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American Economic Association

Prospects for Economic Growth in the U.S.S.R.


Author(s): A. Nove
Source: The American Economic Review, Vol. 53, No. 2, Papers and Proceedings of the
Seventy-Fifth Annual Meeting of the American Economic Association (May, 1963), pp. 541-
554
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/1823894
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ECONOMIC TRENDS AND PROSPECTS IN THE
U.S.S.R. AND EASTERN EUROPE

PROSPECTS FOR ECONOMIC GROWTH IN THE U.S.S.R.

By A. NOVE
London School of Economics

This is not an easy paper to write or to deliver. The only possible


reason for asking me to deliver it is that I happen to be in America
this year and you may want to see a new face. Among the participants
at this conference are many who are eminently qualified to give a
paper on this very subject. Worse still, some of them have in fact done
so, and many of the participants, myself included, have had the benefit
of reading their work.
The title of the paper might suggest that its author has special
qualifications as a crystal gazer. Nothing is further from the truth.
Fortunately he shares this defect with all his colleagues. Even if we
ignore the possible direct impact of nuclear weapons on the productive
capacity of industrial nations or the effect on output of the continua-
tion or cessation of the arms race, there remain a large number of un-
foreseeable developments which could occur in the next decade in
science and technology and also in economic and political organization,
within the Soviet bloc and elsewhere, which defy prophecy. However,
the Soviets have declared it to be their aim to overtake America in
economic might within ten years or so and have indeed published a
number of detailed targets for industry and agriculture through 1970
and even 1980. To some extent, therefore, it behooves us, who claim to
possess some information on the Soviet economy, to become part-time
reluctant crystal gazers. The interested nonspecialist is entitled to
some kind of answer to such questions as: Are the declared aims of
the Soviet leaders in the economic field within the realms of possi-
bility? With what obstacles will they have to contend? By what
criteria can one measure their progress toward their declared goals?
How useful or misleading can such criteria be? Is it the case that the
present organization of Soviet economic planning favors, or on the
contrary restrains, the rapid growth envisaged by the plans? The ob-
servations that follow might be of interest, if only as an attemnpt to
analyze some of the unknown factors relevant in considering answers
to the above questions.
A few basic statistics related to Soviet performance and plans are
541

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542 AMERICAN ECONOMIC ASSOCIATION

given in the table below. These are deliberately confined to the present
decade. Figures for so remote a year as 1980 seem to me hardly worth
detailed discussion.

GROWTH OF U.S.S.R. ECONOMY


SOMF; OFFICIAL SOVIET DATA

(Growth per Annum, Per Cent)

1954-61 1957-61 1959-65 1961-70


(Plan) (Plan)

National income * .9.7 8.3 7.2 9.2


Gross agricultural production 6.0 3.1 8.0 9.6
Gross industrial production .10.1 10.2 8.6t 9.6
Steel .8.0 7.8 8.3t 8.2
Oil .15.4 14.7 11.21 10.1
Electricity .11.7 11.3 12.3t 12.8
Cement .15.6 14.9 12.9 10.2
Cotton fabrics. 3.3 3.8 4.4
Wool fabrics .6.9 5.8 7.8
All fabricsr.-... 7.5

* Soviet definition ("material production").


t Implicitly revised upwards, though no new figure available.
t Upward revision of original targets for 1965 (steel from 88.5 to 96 m. tons, oil from 235
to upwards of 240 m. tons, electricity from 510 to upwards of 520 billion kilowatt-hour; some
of these and other figures are midpoints of ranges).

All figures on past and present performance in the above table


represent official claims. There is a wide consensus in favor of the
proposition that they are a reliable guide to growth rates of industrial
commodities in physical terms, but that agricultural statistics have
been or may have been inflated on an increasing scale in the last few
years. For familiar reasons, aggregate percentage indices of national
income and industrial production should be regarded with varying de-
grees of suspicion, although it is accepted by most critics that the
amount of exaggeration has somewhat declined compared with the
period before 1950. This is not the place for a detailed discussion of
statistical reliability; nonetheless, it is relevant to any real or implied
extrapolations which might be involved in thinking about the future.
For example, in the above table it appears that the growth plan
through 1970 for Soviet industry implies a slight decline in tempo com-
pared with that achieved in the last five years. However, if, as is
widely believed, output indices for past years are somewhat exagger-
ated and if indices reflecting output plans for the future do not suffer
from this defect, what looks like a slowdown may in fact represent
acceleration. This seems a reasonable conclusion, on the admittedly
imperfect evidence available, because the principal causes of exaggera-
tion-essentially the effects on methods of aggregation, statistical re-
porting and certain production choices of the desire to show success in
terms of high growth rates-ought not to be operating when planners

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TRENDS AND PROSPECTS IN EASTERN EUROPE 543

make forward projections. But, of course, we will never be in a posi-


tion to prove our point with official statistics when the future becomes
the past.
It is tempting to substitute for the official figures a recomputation
of the relevant magnitudes by Western scholars. However, it is not to
a discussion of the intricacies of interpreting statistics of the past that
this paper is to be devoted. I will confine myself to the following
generalizations, which most specialists would probably accept. Plans
for the rest of this decade call for increases in industrial output at a
rate slightly exceeding that genuinely achieved in the recent past;
agricultural production is to advance at a spectacular rate never
hitherto achieved in Soviet (or, one suspects, anyone else's) history;
at the same time, the trade and miscellaneous services sectors are to
grow relatively more rapidly than ever before. It is common ground
between Soviet planners and Western scholars that this extremely
ambitious program cannot be achieved without much greater efficiency
in the use of resources.
It is to this question of efficiency, and the related questions of
organization and growth measurement, that much of the present paper
will be devoted. If most of the space will be given over to industry
rather than, for example, agriculture, the reason lies in the fact that
some particularly interesting problems arise in assessing the ability of
the U.S.S.R. to reach its industrial goals, whereas there is an under-
standable and well-founded unanimity among all Western commen-
tators concerning the unrealistic nature of the agricultural plans for
1965 and 1970.
To sustain an annual growth rate of 9.6 per cent to the end of the
present decade, Soviet industry will require a vast increase in the flow
of materials and fuels. A very rapid rise in labor productivity is envis-
aged by the plans, for otherwise labor will be a bottleneck, the more so
as the intake of young workers is now adversely affected by the low
birth and survival rates of the war and early postwar years. This will re-
quire substantial investments. These facts are, of course, well known to
Soviet planners, who seem justified in their confidence that the neces-
sary minerals and fuels can be provided, while synthetics could pro-
vide alternatives to materials of agricultural origin. It is true that new
areas may have to be developed, with consequent expenditures on
social overhead capital. However, this may well increase the capital-
output ratio only in the short term, as some of these new sources of
minerals, notably in the East, should prove economical to work. One
recalls that the Kuzbas, though costly to bring into operation, has for
many years been providing some of the cheapest coal and steel in the
Soviet Union.
However, organizational inadequacies and irrational investment

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544 AMERICAN ECONOMIC ASSOCIATION

choices would quickly lead to shortages. They would express them-


selves by the emergence of bottlenecks, in shortages of labor, of
capital, of this or that material.
Soviet economists and planners are well aware of this, also. Never
has there been such widespread and frank discussion of the defects of
the planning system. To an ever greater extent, Soviet economists
express the view that a new stage has been reached, that the old
methods of planning cannot any more cope with the problems of an
increasingly mature and sophisticated industrial system. The pages of
Pravda and of the specialized press are filled with debates on radical
reforms. It is clear that these are needed if the economy is to cope
with the demands made upon it and that drastic changes cannot be
long delayed. In the words of Academician Berg, "We cannot permit
ourselves the luxury of wasting time, if we soberly consider the tasks
that face us and also the difficulties which we must overcome as
quickly as possible."' The drastic changes in party and state organiza-
tion announced in the November, 1962, plenum-and indeed' the fact
that so fundamental a discussion of the very bases of Soviet planning
has been openly raging in the party's own press-clearly show that
the political leadership is deeply concerned with remedying existing
defects. It also follows that these matters are in the highest degree
relevant to our assessment of the growth prospects of the U.S.S.R.
A number of economists in the East and West have at various times
in the past few years echoed similar sentiments to those cited above.
Oscar Lange, in his lectures in Belgrade in 1957, contrasted the
"highly politicalized" system of the crash industrialization period,
which he likened to a war economy, with the needs of a more de-
veloped and settled economic and political order, in which efficiency
considerations become vitally important. With increasingly diversified
needs, with more complex and less easily defined priorities, new
methods are being sought, a fashioning of new planning instruments,
new thories. There is a search for efficiency in the use of resources
scarce in relation to needs, including the need to increase living stand-
ards.
All this is familiar enough in the form of generalizations. It is neces-
sary to examine the nature of the actual defects from which their
economy suffers and relate them, and possible means of correcting
them, to problems of growth.
The present difficulties of Soviet planning relate both to the position
of the planners and to the behavior pattern of enterprises.
There is ample evidence that the planners are overwhelmed by the
complexity and burdens of planning both output and inputs of many
1 Pravda, Oct. 24, 1962.

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TRENDS AND PROSPECTS IN EASTERN EUROPE 545

thousands of enterprises. As the size of the economy increases, so the


number of planned interconnections increases much more rapidly. The
key problem in operational planning is what in Russian is called
uvyazka, or ensuring consistency of different portions of the plan. Yet
the sheer volume of work requires it to be divided between different in-
stitutions, or different offices within the same institution. The supply
plans often fail, at micro level, to match with another or with the pro-
duction plan, creating headaches and holdups at enterprise level for
which the planners are responsible. Plans for costs, labor productivity,
profits, calculated in yet other offices, may not match output or supply
plans, or one another. Investment plans, a vital aspect of the long-term
growth plan, are not properly geared in to the current production and
material allocation plans, so that machinery is not ready for installa-
tion, building materials fail to arrive, and there is an alarming rise in
unfinished construction. All this is complicated by the fact that the
leadership is pursuing several objectives at once; so that the priorities
have become blurred or at least difficult to enforce. Thus planners find
it remarkably difficult to give priority treatment to the list of "espe-
cially important investment projects" which they themselves have
drawn up. For example, in the Russian republic in the current year the
entire investment plan has been 89 per cent fulfilled, but the percent-
age for the "especially important" projects was 83.2 There are bitter
complaints from below concerning "the endless musical chairs" of re-
peated changes in the plan through the year to which it is supposed to
apply, a consequence of the desperate attempts by planners to cope
with an impossible task. Thus the investment plan for the Tatar ASSR
was amended "almost 500 times" during 1961.'
While centralized planning overburdens the organs charged with
carrying it out, decentralization-the obvious remedy-proves com-
pletely unworkable so long as planners' instructions are the principal
criterion for local decisions. The modest attempt to devolve authority
to territorial economic organs, in 1957, was inevitably followed by re-
newed centralization. Within the system as it is, only the center is in a
position to know the needs of industry and of society at large, since
these are not transmitted by any economic mechanism to any terri-
torial authority. The latter is therefore unable to foresee the effects of
its decisions on the economy of other areas, and, in the circumstances,
decentralized decision making must lead to intolerable irrationalities.
The consequent recentralization went so far that an official of the
Estonian (republican) regional economic council complained in 1962

'Ekonomicheskaya gazeta, Nov. 17, 1962, p. 5 (the figures relate to the first ten months
of 1962).
' Ibid., p. 6.

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546 AMERICAN ECONOMIC ASSOCIATION

that the 17 commodities planned by Estonian officials represented 0.2


per cent of the industrial output of that republic, and that "all the rest
is decided by the USSR Gosplan," which now plans production and
distribution of close on 19,000 commodity designations.4 Thus de-
centralization is both indispensable and impossible. Recentralization
led to errors, confusion, overwork.5 As a result of the reforms at pres-
ent being i'mplemented, the work may be redistributed, but without
curing the diseases necessarily associated with centralization.
Planners are also handicapped by inadequate criteria for decision
making. This applies most clearly to the much discussed problem of
choice between investment variants. It applies also to the placing by
the planners of production orders with different enterprises; as a So-
viet critic pointed out, the officials in charge of this task do not even
conceive it as part of their duty to know the relative costs in different
enterprises; they are busy enough simply distributing the various pro-
duction tasks to be performed.6 These are direct consequences of
quantitative administrative planning.
Obviously, if planners are to perform their tasks effectively, all this
must be changed radically. Two approaches to reform may be ob-
served. They have in common the belief that the central planners, ex-
pressing the will of the Communist party leadership, must decide the
basic pattern of investment and production, as well as the basic "pro-
portions" of the economy (i.e., allocation of resources between
consumption and investment, industry and agriculture, and so on).
However, one group of would-be reformers envisages a high degree of
centralization, hoping that new planning techniques, and especially the
electronic computer, will make it work effectively. The other lays
much greater stress on enterprise initiative, on freely negotiated inter-
enterprise contracts and supply arrangements, which would free the
central planners of much of the detailed operational work which at
present threatens to overwhelm them. Neither species of reform would
be practicable without a major overhaul of the price system. Thus
Berg, in his already cited article, points out that "the task of optimal
and continuous planning cannot be carried out satisfactorily without
a reform of price fixing. Can one speak of any optimum if the cri-
terion of its determination is unclear at existing prices?" He advocated
the creation of "a mathematical economic model of the economy" in
which with the aid of input-output balances, it will be possible to
"correct the sins of pricing." Nor do the advocates of decentralization
deny the need to use mathematical techniques in central planning. One
'Ibid., Nov. 10, 1962, p. 8.
' See A. Nove, "The industrial planning system-reforms in prospect," Soviet Studies,
July, 1962.
'L. Borovitski, Pravda, Oct. 5, 1962.

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TRENDS AND PROSPECTS IN EASTERN EUROPE 547

of the best-known of the "mathematical" reformers, Novozhilov, has


emphasized that the proper use of computers and the efficiency prices
which would emerge would make possible effective decentralization
by providing proper price criteria at enterprise level. Nonetheless,
despite some similarities and overlaps of ideas, one can discern two
different kinds of outlook about the matters with which central plan-
ners, as distinct from productive units, ought to be concerned. One
could perhaps add a third view, apparently held by Khrushchev, to the
effect that proper party leadership can solve all problems. In itself
such a view is naive and irrelevant: "party leadership" cannot provide
rational choices between investment alternatives, or match supply
plans with production programs. In sanctioning or tolerating open de-
bate of basic planning problems, and indeed in his own not unfriendly
comments on some of the radical reform proposals, Khrushchev has
shown himself aware of this. Yet his own predisposition towards party-
enforced priorities and administrative solutions leads him to lean
towards the centralizers.
We have so far been concentrating on planners' problems. However,
as recently published debates in the Soviet press have underlined, much
that goes wrong does so in the microworld of enterprises. It is only
in the imagination of model builders, not in reality, that Soviet enter-
prises are passive and obedient executants of plans passed down from
above. In varying degrees, enterprise management is able to adapt its
behavior, and the product mix, to the often ambiguous process of
measuring the fulfillment of plans. Since, for reasons already given,
the various plans it receives are frequently inconsistent with one an-
other, it can and indeed must maneuver to fulfill some plans at the
expense of others-and its principal guideline, despite efforts to
change this deeply ingrained habit, remains the fulfillment of output
goals in tons or in rubles. Since rewards are related to the fulfillment
of plans, managements are encouraged to conceal production possibil-
ities, to hoard, to refrain from doing too well in case the plan for the
next period is made too "tight." New production methods, new designs,
impose disproportionate risks upon management, with few compensa-
tory rewards. "Plans are fulfilled at any price, to the detriment of
quality, reliability, durability."7 The orders placed by the trading net-
work, which do on occasion reflect consumer demand, are too fre-
quently ignored by industrial enterprises, partly because the required
product mix does not fit plan fulfillment indicators, partly because of
the inflexibility of plans for material supplies, costs, prices. This ap-
plies in at least equal measure to the problem of adapting production
to the requirements of other industrial enterprises. It is worth empha-
'Ibid.

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548 AMERICAN ECONOMIC ASSOCIATION

sizing at this point that, whatever my be the value of computers to


central planners, they are very largely irrelevant to the solution of
"microproblems" of this type.
As is well known, reform proposals designed to provide a rational
basis for choice at microlevel have been put forward by the professor
from Kharkov, Liberman, in the pages of Pravda and elsewhere. By
basing incentives on profits, following a drastic change in the price
system, "the proposals would free central planning from detailed su-
pervision over enterprises, from wasteful attempts to control produc-
tion not by economic but by administrative methods," as Liberman
put it.8 Nemchinov, another vigorous advocate of similar reforms,
wotuld like to see planners planning only final output, leaving inte
mediate stages essentially to interenterprise arrangements; he would
"convert the material allocation system into state trade, cease distrib-
uting commodities through an endlessly complex system of material
allocations."9 These proposals, which would have the effect of relieving
the planners of much detailed work, have run into heavy opposition,
but experiments are proceeding. It is true that they seem to be very
different in spirit to Khrushchev's re-emphasis on party control. Yet
Khrushchev's latest moves may seriously disorganize the planning
organs and miay have the possibly unintended effect of speeding up the
adoption of such proposals as Liberman's. In any event, the growth
prospects of the U.S.S.R. must surely depend in some considerable
degree on the extent and the success of the various reforms now being
implemented or discussed.
It may be objected that all this analysis is exaggerated, that the
very impressive growth of the Soviet economy proves that all is basi-
cally still well-though this would be a criticism which would apply as
much to the Soviet planners as to the author of this paper.
The answer to such an objection falls into two parts: The first con-
cerns the relative impact of the defects of the system on different sec-
tors of the economy. The second relates to the statistical reflection of
the defects themselves.
Some activities lend themselves more easily than others to cen-
tralized planning. For some, indeed, it is decidedly advantageous. If
output is relatively homogeneous, if inputs are few in number and
relatively easy to determine in quantity and quality, if the flow of in-
formation to the central authorities gives them reasonably sure data
on which to base decisions, then the planning system works reasonably
well. These considerations apply, for instance, to pig iron, steel, alu-
minum, cement, electricity, coal, oil, and gas. Electricity is the perfect
'Pravda, Sept. 9, 1962.
' Pravda, Sept. 21, 1962.

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TRENDS AND PROSPECTS IN EASTERN EUROPE 549

example of a homogeneous commodity, producing only kilowatt-hours


of current. In many Western countries its output is nationalized.
Whatever may be the inefficiencies of Soviet electricity generation,
they cannot be ascribed to the nature of the planning system. In fact,
it is noticeable that the bulk of the commodities listed above are con-
trolled by very large enterprises or by monopolies or are nationalized
in Western countries. This suggests advantages of scale, of the possi-
bility of planning output, research and investment. So far as invest-
ment is concerned, future demand in the U.S.S.R. is largely a function
of the planners' own decisions, and consequently investment planning
is facilitated: the quantities required in 1965 are more or less known
already in 1962. This has not prevented expensive errors in choice
between investment variants, but this raises rather different questions.
It is also the case that some of the microproblems of planning arise in
much less acute form in the industries listed above than elsewhere in
the Soviet economy. Output is easier to measure; distortions of the
product mix are less likely or less harmful; the rewards for success (in
increasing output or productivity or reducing costs) are easier to de-
termine. It is surely not a coincidence that few of the vast numbers of
complaints printed in the U.S.S.R. about the operation of the planning
system relate to production in and supplies to these particular in-
dustries. Steel works are efficiently run; they receive the planned
amounts of coking coal and iron ore; they overfulfill output plans.
This is partly due to the high priority they enjoy, but a part of the
explanation is to be found in the relatively simple process of planning
the operations of and supplies to this type of industry. In typically
colorful fashion, Khrushchev put it this way to the November, 1962,
plenum: "Steel production is like a much-used track with deep ruts;
even a blind horse will not lose its way." By contrast, the high priority
chemicals and some of the machinery industries have run into many
troubles. It is true that military weapons and rockets seem to be
efficiently produced, but this is a branch of activity where, in all coun-
tries, decisions on output and exact technical specifications are cen-
tralized, and no one doubts the ability of the Soviet system to ensure
the production of any clearly defined piece of hardware to which high
priority is given.
It is worth noting that the top priorities of the Stalin era, basic
heavy industries, related to the most easily plannable part of the So-
viet economy, are the most amenable to centralized decision making.
It is perhaps not a coincidence either that these basic sectors are still
showing the most impressive increases in production. But now other
sectors, in which output-and therefore inputs-is very varied, have
acquired much greater importance: machinery and metal manufac-

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550 AMERICAN ECONOMIC ASSOCIATION

tures, chemicals, consumers' goods of many kinds, and so on. It is


essential not only to simplify the tasks of the planners but also to
enable the requirements of the users to affect the behavior of pro-
ducers and distributors, without giving the central planners the im-
possible job of incorporating these detailed requirements into their
instructions.
A few words are now needed concerning a difficult but vital ques-
tion: the statistical reflection of irrational production or investment
decisions. It is far too easily assumed that these slow down measurable
growth. But do they necessarily do so?
Of course, some do. Unfinished investment projects, which lock up
resources and delay the flow of output, or production holdups due to
nonarrival of materials, reduce growth rates. However, a whole range
of "irrationalities" have no such effects and may even speed up growth
as this is statistically measured. A few examples will illustrate the
argument.
According to a leading Moscow dental surgeon, Soviet dental fillings
remain in Soviet teeth only a very few months; this seems due to
poor-quality materials used in making fillings ("cement").'0 Statistics
reflect unnecessary production of fillings and also very frequent visits
to dentists. The effect of a switch to the production of a more durable,
but apparently not much dearer, amalgam for filling teeth would cause
a decline in net output and, to the marked satisfaction of all con-
cerned, the U.S.S.R. would fall "further behind America" in this sec-
tor of economic life. Similarly, Soviet tires, television tubes, and a long
list of other goods wear out more quickly than might be expected in
the current state of knowledge and technique. Of course, it is true that
American output of certain consumer durables "benefits" from planned
obsolescence and deliberate avoidance of durability. However, in
the Soviet case, which extends over a much wider field, the cause of
the trouble lies precisely in an overconcentration on fulfilling output
targets; i.e., on the adaptation of the product mix to the statistical
measurement of growth. The same point arises when one considers
quality of consumers' goods, the range of choice, and the differences
between consumer demand and what is actually produced. In terms of
welfare or usefulness, it is obvious that in such circumstances sta-
tistics of gross or net output can be misleading, the more so if, to
repeat, there is an inbuilt tendency to produce for output statistics
rather than for need. It therefore also follows that remedial measures
may slow down statistical growth rates, even while welfare can benefit.
For example, to increase the range of shirts or trousers available for
sale is inconvenient from the standpoint of maximizing production in

" Ekonomicheskaya gazeta, Sept. 29, 1962, p. 39.

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TRENDS AND PROSPECTS IN EASTERN EUROPE 551

terms of either thousands of garments or rubles. It must not be for-


gotten that Soviet prices do not, as a rule, reflect degrees of scarcity,
quality, or need, and tend to be changed by a very clumsy procedure
at infrequent intervals-all of which tends to accentuate the extent to
which aggregate statistics can mislead.
Irrational decisions on investments, location, and production may
also be consistent with high growth rates. Of course, in these and in
other respects there is an opportunity cost: resources cannot be de-
voted to other potential uses if they are wastefully deployed on irra-
tional projects. Yet it does not necessarily follow that they could or
would be used to greater statistical advantage. Let us take two differ-
ent examples. Suppose a steelworks is located far from sources of ma-
terials, so that large additional transport costs are incurred, as has in
fact happened in the case of Cherepovets. Or that agriculture is sup-
plied with equipment so inefficient that its use actually raises the cost
of production. The net output of the steelworks and the farms is ad-
versely affected. But in both the examples, costs consist of unneces-
sary goods and services (freight transport, wagons, locomotives, rails,
tractors, steel for all the above, fuel, etc.). These are part of the na-
tional product on any definition. True, the output of end products
of consumers' goods is less than it otherwise would have been. The
effect of the inefficiencies mentioned above is to increase unnecessar-
ily the volume of intermediate products of "producers' goods." In
fact, this may be one of the explanations for the striking contrast be-
tween growth of aggregate output in the U.S.S.R. and the much more
modest growth in living standards.
Of course, it does not follow from all this that the vast bulk of
Soviet output is either useless or defective. Wasteful or uneconomic
practices are, in any event, common enough in Western economies.
The point is that the Soviet economy was organized for rapid growth,
particularly of heavy industry, and that the incentive system was de-
liberately related to measurable growth as a prime objective. But,
since there is an unavoidable element of artificiality in measuring
growth of varied assortments of products, this led to a sizable dis-
parity between the growth of useful output and the growth of output
as measured by statistics." However, the Soviet political leadership
and planners are increasingly aware that growth as such is a mislead-
ing criterion and that many highly desirable objectives of domestic and
foreign policy require the elimination of waste, even if this waste does
"count" statistically as output. Or, to put it another way, there is
consciousness of the high opportunity cost, in terms of planners' pre-
ferences, of present inefficiencies.

"To this extent there is value in M. Polanyi's "Theory of conspicuous production,"


Soviet Survey, Oct.-Dec., 1960, though he seems to me to go much too far.

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552 AMERICAN ECONOMIC ASSOCIATION

Let us now draw a few conclusions from the arguments set out
above. Soviet industrial planning has run into heavy weather, and
everyone knows it and is busily engaged in seeking remedies, suggest-
ing new courses and reforms. It is by no means clear whether they
will be able to find the desired balance between central planning of
essentials and the local operational initiative which they are seeking.
These are matters in the highest degree relevant to the assessment of
Soviet performance in the next decade. We may see a period of experi-
ment which could lead to increased confusion. In the short run, we
may be seeing a victory of the "conservatives"-an attempt to main-
tain tight centralization, with the computor used to facilitate more
speedy working out of consistent material balances and production
plans. This may no more than enable the planners to keep pace with
the constant increase in the volume of work which they have to per-
form as the economy grows. It is hard indeed to inmagine how any
form of centralization can eliminate the major inefficiencies of the
present system, but we would still see impressive increases in indus-
trial output in terms of percentages or tons or meters which can be
used to substantiate the claim that America is being overtaken and
the long-term plans fulfilled. In particular, the seven-year plan, due to
end in 1965, may even be declared fulfilled in 1964. Yet these figures
may be misleading, for reasons already discussed. Some of the output
will be a consequence of inefficient resource utilization. In any case,
the volume of production of basic commodities or aggregate indices
expressing quantities are becoming increasingly irrelevant as a guide
as to whether or when America is being overtaken. Soviet planners
know this, too. Thus V. Dymshits, the rising star among industrial
planners, expressed this thought when he said to the November, 1962,
plenum: "It is time to take seriously the economy and rational utili-
zation of timber. Of course the question is not one of overtaking
America in the volume of timber-cutting, but of using the timber bet-
ter than in America." These considerations apply, in even greater
measure, to consumers' goods and services.
However, it seems hardly likely that major decentralizing changes
in the planning system will be avoided for long. Let us suppose that
the Liberman proposals or some variant of these are adopted, and that
much greater flexibility is introduced into the economy through the
use of incentives based on prices and profits. The net effect should be
to make production much more responsive to demand and eliminate
inefficiencies of many kind's. However, this could have two adverse
effects on growth-one apparent and one real. In the first place, inso-
far as production geared to growth statistics is replaced by production
for need, the statistics of growth may show a slowdown contrasting

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TRENDS AND PROSPECTS IN EASTERN EUROPE 553

with the increase in the relative usefulness of what is produced. It is


hard, indeed, even to attempt to quantify this proposition; yet the
point is surely not an insignificant one. The second adverse effect con-
cerns the likely drift of resources into nonpriority sectors, which do
not promote rapid growth. This is the great fear of the conservatives-
the source of much of their opposition to the Liberman and Nemchi-
nov proposals. On both counts the effect might well be a rise in real
consumer welfare and probably also a decline in the ratio of pro-
ducers' goods to consumers' goods in industrial production (an exces-
sive production of intermediate goods is a direct consequence of many
of the present inefficiencies). The effect on growth rates is hard to
forecast, since among the unknowns are the extent of the microineffi-
ciencies and underutilization of resources which the reforms might
correct and also the strains and confusions which may follow from
them. However statistical success is certainly possible.
The national income targets through 1970 seem somewhat less
realistic than the industrial output goals for the same period. The
principal reason for skepticism relates to the nature of the plan for
agriculture. A number of analysts, including the present speaker, have
written at length about the difficulties which beset Soviet agriculture,
and there is neither space nor the time to repeat these arguments now.
Even according to the official statistics, farm output has increased
very slowly since 1958 and is very far indeed behind plan. Four main
causes may be distinguished: unfavorable natural conditions, inade-
quate incentives, excessive centralization, and insufficient investments.
One might add the complex of problems connected with the troubled
relationship between the authorities and the peasants and the grossly
excessive size of most farms. Unfortunately, centralization, which
does so much harm in agriculture, has been somewhat reinforced dur-
ing 1962. However, one must expect vigorous efforts to improve mat-
ters. For example, there is to be a substantial rise over the next few
years in the output of fertilizer and in the production of much essen-
tial equipment, and for these and other reasons one must suppose that
the rise in agricultural production will be resumed, perhaps amount-
ing on average to some 3 per cent per annum through 1970. However,
this is only a small fraction of the planned rate. Since in 1960 agri-
culture was, according to Soviet official statistics, responsible for just
un'der 21 per cent of the national income, this in itself will cause a
significant shortfall in the latter.
Other spheres of what is known in the Soviet Union as material
production will hardly be in a position to make up the difference. The
volume of 6onstruction will of course increase, though probably not as
fast as industrial production. The relative contribution of freight

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554 AMERICAN ECONOMIC ASSOCIATION

transportation to the national income ought to diminish somewhat


with the elimination of unnecessary crosshauls resulting from an im-
provement of the planning system and economy in the transport of
bulky, solid fuel by rail. On the other hand, the relative importance
of trade is expected to increase, as the plans envisage substantial im-
provement in the still primitive system of distribution. The labor
plans as published imply a substantial relative increase in the num-
bers engaged in trade, and also in so-called "nonmaterial" services,
ranging from hairdressing and laundries to education and health.
This presupposes considerable release of labor from agriculture, and
a comparatively small addition to the industrial labor force, i.e.,
would be conditional upon a major improvement in productivity and
efficiency. Failure in these respects would express itself in acute labor
shortage in relation to the plan objectives, just as shortages of various
materials are and will be indications of defects in planning.
This brings us yet again to the problems of the organization of the
economy, price system, centralization and decentralization of decision
making, investment criteria and the rest of the now familiar head-
aches of the Soviet planners. Here, in my view, lies the main bottle-
neck, the principal unknown, in the assessment of the Soviet economic
performance in the immediate future. I do not think any confident
forecast can be made either about the pattern of reforms or their
consequences. In all probability we would be no better off even if we
had before us all the information available to Soviet planners, as judg-
ing from the very frank discussions that have been published, they do
not know the answer either.12 It should be a very interesting decade
for those who study the development of the practice and theory of
the Soviet planning system.

Anyone who can read Russian is urged to read the debates in Ekonomicheskaya gazeta,
Nov. 3 and 10, 1962.

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