taken into
account in the wholesale price in the form of incentive mark-
up. If (P P11 Osp) >3, then no matter how this ratio
increases and differs among various items, the size of a
markup will be the same and is presently equal to normative
profitability. Thus, the share of economic effect incor-
porated in the incentive markup may fluctuate among different
products from the maximum of 50% (according to the decree-
70%) to several fractions of a percent. This may distort the
measuring function of prices to a certain extent and sub-
stantially weaken the incentive influence of markups. For
example, in 1976 -1977 more than 4,000 wholesale prices with
incentive markups were approved for machinery, equipment and
instruments. They took into account only 10% of economic
effect, and the average amount of markups was 4% of wholesale
prices.*
At enterprises in the electrical equipment industry, where
the system of incentive markups has been widely adopted, ad-
ditional profits in the form of incentive markups amount to
only 7% of the distributed economic effect. The rest is
transformed into quantitative and qualitative indices of this
See VOPROSY EKONOMIKI, No 4, 1978, p 103.
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enterprises that produce the new products. In addition to
weakening the incentive function and distorting the mea-
suring function, the distribution of the economic effect of
new and highly effective products in such proportions does
not contribute to the correct formation of indices and com-
plicates evaluation of the performance results of both pro-
ducer and user enterprises.
In our view, proposals that have been expressed in the press
that not only P P11 O but also the absolute amount
of the annual economic effect obtained from the production and
use of new products be taken into account in determining the
amount of wholesale -price markups merit attention. In this
connection, it would be a good idea to allow the amount of
wholesale -price markups for fundamentally new and highly ef-
fective products to be increased up to twice normative prof-
itability, within the limits of 70% of the distributed econ-
omic effect.
At the same time, the economic effect of new machinery, net
the portion that is placed at the disposal of producer en-
terprises in the form of the incentive markup, should not be
fully accumulated by user enterprises and fully reflected in
their performance indices. As the natural result of increas-
ing the social productive force of labor, this economic ef-
fect should evidently be redistributed among all the partic-
ipants in production and, in the final analysis, be turned
into the social effect of an improvement in the population's
living standard. To the extent that outlays are reduced,
the prices of products produced with the use of new machinery
should be reduced in such a way that the economic effect con-
nected with the use of new products has no greater impact on
the performance indices of user enterprises than on those of
producer enterprises. This situation can be achieved by means
of the extensive use of markups and markdowns and the planning
and approval for five -year periods of graduated prices not
only for new products but also for products previously put
into production.
The improvement and practical implementation of a system of
graduated prices will help enhance the economic substantiation
of prices and increase their role in providing incentives
for product quality, and in accelerating technical progress.
COPYRIGHT: Izdatel'stvo "Pravda "Voprosy ekonomiki 1980
8756
CSO: 1820
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INDUSTRIAL DEVELOPMENT AND PERFORMANCE
COMPONENT STANDARDIZATION AS ELEMENT IN PRODUCTION EFFICIENCY
Moscow VOPROSY EKONOMIKI in Russian No 3, Mar 80 pp 24 -32
[Article by A. Gusarov and A. Stoynik]
[Text] Standardization of components is one of the important ways of rais-
ing the efficiency of social production. It makes it possible to eliminate
the duplication and unjustifiable diversity of products and elements and
also types of technologies. This type of standardization guarantees a
large economic benefit and a high rate of return on the small capital out-
lays and is among the most highly intensive factors of economic growth. It
is therefore important to clarify the real role of the use of standard com-
ponents and assemblies and to adopt measures to assure development of this
process.
It may seem at first that the scientific technical revolution runs counter
to the use of standard components and assemblies or even precludes it. In
actual.ty matters stand differently. The complexity of the problem is that
the scientific technical revolution is accompanied by a virtual explosion
in the list of products. In our country between 1966 and 1976 more than
28,000 new industrial products were put into production. This is a normal
phenomenon, since mechanization and automation are embracing ever new areas
of social production in which sectors and subsectors of the economy are
rapidly taking shape, consumer dc4uauu i5 experiencing qualitative changes,
and so on. But there is also another aspect of the problem generated by
shortcomings in designs and in the organization of production, the result
being the emergence of products which do not meet the requirements of pres-
ent -day production. This unfavorable side of the growth of the products
list and product assortment in the context of scientific technical progress
is an obstacle to higher efficiency. The problem is to combine the explo-
sion in the products list with standardization of products and product com-
ponents.
The effectiveness of this type of standardization is achieved in all stages
of the production and use of the social product. Experience shows that the
labor intensiveness of scientific research, design and process engineering
projects are reduced to one third one fifth. At the same time new product
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design times are reduced to two thirds two fifths, which brings about a
reduction of total costs of preparing production. Moreover, the use of
standard components and assemblies makes it possible to increase series
size and on that basis to reduce the level of the load on equipment and to
drop the production cost by more than 20 percent. At the same time, when a
new product is to be manufactured, the mobility of production increases,
and that plays an important role in the context of the scientific-technical
revolution. And finally, in the stage of the finished product's use, the
use of standard components and assemblies guarantees a reduction of the
list of replacement parts, reduces repair costs to two thirds two fifths,
increases the length of the repair warranty and service life, and improves
the quality of attendance of machines, instruments and units.
The problem of the capital intensiveness of production has become much more
severe in the context of intensive economic development. The use of stand-
ard components and assemblies makes it possible to transform production
with relatively small capital outlays. For instance, 70- 80- percent use of
borrowed standardized parts reduces by 40 -50 percent the work of preparing
production, and the development and production of standardized jigs, tools
and fixtures reduces to one tenth one twelfth the cost of their manufac-
ture; this could release 200,000 workers employed in making tools available
for other work by 1983, and their number by 1990 would be 1 million. Ex-
perience shows that the production of standardized jigs, tools and fixtures
is repaid in 5 months.
One of the important conditions for raising production efficiency is to
raise the level of utilization of production equipment. In the Report Ad-
dress of the CPSU Central Committee to the 25th party congress L. I. Brezh-
nev noted: "Because of underutilization of production capacities our out-
put is many billions of rubles less than it might be every year. These can
be termed direct losses. But actually the losses are just as great because
far from all ministries and departments are undertaking a vigorous effort
toward specialization, to redistribute resources in favor of interindustry
production operations, and to set up plants specialized in the production
of jigs, tools and fixtures and standardized assemblies and parts. Repair
facilities are fragmented beyond all measure. Such tendencies result in a
considerable squandering of all types of resources."
The organizational structure of production that was historically shaped in
the country on the basis of self- sufficient enterprises producing their own
intermediate products, assemblies, parts and tools has resulted in fragmen-
tation of the production of products which have the same functional purpose
and a situation in which individual enterprises manufacture an excessively
high number of products. Identical products are produced at different en-
terprises in many industries. Parts production averaging less than 100
units per item per year represents the following proportions of total out-
put in these industries: 66 percent in heavy machinebuilding, 61 percent
in electrochemical machinebuilding, 70 percent in chemical machinebuilding,
62 percent in machine tool building, 43 percent in instrumentmaking, 40
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percent in motor vehicle building, 52 percent in agricultural machine and
tractor building, 60 percent in road machinebuilding, and 50 percent in ma-
chinebuilding for light industry and the food industry.* Under those con-
ditions equipment, specialized and highly productive equipment in particu-
lar, cannot be utilized at full capacity. In the industrial sector the to-
tal use of equipment in two shifts averages 45 -50 percent.
Machine tools with digital programmed control are also being used ineffi-
ciently. It is an important problem of the national economy to increase
the load on equipment. One of the principal conditions for solving this
problem is to sharply increase the size of the production series through
maximum standardization of products similar in their design and manufactur-
ing technology. This will make it possible to reduce the number of their
types and sizes, to increase the size of the production lot, and to reduce
the number of setup changes. For example, calculations made at the Lenin-
grad Pnevmatika Plant showed that reduction of the number of setup changes
from three to one makes it possible to double labor productivity.
Concentration of products similar in design and manufacturing technology to
the level necessary for efficient utilization of new equipment and the most
recent manufacturing technology is a precondition for development of pres-
ent -day specialization. Organizing specialized production of products on
the basis of their similarity of design and manufacturing technology will
make it possible to reduce by 45 -55 percent the production cost of machine
building as a whole.
The increase in the size of the production series through the use of stand-
ard components and assemblies is a highly effective condition for setting
up specialized production operations. For example, in tractor and agricul-
tural machinebuilding the size of the production series of many types of
interindustry products increased between fivefold and 12 -fold thanks to de-
velopment of this kind of standardization, and this made it possible to
concentrate their manufacture at specialized enterprises. Moreover, the
production of almost all tractor diesels has been transferred to the large
new plants which have been built. Similar organizational changes are tak-
ing place in the motor vehicle industry, the electrical equipment industry,
heavy machinebuilding and other industries.
Specialized production operations which have been set up frequently serve
not only the industry to which they belong, but others as well. In this
way large -scale interindustry enterprises or shops manufacturing interin-
dustry products in volumes exceeding the requirement of the industry are
D. I. Polyakov and A. I. Kostin, "Spetsializatsiya v mashinostroyenii"
[Specialization in Machinebuilding], Izdatel'stvo Mashinostroyeniye, 1975,
p 26.
Yu. K. Kozlov, "Organizatsionnyye problemy nauchno tekhnicheskogo pro
gressa" [Organizational Problems of Scientific Technical Progress], Izda-
tel'stvo Mysl', 1972, p 377.
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coming into being within the existing industries. For example, the Yaro-
slavl' Motor Plant is producing a line of motors for tractors, motor vehi-
cles, diesel locomotives, motor launches, railroad transport, and construc-
tion and road machines. Development of the use of standard components and
assemblies is bringing about more elaborate division of labor and substan-
tial structural changes in social production.
Optimum reduction of the list of finished products, raw materials and sup-
plies increases the level and quality of cooperative efforts, augments the
size of the production lot and improves the regularity of deliveries. For
example, efforts to standardize components and assemblies at Leningrad en-
terprises reduced the number of types and sizes of parts and materials re-
ceived by 27,000 and types and sizes of fastenings by 16,000 items. En-
larging the size of the production lot of components, raw materials and
supplies of the same type reduced shipping costs and production stocks at
enterprises and increased the rate of turnover of working capital.
Raising the level of concentration thanks to standardization of components
and assemblies and the use of progressive equipment will bring about an im-
provement in the quality of the products produced and fewer rejects and
customer complaints in the production process. Nor is this any accident.
The stability of production makes it possible to do a good job of working
out the production technology and design of parts and assemblies, and the
increase in the relative share of these elements improves the quality of
the end product. Experience has shown that using base models to create a
line of tractors, motor vehicles, diesel locomotives, motors, tower cranes
and other machines has made it possible to sharply increase the warranty
period and to improve the quality of machines to the level of world stand-
ards. For example, the operating life of a standardized motor doubled, its
warranty period increased 70 percent, the need for spare parts was 23 per-
cent smaller, and its quality and performance improved.
The mobility of production depends largely on standardization of components
and assemblies, which speeds up the rate of renewal of the products of the
economy and reduces the time required to assimilate progressive technology.
This is an important factor in the development of scientific technical
progress and in making our products more competitive on the world market.
For instance, building metal cutting machine tools from standard units re-
duces the average time required to design them and put them into production
from 2 -3 years to 2 -4 months, the reduction for automatic production lines
is from 3 -4 years to 6 -10 months, for trucks it is from 2 -3 years to 5 -6
months, for tractors from 5 -6 years to 1 year, and so on. According to
figures of the Scientific Research Institute for Standardization, wide-
spread use of standard components and assemblies will make it possible to
reduce to two thirds one -half the time required to assimilate new technol-
ogy.
Product standardization and standardization of manufacturing processes
raised the level of quality of personnel training for various industries.
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The substantial reduction in the diversity of production thanks to the per-
formance of these projects improves the teaching of skills to personnel and
increases the number of occupations which are interchangeable or which can
be combined. Performance of this kind of standardization on a broad scale
makes a large number of workers available for other work. This makes it
possible to redistribute manpower resources optimally into those production
sectors where an acute shortage of manpower is being felt.
Standardization is at present developing along the following main lines:
standardization of a "family" of machines for different purposes using a
single base model; maximum utilization of assemblies and parts of the same
kind in different machines; and development of standard designs containing
common elements, that is, standardization of manufacturing processes.
Another promising direction in the building of present -day machines of high
quality is to build them up from standard units. At the present time many
types of machines, appliances, instruments and consumer goods are being de-
veloped and produced starting from base models. For example, a "family" of
trucks with 39 modifications has been created in the AvtoZIL Association.
Moreover, the level of standardization of parts has reached 96.4 percent,
which yields an annual saving of 80 million rubles. Mechanical engineers
of AvtoZIL have also created 15 base models of KamAZ trucks using only 2
modifications of the engine, steering gear, cab, and so on. The level of
standardization for the 15 base models is about 90 percent.
At the Krasnyy Proletariy Plant 26 modifications of lathes for different
purposes have been developed and put into production on the basis of a sin-
gle base model. In all the variants more than 90 percent of the parts of
the base machine tool are borrowed, which makes it possible to organize
large- series production with the most up -to -date technology. The economic
benefit runs to 80,000 rubles in the stage of design and development alone.
Standardized motors have been created at the Yaroslavl' Motor Plant for
different pieces of equipment: motor vehicles, tractors, truck tractors,
launches, truck cranes, power plants, and so on. The level of use of
standard components and assemblies has reached 90 percent, and motor oper-
ating life has doubled. Between 1965 and 1970 the economic benefit from
increasing the operating life of motors accumulated in an amount sufficient
to build two motor plants with the same capacity as that in Yaroslavl'.
At the present time there are a large number of different types and sizes
of assemblies and parts for the same functional purpose used in different
industries. For instance, enterprises are producing about 480 types and
sizes of nuts, 1,000 types and sizes of electric motors, 1,300 screws,
18,000 bolts, 25,000 wire springs, and so on. It is well known that inter-
industry products comprise about 40 percent of the production of machine
building, and products confined to the industry approximately 20 percent.
This makes it economically indispensable and possible to undertake type
standardization of interindustry and industrywide products for exactly the
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same purpose. Today certain types of products which have broad interindus-
try and industrywide uses have been standardized: reducers, gears, bush-
ings, hydraulic drives, pumps, crawler track links, plows, etc.
Work done to standardize parts of automatic equipment is becoming very im-
portant. This equipment is manufactured at different enterprises. More-
over, enterprises are making 43 percent of the new equipment they need for
themselves. Automatic equipment is manufactured at specialized plants un-
der individual designs on the basis of customer requests, so that there are
130 types of electronic computers of different designs in operation. Auto-
matic equipment of different models but an identical purpose is in use at
enterprises, which makes operation and repair considerably more difficult.
It seems to us that it is high time to develop automatic equipment, instru-
ments and apparatus with kindred design and manufacturing technology. This
in turn will make it possible to organize their series manufacture using
progressive equipment and technology, to reduce production costs, and to
increase the quality of the automatic equipment. Research shows that the
standardization of the assemblies and parts of the automatic equipment to
be produced reduces the products list to one eighth one -tenth and shortens
the average design time to one sixth one eighth.
As production is made more mobile, new requirements are being imposed on
the construction of production buildings and structures. At the present
time buildings are designed for a service life of more than 50 years. They
are built with permanent walls and partitions, and they are planned only
for a certain set of equipment. Often production buildings of this kind
are unsuitable for the installation of new equipment, especially if the
production process is continuous or on a flow line. This is an obstacle to
technical reconstruction of production.
Our country's progressive know -how and also foreign experience (the United
States, West Germany, Japan and the GDR) confirm the efficiency of building
production buildings with alterable ceilings and floors, movable walls, ex-
ternal hoisting machinery and standardized utility installations for enter-
prises for different industrial purposes. Standardization of elements in
the designs of buildings and utility installations makes it possible to
make the transition to the conveyor method of building them using team as-
sembly, which considerably reduces construction time. In view of the new
requirements of the national economy applying this principle to construc-
tion will make it possible to alter the character and structure of produc-
tion of an enterprise in a short period of time and to improve the list of
products being produced.
Given the objective persistence of small- series and single -unit production,
it will be very important to raising efficiency that maximum use be made of
the continuity of manufacturing processes. Research shows that as much as
80 percent of the entire list of parts can be produced with standard
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manufacturing processes already developed.* Introduction of these manufac-
turing processes will make it possible to solve an important problem of the
national economy putting the manufacture of tools and production jigs and
fixtures on a present -day technological foundation.
In the USSR tools, jigs and fixtures are manufactured at almost all indus-
trial enterprises. Specialized production accounts for 4.4 percent of the
jigs and fixtures and 35.1 percent of the tools manufactured. Moreover,
the tool plants as a rule have a large products list, but the size of the
series of the individual tools, jigs and fixtures is small. The labor in-
tensiveness of designing and manufacturing tools, jigs and fixtures is
about 80 percent of the total labor intensiveness of the preparation of
production and exceeds by a factor of 2 -2.5 the labor intensiveness of a
product design that has been developed. The low level of standardization
of manufacturing processes does not allow for reuse of tools, jigs and fix-
tures. Only 20 percent of all the manufacturing attachments are reused,
while the other 80 percent are scrapped.
In spite of the large economic benefit achieved by individual enterprises
in the field of component and part standardization, this process is going
slowly. Serious shortcomings in management account for poor work on stand-
ardization of components and assemblies, and in many cases this effort has
been intolerably neglected. Moreover, the present economic mechanism not
only fails to guarantee that projects be set up for component and assembly
standardization, but it even stands in their way. It is therefore neces-
sary to improve the mechanism for management of component and assembly
standardization. This applies above all to drafting a unified goal -ori-
ented program for component and assembly standardization.
Component and assembly standardization is a complex process in which pro-
duction undergoes alteration throughout the entire vertical chain of a
product's manufacture. But standardization of components and assemblies
results in improvement not only of vertical, but also horizontal relations-
it brings about a reduction in the number of types and sizes of identical
assemblies, parts, and tools produced at enterprises of different indus-
tries. Therefore projects to standardize components and assemblies should
be carried out only in an interrelated fashion so as to achieve the optimum
benefit. Development of component and assembly standardization is above
all an industrywide and interindustry problem, and to limit such projects
to the framework of individual enterprises or groups of enterprises reduces
their potential benefit.
Widespread component and assembly standardization presupposes changes in
the engineering, technological and organizational levels of production, and
therefore the comprehensive national economic program for component and
B. D. Rabinovich and B. V. Donskoy, "Ekonomika zavodskoy standartizatsii"
[The Economics of the Adoption of Plantwide Standards], Izdatel'stvo Zna-
niye, 1974, p 37.
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assembly standardization should be closely coordinated with other programs
aimed at improving social production. At the present time there is no in-
terindustry national economic program for assembly and component standard-
ization. In our opinion a purposive national economic program should in-
clude a set of measures to develop and interrelate the most important lines
of product and assembly standardization and also to give them scientific,
organizational and economic, and material support. Such a program might
contain the following main directions for development of component and as-
sembly standardization in the future: systematization on the principle of
common function of all products (parts, assemblies and tools) of interin-
dustry importance and their subsequent standardization by developing para-
metric series, and unit standardized systems of machines or groups of fin-
ished products; the publication of books of standardized products and base
models; the drafting and adoption of state and industrywide standards gov-
erning standardized products, parts, assemblies, tools, etc.
The economic section of the program should include measures aimed at devel-
oping comprehensive component and assembly standardization and related to
improvement of planning, material incentives and pricing. Moreover, in all
stages from design to operation of the product it is indispensable that the
manufacturer and consumer have an interest in the inclusion of a larger
number of standardized elements in the product and in new designs. In-
creasing the use of standard components and assemblies should be an impor-
tant parameter in planning and incentives.
The comprehensive program should provide for a broad range of qualitative
transformations of production interrelated in terms of participants and
times. Of course, it takes a lot of time to draft such a program. If a
program meeting present -day requirements is to be drafted in a short time,
a large group of specialists who have accumulated experience and profes-
sional knowledge in this field need to be enlisted in the effort.
Interindustry planning of component and assembly standardization needs to
be combined with planning on the basis of special purpose programs. At the
same time the present principle of drafting the national economic plan by
sectors and industries does not allow for optimum utilization of the advan-
tages of component and assembly standardization, since no separate industry
can correctly outline the direction for development of component and assem-
bly standardization as a comprehensive intersector process. The present
system for drafting industrywide plans is based on planning the development
of component and assembly standardization on the basis of the level already
attained. In the absence of intersector programs for component and assem-
bly standardization planning indicators of industries in this field are ac-
tually incorporated into the national economic plan without changes.
These shortcomings are manifested with particular vividness in the drafting
of annual national economic plans for component and assembly standardiza-
tion. For certain products the level of assembly and component standard-
ization is planned on the basis of different methodological principles.
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For instance, standardization of certain groups of products is planned by
types, others by classes, still others by types and sizes, and so on. In
this situation putting the planning targets in specific terms is directly
bound up with the scale of projects for component and assembly standardiza-
tion in the relevant industry or at the enterprise. For example, the level
of component and assembly standardization in the national economic plan for
certain types of motors is set for specific enterprises and even makes,
while for passenger cars and for trucks the planning indicator pertaining
to component and assembly standardization is set for groups as a whole. In
the motor vehicle industry there is frequently no standardization of compo-
nents and assemblies of motor vehicles in the same class.
There are also differences in the scale, character and methodology of plan-
ning component and assembly standardization at the level of industries and
enterprises. In some industries they are limited only to planning adoption
of unified design and .aanufacturing documentation, and in others to the
system for technological preparation of production. At many enterprises
plans for component and assembly standardization are not included in the
technical, industrial and financial plan as an organic part of it. Conse-
quently, there is a diversity of systems for planning component and assem-
bly standardization. This kind of planning lacks a unified set of goals
and principles and a uniform methodological approach, and therefore it can-
not arrive at the optimum result.
The system of planning indicators has great importance to planning and
evaluating the activity of enterprises and industries in developing compo-
nent and assembly standardization. The present economic indicators do not
always orient the producers toward seeking a feasible similarity in design
and manufacturing process, nor does it make it necessary for them to bor-
row, since it allows for plan fulfillment to be achieved even in cases when
projects for component and assembly standardization are inadequately car-
ried out. The point is that the principal indicator of component and as-
sembly standardization used at all levels of planning is the coefficient of
applicability (proportion of products governed by standards, containing
standardized components and assemblies, borrowed or purchased to the total
number of products in the enterprise's finished product), but it does not
make it possible to determine- -and therefore to plan -the actual level of
component and assembly standardization. First of all, this coefficient
does not reflect the relationship between the planned or actual component
and assembly standardization and that which is optimally possible in the
design being developed in a given stage of technical development. Second,
the elements comprising the coefficient make it possible to speak at best
about an indicator of component and assembly standardization and the adop-
tion of standards governing the products of the enterprise, but not the
level of component and assembly standardization, since products subject to
standards do not automatically contain standardized components and assem-
blies, especially when the standards are those at the enterprise level.
The system whereby standards can be adopted for identical component prod-
ucts allows the existence of different standards.
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Component and assembly standardization is among the technical- and economic
factors in development of social production whose scale and pattern of ef-
fect are not the same at different levels of management. As a consequence
different indicators should be used for judging development of component
and assembly standardization at the level of the enterprise, the industry
and the national economy. At present consolidated indicators of the pro-
cess of component and assembly standardization at the enterprise are used
as industrywide coefficients. The result is that favorable results in in-
dustrywide development of component and assembly standardization are
achieved though for all practical purposes the industry has not carried out
projects for component and assembly standardization of products of interin-
dustry and industrywide importance.
Consequently, the system of indicators of component and assembly standard-
ization must be differentiated as a function of the particular features of
conducting these efforts at the level of enterprises, the industry and the
national economy. For example, within industries the following levels
might be the planned indicators of the development of component and assem-
bly standardization: component and assembly standardization of products of
industrywide and interindustry importance; intermodel component and assem-
bly standardization; the design of products using standard units for the
principal groups of products; and the standardization of manufacturing pro-
cesses. In our opinion the use of these indicators would make it possible
to determine the actual scale of the effort being made by each industry.
Shortcomings in the system of material incentives of designers and process
engineers are a serious obstacle to development of component and assembly
standardization. The present practice in the material incentives of de-
signers has the result that every year a sizable portion (as much as 85
percent) of the total amount of new technology constitutes modifications of
prototypes created previously and actually lacking any fundamental innova-
tion: the composition is changed, additional parts are added to the de-
sign, and a "new" machine is drafted. The level of component and assembly
standardization of such modifications is nevertheless rather low.
The principal effort toward component and assembly standardization of prod-
ucts is being conducted in the stage of project planning and the prepara-
tion of production. It is therefore indispensable to relate the system of
incentives of designers and process engineers with the enterprise's effort
on component and assembly and process standardization. Finished designs
should be thoroughly sound whenever they use original components. The ma-
terial incentives of designers and process engineers must be based on the
awarding of bonuses, first, for creation of products containing a fundamen-
tal innovation and competitive on the world market; second, for the maximum
possible utilization of the analogs that exist in the designs being devel-
oped; and third, for the saving the enterprise has achieved through compo-
nent and assembly standardization.
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But underutilization of available analogs in designs does not always depend
on the designers and process engineers. The level of the data base for de-
velopers of new products is extremely low; cases are not uncommon when for
all their efforts they cannot obtain the information that interests them on
a particular product. Moreover, information is lacking on products assem-
bled from standardized components and assemblies and there is no method for
substantiating the efficiency of using them, which is a serious obstacle to
developing the design of products from standard units.
Many enterprises themselves are compiling classifiers of applicable prod-
ucts. They do not have mechanized data retrieval systems, nor normative
and reference documentation. There is not even an organization where they
might order such a system. That is why a tremendous amount of time is
spent tracking down the necessary reference material, and at large enter-
prises, where the list of parts and assemblies runs to the thousands, it is
not efficient at all to do this by hand. In the absence of centralized
scientific information the effort toward component and assembly standard-
ization can be conducted only locally, within enterprises or at best within
an industry for those types of products on which systematic information is
available. It is especially important that plans for component and assem-
bly standardization include the drafting of classifiers for the various
types of products containing standardized components and assemblies, that
all interindustry and industrywide products gradually be covered and that
resources be made available from funds for technical development to carry
on this effort.
Taking into account that component and assembly standardization is lagging
behind present -day possibilities and needs, a system of measures should be
drafted and carried out to speed up development of this process and to ac-
complish it in two stages: the first should cover that portion of the meas-
ures which can be carried out at minimum cost on the basis of generaliza-
tion and widespread dissemination of advanced know -how; the second would
include the broader range of problems involving more thorough component and
assembly standardization and supported by the appropriate development of
production. The main thing in this stage might be a national economic pro-
gram for component and assembly standardization, which would be correlated
with the State Product Quality Control System, plans for technical develop-
ment, the specialization of production, etc.
The following are necessary to speeding up the development of component and
assembly standardization: raising the level of management of component and
assembly standardization, directing it toward solving large -scale compre-
hensive problems; improvement of the system of planning component and as-
sembly standardization of products and their elements and manufacturing
methods; raising the quality with which national economic and industrywide
plans are drafted on the basis of a single methodological approach and al-
tering the system of planning indicators according to the level of manage-
ment; structuring a system of material incentives for designers, develop-
ers and manufacturers so that other things being equal there would be an
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incentive for a high level of utilization of standardized parts, assemblies
and technological solutions; and improvement of the quality of the informa-
tion base, which is an indispensable prerequisite to the widespread d evel-
opment of component and assembly standardization.
Enhancement of the role of component and assembly standardization in pro-
duction of the social product is an important condition for utilizing the
substantial potential for comprehensive development of this process.
COPYRIGHT: Izdatel'stvo "Pravda," "Voprosy ekonomiki," 1980
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9
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INDUSTRIAL DEVELOPMENT AND PERFORMANCE
BETTER INCENTIVES NEEDED FOR INDUSTRY
Moscow VOPROSY EKONOMIKI in Russian No 4, Apr 80 pp 134 -138
[Article by T. Ergashev (Tashkent): "Improvement of Economic Incentives
in Industry
[Text] The decree of the Central Committee of the CPSU and the USSR
Council of Ministers "On Improving Planning and strengthening the
Effect of the Management Mechanism on Increasing the Efficiency of
Production and Improving the Quality of Work" specified a considerable
strengthening of the relationship between material incentive and the
efficiency and quality of work, and the final results of productive
activity. Measures to increase the role of economic levers and stimuli
make it necessary to rebuild the mechanism of economic incentives of
production associations (enterprises) in accordance with the new
requirements.
Material incentives in industry include the following: bonuses for
fulfilling and overfulfilling norms and tasks; wages on the basis of
pay rates; various kinds of allowances; bonuses for the results of the
current cost accounting activity of the enterprise (association) and
for creating and introducing new equipment. Each of these incentive
forms has its own financial sources wage fund, enterprise profits
(or savings due to a reduction in production costs) and extra charges
on production costs.
The basic shortcoming of the existing incentive systems of enterprises
and production associations is their contradiction and the separation
between them. Thus, the contradiction between incentive systems for
current results of production and the introduction of new equipment
produess a temporary deterioration of current activity indicators of
an enterprise (association), including also the fund forming, as a
result of which the sizes of deductions from profit to the material
incentive fund decrease. In this case, a paradoxical situation is
created the production collective is interested in achieving high
results of economic activity, while measures for scientific technological
progress become unprofitable because they temporarily depress the cost
accounting indicators.
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rva urrit iu UJL ULNLY
Also contradictory is the incentive system for supplying products for
export because the production of products intended for foreign markets
is connected in most cases with expenditures which affect production
cost and profit. Moreover, there are other negative sides to the
existing systems of economic incentives an insufficient tie with
the increase in the labor productivity indicators, complexity of account-
ing, and monitoring the bonuses, etc.
It should be noted that the implementation of the new decree will
facilitate the elimination of many of the above shortcomings. It
specifies measures on the further development of cost accounting and
the strengthening of the role of economic levers and stimuli in
accelerating scientific technological progress. It must be stressed
that there is still a lack of proper coordination in planning between
the cost accounting indicators of the enterprise activity and indicators
for introducing new equipment. This leads to weakening the cost
accounting stimuli for new equipment. For example, not over one to
two percent of the material incentive fund formed as a result of cost
accounting activity is spent for awarding workers for creating,
assimilating and introducing new equipment and technology.
An analysis of the activity of enterprises and production associations
of the Uzbek SSR industry indicated that the size of the material
incentive fund for paying bonuses to workers has an upward trend.
For example, during the past years of the Tenth Five -Year Plan period,
at most agricultural and textile machine building enterprises, the
size of the bonuses paid out from the material incentive fund reached
ten to twelve percent of the wage fund. At the same time, bonuses
from the incentive fund for new equipment was below even one percent.
This is due to the insignificant size of the fund itself, the relatively
small scale and lack of efficiency in implementing measures for
scientific technological progress. In 1978, in USSR industry, money
spent on awarding workers for creating and introducing new equipment
was 3.77. of the material incentive fund.*
The economic incentive system is being called upon to subordinate the
interests of production collectives and each worker to solving general
government problems and to increasing labor income which depends upon
the increase in the productivity of labor and personal contributions to
social production. In our opinion, the solution of these problems
would be facilitated by the orientation of production collectives not
only toward fulfilling national economic plans, but also toward the
development and implementation of long -range programs of scientific
technological development, improvement of consumer properties of the
output, the interest of each worker in the results of his labor and in
the best final results of the economic, activity of the association
(enterprise).
See "National Economy of the USSR in 1978." Statistical Annual Hand-
book. Izdatel'stvo "Statistika," 1979, page 530.
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The system of economic incentive depends on how much the components
of the management mechanism, particularly planning, facilitate
combining the interests of labor collectives and each worker with the
interests of the entire society.
Experience indicates that the system of plan indicators has certain
negative aspects. There are frequent cases where enterprises increase
profit by disrupting the assortment of products (making the more
profitable products), by not fulfilling the plan for supplying labor
intensive products, etc. Moreover, violations of government price
discipline are also observed.
The device specifies measures whose implementation makes it possible
to convert five -year plans into the main form of government planning.
This is important for the efficient functioning of the whole management
mechanism, in particular, of the economic incentive system. The
development and solution of large scientific technological problems
stipulate the necessity of establishing long -range stable economic
norms. The decree stresses the great importance of further development
of cost accounting on the basis of the five -year plan goal and long-
term economic norms that guarantee an increase in the resources which
remain at the disposal of production associations (enterprises)
which depend upon the final results of their management activity,
with a simultaneous increase in the monetary deductions for the govern-
ment budget.
These and other measures will provide economic conditions for increasing
production efficiency by accelerating scientific technological progress.
In our opinion, the involvement of scientific technological progress
in the sphere of cost accounting relationships will become possible due
to the creation of a single system of economic incentive and a reduction
in existing autonomous incentive systems. The problem may be solved
by forming and utilizing, in production associations and enterprises,
a single fund for material incentive YeFMP).
The expediency of creating the YeFMP from profit obtained by the enter-
prise (association) is due to the fact that good final results are
impossible to obtain without introducing scientific-technological
achievements in production. The YeFMP must become the source of bonuses
for all categories: workers, employees, management, engineers and
technicians as a result of current economic activity, as well as due
to achievements in the area of scientific technological progress.
In experiments conducted in electrical equipment production associations,
for example, the "Zaporozhtransformator" and "Uralelektrotyazhmash,"
the money for all bonus systems above deductions from profit was
directed to this fund, made in accordance with basic regulations on
forming and utilizing the material incentive fund. Experience has shown
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that creating the YeFMP in associations improved the material incentive
system as a whole and increased the interest of the workers in the
subdivisions (scientific research institutes and plants) in accelerating
the rates of scientific technological progress. At the same time, when
creating the YeFMP, it is necessary to proceed on the basis of preserv-
ing the present incentive systems and its formation by adding all
incentive funds. In our opinion, the system of the fund forming and
fund correcting YeFMP indicators at associations does not fully respond
to accelerating scientific technological progress and requires further
improvement. The efficiency of an economic incentive system depends
on the selection of fund forming indicators which must be established
by solving the following problems: increased labor productivity,
better quality of products, reduced production cost, increased volume
of production, increased efficiency of utilizing production capital
increased profit and profitability of production. In this case, the
number of fund forming indicators for each production (scientific
production) association and enterprise must be minimal and reflect in
its dynamics an improvement (deterioration) of these or other aspects
of the production- management activity of the enterprise (association).
The basic fund forming indicators for most sectors of industry may be:
productivity of labor, ratio of products of the highest category of
quality in the total volume of production and the net profit. However,
for individual sectors and groups of enterprises (associations) another
combination of fund forming indicators may be used, taking into account
specific conditions of their work and concrete production economic
problems.
Using the net profit indicator has a number of advantages. First, this
indicator has a moderating effect on extensive factors for increasing
profit so that its use provides for keeping the interest of the enter-
prise in reducing the capital- output ratio compared to the average
value of the industrial sector. Secondly, the value of the net profit
is inversely proportional to the cost of the fixed capital and turnover
capital used in the process of production. In this case, the more
resources used to obtain a unit profit, the smaller the net profit, all
other conditions being equal and vice versa. Thirdly, the net profit
indicator provides coordination between the cost accounting of the
incentive and its source. Fourthly, increasing the role of the net
profit indicator in the system of cost accounting relationships
prevents enterprises and associations from being interested in artificial-
ly increasing the cost of raw materials and expansion of cooperative
deliveries.
The question of using net profit indicator as a criterion of the
efficiency of cost accounting link and stimulating its activity was
discussed after the September (1965) Plenum of the Central Committee
of the CPSU. Proponents of the net profit indicator considered it
almost the only criterion in the system of cost accounting incentive.
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Their basic error is that they idealized the advantages of this indicator.
Actually, however, no indicator is capable of taking into account all the
multiplicity of problems to be solved in the national economy. The
advantages of all indicators, including the net profit, are relative.
Therefore, it can function efficiently as a fund forming indicator in
combination with others.
An important role in the economic incentive system of an enterprise
(association) is given to fund correcting indicators that must serve as
conditions for deductions from profits in the YeFMP. The size of the
actual deductions depends on their fulfillment. In this case, deductions
from profits to the YeFMP should fully implement tasks on creating,
assimilating and introducing new equipment, technological processes
and other measures of technical improvement of production. In case
they are not completed on planned schedules, deductions to the YeFMP
may be made in accordance with norms reduced by ten to forty percent
depending on the degree of incompletion. Providing a relationship
between the size of the YeFMP and the schedules of putting the new
productive capital into operation is of exceptionally great importance
for taking into account the time factor in the production incentive
system. This is due to the fact that the efficiency of any measure
on scientific technological progress is so much higher the earlier an
economic effect is obtained from it. Incompletion of the plans for
new equipment on the planned schedule causes great harm to the national
economy.
Another, no less important, fund- correcting indicator is fulfilling the
plan of delivering products in accordance with the product list
(assortment) and schedules in the concluded contracts. When production
associations, enterprises and organizations do not fulfill these tasks
and obligations, it is expedient, in our opinion, to reduce the deduc-
tions for all fund forming indicators by ten to forty percent (depending
upon the nature of the violation of the contract terms). Evidently,
the volume of the YeFMP money should be determined by the USSR Gosplan
and sent to ministries (departments) together with norms for forming
this fund.
Norms should be established for forming the YeFMP by industrial sectors
by taking into account the most important national economic proportions
(between consumption and savings in the national income, between the
increase in wages and productivity of labor, between the increase in
monetary income and the production of consumer goods, etc.); the share
of bonuses not to exceed thirty to thirty -five percent of monthly wages;
gradual equalization of differences in wages in various industrial
sectors; and planned rates of increase in the fund forming indicators.
Control figures and norms for forming the YeFMP will be given to
ministries (departments) prior to their development of the five -year
plan and serve as a initial base for its preparation.
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In their turn, ministries (departments) must, on the basis of this
data, determine corresponding indicators and norms for industrial
production (scientific production) associations and their directly
subordinated enterprises and refine them before the beginning of the
five -year plan development.
Ministries (departments)must also develop scales for reducing the
norms of deductions from profit to the YeFMP for the unfulfillment
of the plan in introducing new equipment, tasks and obligations on
delivery of products in the assortment specified by contracts and
orders of export organizations. Rates of increase in the productivity
of labor and estimated profit are calculated by increasing the totals
since the start of the five -year plan period.
Incentive norms should remain stable during the whole five -year plan
period. They create an interest of production associations and enter-
prises in developing and implementing not only current, but also long
range programs for social- economic development that provide for accelerat-
ing the rates of scientific technological development and improving
qualitative work indicators. At the same time, if the five -year plan
specifies a smaller increase in rates of the fund forming indicators
due to implementing measures on assimilating new capacities, introducing
new equipment, etc., then the incentive norms for the corresponding
period should be increased somewhat.
It is also good practice to introduce incentive norms for enterprises
and organizations within the production associations. Deductions from
profit to the YeFMP should be set for groups of enterprises or the
industrial sector as a whole. In setting these norms for production
associations and enterprises, it is necessary to create priveleges for
those collectives who not only adopt intensive plans, but also tasks
on creating, assimilating and introducing new equipment and technological
processes, and improving the quality of the products.
The new decree specifies the establishment of norms in a percentage of
profit (estimated profit) and in individual industrial sectors in a
percentage of the wage fund the industrial- production personnel for
the year preceding the new five -year plan period.
Ministries (departments) and production associations must get the right
to create, within the limits of the YeFMP norms determined for them,
centralized material incentive funds made up of deductions from the profit
of their subordinate production associations and enterprises. In this
case, they should not exceed ten percent of the total YeFMP of the
associations and enterprises.
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The creation of the YeFMP in production associations (enterprises) will
require considerable changes in the distribution and utilization of
incentive funds: current bonuses to workers, management and engineering
technical workers and employees, taking into account the quality of labor
and products, in accordance with the bonus systems developed by
associations (enterprises); a one -time bonus for introducing new
equipment and technological processes and participating in measures for
further improvement in production; bonuses to workers for results in
intraplant socialist competition; material help; payment to workers
and employees for vacations in part, corresponding to their share of
average wages, paid from the YeFMP; bonus payments to workers for the
general results of the operation of the enterprise (association) for
the year and the five -year plan period.
Taking into account the special features of the industrial sectors and
concrete production technical problems, it is necessary to develop
allowable limits for using the YeFMP for various kinds of incentives.
Here, it is good practice that not less than forty percent of the fund
be used for current bonuses to workers according to the quality of
the work and the products.
We think that up to twenty percent of the YeFMP should be reserved for
paying bonuses to workers for the operating results of the enterprise
(association) for a year and for the five -year plan period. These
incentives should be related to the length of service of each worker
at the given enterprise and his contribution to the implementation of
the annual and five -year plans.
Reserving a part of the YeFMP until the end of the five -year plan
period will make it possible to pay workers considerable (up to two
three month's wages) rewards, which is important in increasing the
interest of workers in developing and implementing long -range programs.
This measure is also justified by the fact that it may have an important
effect on reducing the turnover of cadres and strengthen production and
labor discipline. It is obvious that with greater ability to pay,
consumer demand for goods will increase, with the structure of the
demand being sharply different from current demand. However, with
a planned economy, the problem of supplying goods to cover the
additional monetary income of the people is entirely solvable.
The solution of this problem will be facilitated by strengthening the
economic interest of heavy industry enterprises in increasing the
production of consumer goods due to the creation of the YeFMP and
simplification of the order of setting prices for cultural personal
service and household goods. At the same time, it is necessary to
create a mutual economic interest of industrial and commercial workers
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in increasing production and improving the quality of those goods in
greater demand by the people. This may be achieved by making long -range
contracts between the USSR Ministry of Commerce and industrial associa-
tions on the basis of which commercial enterprises must conclude
contracts with production associations. Obviously, the share of the
YeFMP and incentive fund for workers in commerce must be established
for bonuses to implement long -range agreements.
The size of the funds allotted for a one -time bonus to workers for new
equipment should be related to the scale and rate of implementation
of measures on scientific technological progress and be not less than
twenty to thirty percent.
The proposed methodological approach to the formation of a YeFMP will
facilitate further improvement in stimulating production.
COPYRIGHT: IZDATEL'STVO "PRAVDA "VOPROSY EKONOMIKI 1980
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REGIONAL DEVELOPMENT
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IMPACT OF PRODUCTION FACTORS ON UNION REPUBLIC GROWTH
Moscow VOPROSY EKONOMIKI in Russian No 4, Apr 80 pp 104 -112
/Article by Ye. Silayev and A. Baramidze: "The Effect of Production Factors
on the Economic Growth of the Union Republics
/Text/ Measures on the rational combination of territorial and sectorial
planning, which are aimed, on the one hand, at the concerted participation
and coordination of sectorial ministries and departments in planning and
management on a specific territory and, on the other, at enhancing the role
of local economic organs, are specified in the decree of the CPSU Central
Committee and the USSR Council of Ministers, "On Improving Planning and
Strengthening the Influence of the Economic Mechanism on Increasing Produc-
tion Efficiency and Work Quality."
The improvement of sectorial and regional planning should be aimed at in-
creasing the efficiency of the entire national economy of the country and
its union republics. At this time mainly sectorial planning prevails, but
this is inadequate for objectively evaluating the end results of social
production, since the process of reproducing material and spiritual wealth
takes place not only in the sectors of the national economy, but also on a
specific territory, in the unity and interdependence of all socio- economic
factors.
New methods of calculating a number of indicators of the economic growth of
the union republics are set forth in the article. In our opinion, they make
it possible to determine the impact of physical production by republics and
for the country as a whole; to determine the degree of influence of the fac-
tors of economic growth, including some components of technical progress, on
the end result of physical production; to predict the amounts of national
income (the net production) and the main parameters of economic growth (the
number of employed, the fixed capital, labor productivity, the capital
labor ratio and others) by republics.
The regression analysis method was used for studying the effect of produc-
tion factors on the end result of the production process. All the factors
of the growth of production can be included in the formula of multiple
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regression and their influence on the process of production both independ-
ently and together can be determined. It is possible to solve the equations
stage by stage. At the first stage it is possible to determine the effect
on the growth of the national income of the factors obtained on the basis of
primary data (the number of employed, the amount of fixed capital and
others), at the second -the factors calculated from derived data (labor pro-
ductivity, the output capital ratio, the capital -labor ratio and others).
The statistical data for 1960 -1975 for sectors of physical production of
seven union republics were used for the calculations. The chosen multiple
regression equations conform to the empirical data of the mentioned indica-
tors.
Coefficients of elasticity, which show the dependence of the change of the
amounts of net production in percent during the desired period of time on
the change of the values of the primary and estimated indicators by 1 per-
cent, were obtained in the process of building the selected equations.
Coefficients of Elasticity of the Growth of the Net Production (National
Income) of the Sectors of Physical Production From the Growth of the
Number of Employed and the Fixed Production Capital (1960 -1975)
Physical pro
duction-
total
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Including
Table 1
Industry Agriculture Other sectors
C! d U C!
4 o 4 4 o .r~ .c o 4 4 o .0
1+ 3 u 3 I+ 3 v 3 W 3 U W 3 U
0 w t3 0 0 O Cl) b O O O W b O O O N 'C3 0 O
14 .o al 14 b r-1 is .a N 14 b r-1 1-1 al 1�+ b r4 1+ .n al 11 b v--1 ao E o0 2 co 00 0 ono cd oo Ea ao o 2 oo 0 on o ca
0 0 o 4 o o t-+ O s w
0 0 r-1 E 0. ,-1 0 0 r- 0 A. ,-1 0 0 ri E3 0..,-1 0 a r-1 E 0..r1
0 o O o o a o a O O a o w
1+ 4-1 F+ 41 cti >4 4a $.4 4a cd >`1 4-i H 4-1 C I 4-1 S-i 4-I cd
W O 4/ r4 0 U W O N W O U W O N W O U W O N W O U
USSR 0 555 0.647 0.129 0.703 -5.076 0.149 0.548 0.137
Lithuanian SSR. 1.769 0.282 0.548 0.356 -4.228 -0.185 -0.577 1.076
Estonian SSR. 0.072 0.674 0.617 0.908 -0.102 -0.149 -0.051 0.889
Georgian SSR. 1.616 0.667 -0.734 1.434 0.080 0.442 2.471 0.125
Azerbaijan SSR. 1.675 0.030 -1.842 2.200 -2.920 0.646 1.537 0.213
Armenian SSR. 0.230 0.672 0.582 0.764 -0.051 0.351 -0.233 0.778
Tadzhik SSR 2.727 -0.096 1.339 0.140 0.124 0.113 -0.675 0.691
Moldavian SSR 2.500 0.317 0.890 0.432 0.111 0.255 1.334 0.217
Calculations show that for the USSR national economy as a whole with an in-
crease of the number of employed in physical production by 1 percent the na-
tional income increases by 0.555 percent (9=0.555), in industry accordingly
by 0.129 percent (3=0.129). At the same time for agriculture the coeffi-
cients of elasticity have a negative value, which might be caused either by

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a decrease of the number employed or by a reduction of the amounts of net
production of the sector. During 1971 -1975 the net production of agricul-
ture owing to unfavorable natural and climatic conditions and the increase
of the materials- output ratio of production declined slightly.
The Lithuanian SSR, the Estonian SSR and the Azerbaijan SSR also have nega-
tive coefficients of elasticity for agriculture. In the Lithuanian SSR in
the past five years the growth rate of the net production of agriculture and
the number of employed have declined appreciably. Structural changes (the
increase of the proportion of animal husbandry), which caused an increase of
the materials- output ratio and, consequently, of the production cost of the
sector, also occurred. Approximately the same economic process can also be
traced in the Estonian SSR, but it is less pronounced. In the Azerbaijan
SSR the formation of new capital- intensive sectors (viniculture and fruit
growing) changed the structure of agricultural production significantly,
while due to adverse weather conditions in 1971 -1975 the absolute amounts
of the net production declined.
The negative coefficients of elasticity of the growth of the net production
from the growth of the number of employed in the industry of the Georgian
and Azerbaijan SSR's (3=-0.734 and 3=-1.842) are explained either by the
lag of the growth rate of the capital -labor ratio behind the growth rate of
the number of employed or by the formed structure of industrial production
of the indicated republics. Thus, in the Azerbaijan SSR during the period
1960 -1975 the growth rate of the number of employed in industry exceeded the
growth rate of the capital -labor ratio, which had a negative influence on
the growth rate of the indicator of labor productivity in this sector. It
is possible to examine these trends in greater detail by calculating the in-
dices of the growth of the capital -labor ratio and the number of employed.
Table 2
Index of the Growth of the Capital -Labor Ratio and the Number of Employed
(1960- 1975)
Physical Including
produc- Industry Agricul- Transpor- Construc- Other
tion ture tation and tion sectors
(total) communi-
cations
USSR. 2.01 1.70 4.08 1.42 1.24 1.17
Lithuanian SSR. 1.90 1.15 6.39 0.86 0.98 0.84
Estonian SSR. 1.83 1.91 7.76 1.20 1.34 0.45
Georgian SSR. 2.68 1.49 3.60 2.39 1.89 1.82
Azerbaijan SSR. 1.60 0.82 1.80 1.05 0.98 3.44
Armenian SSR. 1.46 1.04 3.10 0.90 2.86 0.31
Tadzhik SSR 2.10 1.39 3.11 1.86 0.77 0.68
Moldavian SSR 3.82 1.29 6.29 1.03 3.93 1.33
The indices were obtained by dividing the growth rate of the capital -labor
ratio by the growth rate of the number of employed.
1.9
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From Table 1 it is evident that in the republics, where the index is less
than 1, the coefficients of elasticity of the growth of the net production
from the growth of the number of employed are mainly negative. Precisely
this explains the negative value of the coefficient of elasticity of the
growth of net production from the growth of the number of employed for in-
dustry of the Azerbaijan SSR and for other sectors of physical production of
the Lithuanian SSR, the Estonian SSR, the Armenian SSR and the Tadzhik SSR
(see Table 1).
Some republics have a negative value of the coefficients of elasticity of
the growth of the net production from the growth of the number of employed
in some sector of physical production due to their formed structure. For
an example let us illustrate the efficiency of the sectors of industry of
the Georgian SSR. The coefficient of elasticity of the growth of the net
production of the industry of the Georgian SSR from the growth of the num-
ber of employed for 1960 -1975 was negative. However, industry consists of
a large number of sectors, which participate in different ways in the crea-
tion of its aggregate economic impact, therefore it is important to identi-
fy the sectors which reduce the amount of the impact (see Table 3).
Table 3
Coefficients of Elasticity of the Growth of the Net Production of
the Sectors of Industry of the Georgian SSR in 1960 -1975 From the Growth of
the Number of Employed (31) and the Industrial Productive Capital (32)
Coefficients of elasticity
of the growth of the net pro
Sectors of industry duction
From growth of From growth of
number of em- fixed produc-
ployed tion capital
Industry, total -0.734 0.883
Including:
Electric power engineering 0.202 0.464
Fuel industry. 10.560 -6.910
Ferrous metallurgy 3.557 0.482
Nonferrous metallurgy 1.220 4.341
Chemical and petrochemical industry. 0.218 0.864
Machine building 1.917 -0.012
Timber and wood processing industry. 3.459 -0.259
Construction materials industry -0.474 0.503
Light industry 0.415 0.749
Food industry 0.528 0.620
As the data of the table show, the sectors, which governed the negative
value of the coefficient of elasticity of all industry of the Georgian SSR,
are the fuel industry (3=-10.560) and the construction materials industry
(3=-0.474). Coal production during the period in question declined as a
5o
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result of the depletion of reserves at all deposits. At the same time the
decline of the production volumes was not accompanied by a decrease of the
number of employed, which, in turn, caused a reduction of labor productivity.
In the petroleum industry -a new sector of the republic considerable capi-
tal investments were channeled into geological prospecting and the creation
of fixed capital. The sector attracted a large number of workers, but due
to the untimely increase of the commercial reserves of raw materials the
yield of finished products lagged. The materials- output ratio, the labor
output ratio and correspondingly the unprofitableness of production in-
creased, which was reflected in the overall indicator of efficiency.
The negative value of the coefficient of elasticity of the growth of the
net production from the growth of the employed in the construction materials
industry is explained by the higher growth rate of the number of employed
with respect to the growth of the capital, which caused a decrease of labor
productivity and, consequently, a decline of the growth rate of the net
production.
Such important sectors in the structure of industrial production of the re-
public as light and the food industry, machine building and ferrous metallur-
gy have comparatively high positive values of the coefficients of elasticity.
These sectors also govern the magnitude of the economic impact of industrial
production of the republic. This impact would be even higher, if the fixed
capital were used more intensively in machine building by means of the im-
provement of the processing method, modernization, the increase of the de-
gree of the workload of production capacities and the increase of the ma-
chine shift coefficient.
In the future the change in the structure of industrial production of the
Georgian SSR and the commitment of new material, raw material and manpower
resources will have an appreciable influence on the increase of economic ef-
ficiency. This will also be promoted by the fact that certain shifts will
take place in the fuel industry, first of all by means of the accelerated
development of the production of high quality grades of petroleum.
The interdependence of the growth of the national income (the net produc-
tion) on the growth of labor productivity and the output- capital ratio is of
interest. Only their combination can explain the efficiency of physical
production (see Table 4).
As is evident from the table, the coefficients of elasticity of the growth
of the net production of industry from the growth of labor productivity in
all the union republics are positive, since the growth rate of the net pro-
duction exceeds the growth rate of the employed. At the same time the coef-
ficients of elasticity of the growth of the net production from the growth
of the output capital ratio are negative, which can be explained by the fact
that the growth rate of capital exceeds the growth rate of the net produc-
tion. The decrease of the output capital ratio depends on the structure and
level of technical and technological perfection of the fixed capital. The
question is, to what extent does the increase of this capital provide a
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saving of living labor. Therefore, it is important to identify the depend-
ence of the increase of the value of labor productivity on the increase of
fixed capital. The example of the Azerbaijan SSR, where the coefficient of
elasticity of the growth of the net production from the growth of the
output- capital ratio has the lowest value (3=-1.532), while the coeffi-
cient of elasticity of the growth of the net production from the growth of
labor productivity has the highest value (3=2.340), is the most indicative.
In this case the efficiency of industrial production of the republic, which
is expressed by the growth of the net production, is declining. In examin-
ing the analogous indicators for the Armenian SSR it is evident that along
with a significant growth of the net production from the growth of labor
productivity the negative influence of the output capital ratio on its
growth is minimal.
Table 4
Coefficient of Elasticity of the Growth of the Net Industrial Production
of the Sectors of Physical Production From the Growth of Labor Productiv-
ity and the Output Capital Ratio (1960 -1975)
Physical pro
duction-
total
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Including
Industry Agriculture
0 0 0
4 .0 .0 4 x
0 L �rl 1 1 I 1J V ,3 I N 45 V rl 3 I cd
$4 r l 0 0 1+ .1-1 O 0 0 1-i r O
1+ 0 4-) 1a a r-1 11 0 4.= P Cl. r-1 1a 0 +J 1a a ri
ao c 0 0 ):10 W 0 +w 0 4 b0 c' 0 b0 a
E H b E 0 rr-1 q r-I b q o �r1 0 .--I b q o �r1
0 0 o a o 0 o a o 0 o a
P4-1 41 P 1a 4a c d 1.44-1 1 P 4-I W 1a 4-1 1 1 $4 4 cd
44004 4 4 44004 w 0 u w 0 e w 0 u
USSR 1.329 -0.186 1.410 -0.447 0.978 0.193
Lithuanian SSR 1.358 -0.257 1.250 -0.330 0.903 0.371
Estonian SSR 1.042 -0.644 1.250 -0.176 0.635 0.235
Georgian SSR 1.149 0.094 1.394 -0.439 0.913 0.086
Azerbaijan SSR 1.020 -0.674 2.340 -0.532 0.940 -0.257
Armenian SSR 1.577 -0.612 2.030 -0.230 0.926 -0.130
Tadzhik SSR 1.296 -0.386 1.792 -0.401 1.242 0.008
Moldavian SSR 1.205 -0.025 1.960 0.281 0.974 0.560
Thus, the factor analysis of the efficiency of physical production of the
union republics makes it possible to determine the degree of influence of
one factor or another on the end result of the operation of physical produc-
tion. Statistical data were analyzed for seven union republics, where pro-
duction has basically be stabilized and the proportion of new capital con-
struction in the total amount of the physical assets of production is negli-
gible. In the future the proportion of the increase of new works will de-
crease even more. In the RSFSR the increase of the fixed production capital
and the number of employed will take place at an accelerated rate by means
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of the eastern regions. Therefore, here the degree of dependence between
the factors and the end result of production is slightly different.
The coefficients of elasticity of the growth of the economic indicator from
the factors influencing it can be used in short -term forecasting since,
having ascertained the perspective changes in the indicator, -s possible
to determine the amounts of the end result of production. The coefficients
of elasticity, by means of which the economic structures regions are
analvz in our opinion, make it possible to ascertain the influence of
each factor both separately and in interdependence.
Scientific and technical progress is an important factor of economic growth.
A number of articles, which have touched on the problems of the influence
of scientific and technical progress on the national economy, have appeared
in the press in recent years. Thus, S. Golosovskiy and B. Grinchel' examine
factors which in one case directly reflect the influence of technical pro-
gress on the national income, while in another -in a mediated, indirect man-
ner. This pertains first of all to the natural factor.l It is well known
that the natural factor does not affect equally the different sectors of
physical production. For example, the volumes of agricultural production
and correspondingly the production volumes and labor productivity in the
food and light industry depend substantially on climatic conditions, which
the authors take as a criterion which influences the national income. At
the same time the influence of this factor in practice does not affect ma-
chine building, ferrous metallurgy and other sectors of industry. Therefore,
the natural factor certainly affects labor productivity and accordingly the
national income, but its influence is nonuniform by sectors.
A formula for calculating the influence of the increase of the number of
workers in social physical production on the national income is also pro-
posed in the article. This formulation is natural, but, in our opinion, it
is impossible to take the absolute increase of the number of workers in pure
form for the factor of technical progress, since as a result of technical
progress a relative decrease of the number of workers should occur. In fact
the proposed formula reflects the product of the labor productivity of the
preceding year times the increase of the available working time during the
reference year. This would be legitimate if the labor productivity remained
unchanged.
The question arises: is it possible by the means of modern economic analysis
to determine the influence of scientific and technical progress on the pro-
cess of social production? The concept "scientific and technical progress"
is a very broad one, it covers basic theoretical and applied research, de-
signing, the development of new technical and technological means and so on.
The direct influence of the basic sciences on production and economic pro-
cesses is manifested through the introduction of certain technical innova-
tions or others in production. In turn, the increase of the technical level
of production creates the need to increase the skill of production personnel.
1. See VOPROSY EKONOMIKI, No 10, 1976, pp 24 -37.
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The statistical data on the union republics make it possible to determine
the laws and dynamics of the introduction in production of new equipment and
technology, the degree of increase of the skills of workers and so ot:. Re-
lying on the available economic data, we attempted to ascertain the influ-
ence of some components of scientific and technical progress on the growth
of labor productivity. Here it was presumed that a certain proportion in
the increase of labor productivity should correspond to each component of
scientific and technical progress, while a direct link exists between the
growth of the individual components of scientific and technical progress and
the labor productivity. The following components (with allowance made for
the available data) were used for the calculations: the number of special-
ists with a higher and secondary specialized education, the power- worker
and electric power- worker ratios, the availability of mechanized flow and
automated lines, the number of introduced inventions and rationalization
proposals. The goal of the calculation is to find the total influence of
the above indicated components of scientific and technical progress on the
growth of labor productivity.
The increase of the number of specialists with a higher and secondary spe-
cialized education has taken place at an accelerated rate in industrial pro-
duction of the republic, which stems from the overall increase of the
electric power- worker and power- worker ratios, as well as the introduction
of new automated and mechanized flow lines of production and so on. The
data of the table reflect the dynamics of the absolute increase of each com-
ponent. individually.
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Table 5
Dynamics of the Increase of the Components of Scint..:'ic and Technical
Progress in Industry of the Georgian SSL (19b0=
Components 1965 1970 1971 1972 1973 1974 1975
Scientific and technical
progress
Including:
Number of specialists
with a higher and sec-
ondary specialized
education 151.2 230.7 243.4 262.0 283.2 297.2 318.2
Power worker ratio 142.9 185.7 199.5 207.1 214.3 222.3 231.0
Electric power- worker
ratio 137.5 175.0 183.3 196.0 204.2 213.4 223.7
Availability of mechan-
ized flow lines 148.6 193.8 208.4 219.7 233.7 250.1 268.5
Availability of auto-
mated lines 102.6 137.1 182.5 200.7 225.0 249.7 269.8
Introduction of inven-
tions and rationaliza-
tion proposals 112.0 134.6 137.1 140.4 147.7 157.2 163.9
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The degree of dependence of the growth of labor productivity on the growth
of the separate components can be ascertain by using the methods of regres-
sion analysis. The labor productivity (Y, acts as the function, each one
of the above indicated components of technical progress (xl x2 x
acts as an independent variable. Then the multiple regression equation will
assume the form:
The coefficients of elasticity of the growth of labor productivity from the
growth of the individual components of scientific and technical progress are
determined during the solution of the equation. These coefficients show the
proportion of each component of scientific and technical progress in the in-
crease of labor productivity. The sum of the proportions of the components
(in this case there are six of them in connection with the limitedness of
the necessary data) reflects the proportion of scientific and technical pro-
gress in the growth of labor productivity (see Table 6).
Coefficients of Elasticity of the the Growth of Labor Productivity From
the Growth of the Individual Components of Scientific and Technical
Progress in Industry of the Georgian SSR
Factors
Y, a0 al x l.n a 2 x 2,n a3x3n a4x4n a5x5.n a6x6n
Overall influence of the factors
of economic growth on labor pro-
ductivity
Scientific and technical progress
Including:
Number of specialists with a
higher and secondary specialized
education (xl
Power worker ratio (x2
Electric power- worker ratio (x3
Availability of mechanized flow
lines (x4
Availability of automated lines
(x
Introduction of inventions and
rationalization proposals (x6
Other factors (x)
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Coefficients
of elasticity
31, 32... 36
2.920
2.013
0.760
0.500
0.103
0.023
0.077
0.550
0.907
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Proportion of individual
components of scientific
and technical progress in
the increase of labor pro-
ductivity (percent)
Y, =3(3 100)
1 00
70
25
17
4
1
3
19
30
Table 6

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From the table it follows: first, the individual components of scientific
and technical progress influence the magnitude of labor productivity differ-
ently; second, the sum of the coefficients of the individual components of
scientific and technical progress on the whole shows that with an increase
of the components of scientific and technical progress by 1 percent labor
productivity increases by 2.013 percent (3=2.013). Now let us calculate
the proportion of scientific and technical progress in the increase of labor
productivity, which can be calculated by the formula:
X =3(31 +3 3
(1)
where X is the proportion of scientific and technical progress in the in-
crease of labor productivity; 31, 32... 3 are the coefficients of elastici-
ty of the growth of labor productivity from the growth of the individual
components of scientific and technical progress; 3 is the coefficient of
elasticity of the growth of labor productivity from the growth of the fac-
tors acting on it together.
The growth of labor productivity in the republic during the period of time
in question was 75 percent. It is possible to determine the proportion of
scientific and technical progress as a whole in the increase by substituting
the actual data from Table 6 in the formula. The calculations show that
the number of specialists with a higher and secondary specialized education
accounts for 25 percent of the total increase of labor production, the imple-
mentation of inventions and rationalization proposals -19 percent and so on.
Thus, of all the components the greatest proportion of the growth of labor
productivity was obtained by means of the increase of the level of skills
of workers and engineering and technical personnel.
In connection with the updating and renovation of the fixed production capi-
tal the influence of the power- worker ratio on the increase of labor pro-
ductivity is also significant. Mechanized flow and automated lines account
for the smallest increase of labor productivity for the republic as a whole.
This is the result of the still inadequate proportion of mechanized and
automated lines in the total amount of fixed production capital. On the
basis of the experience of individual enterprises, which are notable for
the greater mechanization and automation of production processes, it is
possible to assert that in the future the influence of the indicated compo-
nent on the growth of labor productivity will increase.
In connection with the fact that scientific and technical progress, which
has a decisive influence on the increase of the ultimate impact of physical
production -the produced national income, is the main source of the increase
of labor productivity, it is necessary to find the dependence of the in-
crease of the national income on the increase of labor productivity, that
is, the proportion of labor productivity in the growth of the national in-
come.
During the period in question by means of the increase of labor productivity
the national income increases for the union republics by 75 -85 percent,
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while for the country it increases on the average by approximately 80 per-
cent a year. Consequently, by knowing the proportion of scientific and
technical progress in the growth of labor productivity, it is also possible
to calculate its proportion in the production of the national income (the
net production). If, for example, the growth of the national income of
some republic in 16 years was 2 billion rubles, by means of the increase of
labor productivity it increased by 80 percent, or 1.6 billion rubles. Tak-
ing into account the fact that the growth of labor productivity during this
period amounted to 75 percent, each percent of increase of the labor pro-
ductivity accounts for 21.4 million rubles. Thus, if scientific and tech-
nical progress constituted 70 percent of the total increase of labor pro-
ductivity, it accounts for 1,498,000,000 rubles (70X 21.4 million rubles)
of the national income.
The most important indicator, which reflects the economic growth of the re-
publics and the country as a whole, is the produced national income. One
of the methods of predicting the national income is the so- called production
method, in which the dynamics of the change in the ratios of the gross so-
cial product with material expenditures is taken into account. In recent
years the method of calculation according to the dynamic intersectorial
balances has become widespread. However, in the former and the latter cases
the calculation of the standards of material costs has a strong influence
on scientific and technical progress, the elements of which are difficult
to take into account for the future. By knowing the amount of the national
income for the required period, it is possible to calculate the main pro-
duction factors (the number of employed, the fixed captial, the output
capital ratio) from the formula:
Ti0�Ht Tit 100.31 Ti0
where Tit is the amount of factor i in the year being planned; T is the
amount of factor i in the base year; H is the increase of the national in-
come (the net production; percent in the year being planned); 3 is the co-
efficient of elasticity of the growth of production factor i.
The dependence of the increase of the employed on the growth of the national
income (the net production) is determined initially according to this formu-
la, Here the magnitude of the increase of labor productivity, which re-
flects the saving of living labor, is used. By substituting in the formula
the values of the coefficient of elasticity of the growth of the national
income from the growth of labor productivity and the magnitude of the labor
productivity during the base year, we obtain its amount for the year being
planned.
The calculation of the amounts of fixed production capital for the future
is made in a similar manner, but the labor productivity, and not the na-
tional income, functions as the initial indicator. The coefficient of elas-
ticity of the growth of labor productivity from the growth of the
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capital -labor ratio is used for this. By substituting the values of the
coefficient of elasticity of the growth of labor productivity during the
base year, we will obtain its magnitude for the year being planned. The
product of the number of employed times the value of their capital -labor
ratio reveals the amounts of fixed capital.
The proposed methods of calculation made it possible: to ascertain the effi-
ciency of the functioning of physical production of the republics, to de-
termine the existing dependence of the value of the impact on labor produc-
tivity, technical progress and other factors, which affect it, to substan-
tiate the most rational ratios between the number of employed and the
capital -labor ratio, which can serve as an important economic tool for fore-
casting the structure of the physical production of the republic, to use
the identified trends for forecasting the development and improving the
structure of the sectors and subsectors of physical production.
COPYRIGHT: Izdatel'stvo "Pravda "Voprosy ekonomiki 1980
7807
CSO: 1820
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END
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