REFORM OF SOVIET INDUSTRIAL MANAGEMENT: A STATUS REPORT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A005300060003-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 20, 2016
• Document Release Date: May 24, 2006
• Sequence Number: 3
• Publication Date: June 10, 1966
• Content Type: REPORT

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REFORM OF SOVIET INDUSTRIAL. MANAGEMENT:- A STATUS REPORT
The Soviet regime is cautiously and deliberately
implementing the reforms in the management of indus-
try proposed by Premier Kosygin at the September 1965
plenum of the CPSU's central committee. In the ensu-
ing eight months, the regime has completed changes
affecting over-all administration--principally, by
abolishing Khrushchev's system of regional economic
councils and re-establishing the industrial minis-
tries--and has begun to introduce the changes proposed
for the management of individual industrial enter-
prises.
The changes in enterprise management to be ac-
complished between 1966 and 1968 have three main as-
pects. Increased use of financial incentives is to
induce enterprises to raise efficiency and improve the
quality of their output. Directors will have more
freedom to manage their plants and to respond to the
changed incentives. Finally, the reform of indus-
trial wholesale prices will facilitate the operation
of the financial incentives.
The benefits derived from the reforms as they
now are designed are not likely to be great. For the
most part the over-alloadministrative changes merely
restore the pre-1957 structure of administration. As
for the new system of enterprise management, the in-
ducements now offered have little potential for im-
proving efficiency and quality of output. Moreover,
continued detailed central planning of output and sup-
ply, together with the lack of flexible prices, will
hamper whatever efforts the enterprises do make to im-
prove their efficiency.
Progress on Implementation
Since September, progress
on implementing the reforms has
been registered in several
areas. In October, a revised
statute codified the new free-
doms and responsibilities of en-
terprises. Provisional in-
structions published in Febru-
ary detailed the operation of
plants and factories under the
new system. By 1 July, approxi-
mately 240 enterprises will be in
the new system--43 in the first
quarter of the year and about 200
in the second..
The new enterprise statute,
which apparently applies only af-
ter a plant has transferred to
the new system, permits managers
to make many decisions on inter-
nal operation that formerly were
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PLANNING ASSIGNMENTS TO SOVIET ECONOMIC ENTERPRISES:
OLD AND NEW SYSTEMS COMPARED
OLD SYSTEM LEVIED
ASSIGNMENTS COVERING:
MOST IMPORTANT ASSIGNMENTS
(Must be fulfilled before bonuses can
Cost per unit of output
Gross value of output
Physical volume of output
of principal products
Total wages paid
Output delivery schedules
Labor productivity
Total number of workers by
grade and type
Amounts and sources of
materials and equipment
New investments in fixed
capital
Introduction of new
production processes
Payments to state budget for
profits tax and amortiza-
tion of fixed capital
MINOR ASSIGNMENTS
Detailed assignments (20 to 30
in number) covering such mat-
ters as volume of output, cost
of specific products,and pro-
ductivity of labor and equipment
in producing specific products
NEW SYSTEM LEVIES
ASSIGNMENTS COVERING:
Transferred To
MOST IMPORTANT''
Category Aboyp
0
Total profits
Total value of sales
Physical volume of output
of principal products
Total wages paid
Profitability (total profits
as a percent of total value
of fixed and working capital)
Amounts and sources of
materials and equipment
Major investments in fixed
capital
Introduction of new
production processes
Payments to state budget for
charge for use of capital,
repayment of credits for major
investments in fixed capital
and part of amortization of
fixed capital
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made for them by their superior
agencies. These decisions in-
clude, for example, the number
of workers and the size of inven-
tories of materials and semi-
finished goods. The provisional
instructions put out in February
list both the goals still to be
determined by the central author-
ities under the new system and
the specific details of the re-
vised incentives.
At least the first 43 en-
terprises met stringent criteria
in order to qualify for selec-
tion. Selected plants had to
earn sufficient profits to be
able to pay an interest charge
on their capital. They also
needed to have available suffi-
cient additional funds to meet
interest charges on short-term
loans, provide for managerial
bonuses, and make other payments
required from profits under the
new system. Other criteria in-
clude high quality of output,
stable finances, and satisfac-
tory administrative organization.
The requirements also specified
that the plant must have "agree-
ments" with customers and suppli-
ers, although such "agreements"
are not the same thing as direct
contracts, which have been used
only in the light industries.
however, is the responsibility
of the industrial ministries to
which the plants are subordinate.
Future Implementation
A tentative schedule for
introducing new prices and for
transferring the remainder of
industry to the new system was
announced last March by the
chairman of Gosplan. Beginning
7L July, whole branches of in-
dustry will switch to the new
system; this presumably means
that the present strict criteria
for the transfer of individual
enterprises will be relaxed. A
number of minor branches of the
food industry are to lead the
Changeover because no price
changes are to be made in them.
In late 1966 and early 1967,
most of light industry and the
food industry will convert after
new prices are established--pos-
sibly on 1 October 1966. Ac-
cording to Kosygin at the recent
party congress, the enterprises
in question employ nearly a
third of all industrial workers.
The remainder of industry will
switch in two further stages,
on 1 July 1967 and on 1 January
1.968, again apparently after the
planners have set new prices.
A special interdepartmental
commission, headed by the State
Planning Commission (Gosplan),
is directing implementation of
the reforms. Representatives of
the Ministry of Finance, the
state committees for labor and
wages and for prices, and other
central agencies sit on this com-
mission. Introduction of the
reforms in individual enterprises,
Main Features of New System
The provisional instructions
impose on enterprises new cri-
teria by which their performance
will be judged. These criteria
include: total profits, total
value of sales, and profitability.
The Soviets define profitability.
as a percentage of total profits
to the total of fixed and working
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capital. Moreover, under the new
system enterprises must pay the
State Bank a new charge on the
use of fixed and working capital
--now set at three to six per-
cent--as well as higher interest
charges for short-term loans
than in the past. They now also
must repay credits advanced from
the state budget for reconstruc-
tion and expansion instead of re-
ceiving what were, in effect,
grants for these purposes. All
of, these payments will come from
enterprise profits.
For each plant, central as-
signments of goals for profits
and profitability replace the
previous assignment governing
costs, which induced managers
to reduce their production costs
at the expense of quality. The
new assignment specifying total
value of sales replaces the
former assignment of gross value
of output. The latter had led
plant managers to emphasize vol-
ume at the expense of quality.
(The table on page two com-
pares the old and new system of
plans assignments to Soviet en-
terprises.)
Increased Freedom for Enterprises
The new freedoms ,granted
under the revised enterprise
statute permit the enterprise
managements (a)to determine for
themselves the total number of
employees they need, (b) to spec-
ify the composition of their
working capital (materials and
tools), (c) to determine more
freely their own needs for fixed
capital, (d) to dispose of un-
needed fixed capital such as
underemployed machinery, without
the express permission of supe-
rior agencies, and (e) to borrow
more freely from the State Bank.
Under the provisional instruc-
tions, moreover, the number of
assignments the central author-
ities give an enterprise are re-
duced from 30 or 40 to about ten.
The central authorities re-
tain the right to decide, how-
ever, such crucial matters as
how many of each 'of the en-
terprise's principal products
will be made (the output as-
sortment), total wages paid, the
amounts and sources of materials
and equipment, new investment
in fixed capital, and the in-
troduction of new products and
new production methods. Central
authorities also continue to
set basic wage rates and the
wholesale prices of products.
Bonuses for Managers
The provisional instructions
specify that bonuses for indus-
trial managers now are to be fi-
nanced from profits rather than
from the wage fund, as in the
past. However, the amounts set
aside for bonuses are determined
by the size of the total wage
bill, the increase in sales, and
the level of profitability at-
tained by the enterprise. Actual
payment of bonuses, moreover,
will depend on whether the mana-
ger has fulfilled his quota for
sales, profits, profitability,
and volume of output; whether he
has avoided overspending on
wages; and whether the enterprise
has paid off capital charges and
interest on short-term loans.
The linking of managerial bo-
nuses to enterprise profitability
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is the most significant innova-
tion of the new bonus system.
The sales component of the bo-
nus--carried over from the old
system--links the amount of bo-
nus payment to the enterprise's
performance in a current year as
compared to its past performance.
The new profitability component
of the bonus is based on the en-
terprise's performance compared
to other, similar enterprises,
thereby introducing a competi-
tive: element. Failure to compute
bonuses on this basis under the
cost reduction system, which has
been in effect.since 1959, is an
important reason for the failure
of the old system to bring about
significant increases in enter-
prise efficiency.
Production Development. Fund
The provisional instructions
also provide for the establish-
ment at each plant of a new en-
terprise fund--the "production
development fund"--to be used
for plant modernization and im-
provement at the initiative of
the enterprise. The fund is
financed partly out of profits
and partly out of funds for amor-
tization of fixed capital that
formerly were returned to the
state budget. The intent of the
fund is to make it possible for
plant managers to exercise their
initiative in making improvements
not specified'in their plan as-
signments. The manager must in-
clude in his plans: submitted
to the central authorities, how-
ever, proposals for the purchase
of equipment from this fund, and
receive the equipment through
the normal channels of centrally
controlled supply.
Reform. of: Industrial
Wholesale Prices
No details on the reform
of industrial wholesale prices
are yet public. In his speech
to the September 1965 plenum,
Kosygin gave the newly formed
State Committee for Prices re-
sponsibility for submitting rec-
6mmendations for determining new
:industrial wholesale prices by
1 January 1966. Although the
details of these recommendations
were never published, the com-
mittee chairman released some
general statements on them early
:in January, which indicated the
'three main features of the price
reform:
(1) The revised industrial
wholesale prices are to provide
a profit margin sufficient to
cover capital charges, bonuses,
and other payments from enter-
prise profits. The cost for
most products is to be the aver-
age for all enterprises produc-
ing a given product. The lower
profits of high-cost enterprises
could result in lower managerial
bonuses, but lower profits may
be offset by fixing a lower cap-
ital charge for plants in a dis-
advantageous cost position.
(2) The price reform is. to
provide inducements to enter-
prises to produce "technically
progressive" products by estab-
lishing higher prices for new
products. The prices of new
products will be high in rela-
tion to production costs,'and
then lower after a fixed inter-
val of time, when these goods
are "no longer technically pro-
gressive."
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(3) The reform seeks to en-
courage enterprises to improve
quality by authorizing price in-
creases to cover the increased
cost of high-grade output. Such
price increases were permitted
only infrequently in the past.
Corresponding reductions in
prices are to be made when en-
terprises fail to maintain qual-
ity standards.
when he stated that as the ex-
tent of direct contracts in-
creases, the detail with which
central output plans are com-
piled could be reduced. He also
noted that the present central
rationing of industrial materi-
als and equipment could eventu-
ally be abolished, and supplies
could be freely distributed by
the wholesale trade network.
The fate of recent proposals
by prominent economists to in-
troduce some flexibility in pric-
ing is unknown. These economists
have suggested retaining central
fixing of prices for only a few
key products and permitting the
prices of other products to fluc-
tuate between limits determined
by the state.
Unsettled Issues
Neither the enterprise
statute nor the provisional in-
structions have made any clear
statements about the specific
role that direct contracts be-
tween enterprises and their cus-
tomers are to play under the
reform or about the changes in
the central planning of output
and supply that may be required
to carry out the reforms. The
enterprise statute provided that
consumer goods enterprises would
base their output plans on or-
ders from the trade network and
urged that all other plants en-
ter into direct contracts. The
provisional instructions, how-
ever, failed to mention how this
was to be implemented in enter-
prises transferring to the new
system.
Kosygin alluded briefly to
these questions in September,
The failure to clarify these
issues or to publish the details
of the price reform have led So-
viet economists to give varying
interpretations of the over-all
impact of the reforms. Some
liberal economists, such as Li-
berman, Birman, and Pugachev,
have viewed the reforms as re-
sulting in a substantial move-
ment toward the introduction of
market forces. In their view,
the reforms will sharply reduce
tautness of planning, enterprises
will compete with one another
for orders, and industrial whole-
sale prices will be able to fluc-
tuate, albeit within limits set
by the state. These economists
also state that detailed central
plans for the physical assort-
ment of output and for supply
will be abolished.
Most of the more conserva-
tive economists do not interpret
the changes in this light. To
them, the role of direct con-
tracts--apart from consumer
goods--is approximately the same
as that experimented with in
heavy industry prior to the Sep-
tember plenum: they are to be
used to determine the details of
delivery of products after the
specifications, supplier, pur-
chaser, and prices have been set
centrally. Any changeover from
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central rationing of industrial
materials and equipment to free
distribution through wholesale
trade channels will occur only
after there has been a sharp im-
provement in their availability.
Moreover, this will apply only
to enterprises producing commodi-
ties whose supply has caught up
with demand.
Similarly, any elimination
of central planning of the prod-
uct "mix" for these commodities
will await the abolition of cen-
tral rationing of industrial.ma-
terials. The Soviet leadership
apparently shares this conserva-
tive view. For example, the new
five-year plan (1966-70) calls
for a sharp improvement in the
availability of industrial ma-
terials and equipment, to provide
the basis for an eventual trans-
fer to freer distribution through
wholesale trade channels, presum-
ably after 1970.
Prospects
The benefits from Kosygin's
program of economic reform as
presently constituted are likely
to prove disappointing. Frag-
mentary reports on the details of
the system as applied to the 43
enterprises transferred to it in
the first quarter of-this year
suggest that they fail to give
sufficient stress to the improve-
ment of efficiency. In many cases,
attainment of sales target influ-
enced the amount of managerial
bonuses paid more than did the
level of profitability. For ex-
ample, the profitability of one
enterprise dropped during the
quarter as a result of improve-
ments in quality not compensated
by price increases, but substan-
tial bonuses still were paid be-
cause the enterprise attained a
large increase in sales.
The results in the 43 en-
terprises also indicated an un-
willingness to permit payment of
the capital charge to infringe
unduly on managerial bonuses.
The provisional instructions, for
example, called for a six-per-
cent capital charge, but the
actual charge levied on less
profitable enterprises during
January-March 1966 was set as
low as three percent.
The affected enterprises
now are theoretically free to
increase the efficiency of their
operations, but the Soviet
bureaucracy may nullify this
freedom before it becomes:.fully
effective. Recent press arti-
cles by Birman and other liberal
economists express this fear.
No evidence exists, for example,
that a significant number of
workers was discharged by the
first 43 enterprises, although
the enterprise statute specifi-
cally allows them to do so. In
another instance of frustrated
efficiency, at least one of the
43 enterprises sought to sell un-
needed equipment but was unable
to find a buyer because the State
Bank refused to lend funds for
its purchase.
Perhaps the most important
impediment to the improvement of
efficiency under the new system
is the continuation of central
controls over both the level and
physical assortment of output
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and the supply of materials and
equipment. In the absence of
flexible prices, central assign-
ments for total sales and for
the output of specific products
will not be consistent with maxi-
mum profits. Thus, enterprises
may find it difficult to meet
their sales and production as-
signments and still raise prof-
its. If the incentives to in-
crease profits are made strong,
assortment and sales plans could
be unfulfilled, and instances of
excess productive capacity may
appear. If, on the other hand,
the incentives to raise profits
are weak, the physical assortment
and sales plans could be ful-
filled at the expanse of effi-
ciency.
In addition, continued cen-
tral controls over (a) plant ex-
pansion and reconstruction, (b)
the introduction of new products
and new technological processes,
and (c) the sources and amounts
of materials and equipment will
work against enterprise efforts
to improve efficiency. Plants
may attempt to resist centrally
imposed expansion plans or as-
signments for introducing new
technology as being unprofitable,
or worse, they may accept the
plans at the expense of effi-
ciency.
Failure of the reform pro-
gram to produce appreciable
gains in economic efficiency and
quality of output during the
next few years will generate in-
creasing pressures for a more de-
cisive movement toward the use
of market forces in the Soviet
economy. Liberal Soviet econ-
omists, in their warnings that
the present program may be in
danger of being sabotaged by con-
servative bureaucrats, seem to
be building their case for such
a movement. The increasing in-
stitutionalization of Soviet so-
ciety and the continued develop-
ment of an entrenched bureauc-
racy, however, suggest that re-
forms will continue to be piece-
meal and relatively ineffective.
The time for a sweeping reorder-
ing of economic reality--as op-
posed to intellectual blueprints
--is Apparently not yet at hand.
(This report was prepared by the Office of Research and Reports)
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