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Full Economic Accounting


In the Soviet economy, industrial enterprises were treated as independent units from a financial management and economic accountability perspective. Under the system of full economic accounting (polny khozrachet ) introduced by Mikhail Gorbachev, each enterprise was to be self-financing in the long run, meeting wage payments and other production costs from sales revenues. Investment requirements identified in the techpromfinplan were to be met from enterprise profits. Full economic accounting was a cornerstone of perestroika, regarded as an important measure to improve enterprise operations.

The khozrachet system used by Soviet enterprises during the 1980s was not new, but the attention paid to enterprise autonomy and accountability during the period of perestroika appeared more serious. Under the system of full economic accounting, unprofitable or "negative-value-added" firms were to go out of business either through a bankruptcy proceeding or by another enterprise taking over the loss-making firm's assets. Prior to perestroika, the khozrachet system gave lip service to self-financing and economic accountability, but in practice, loss-making firms routinely received subsidies from central authorities or industrial ministries redistributing profits from "winners" to "losers."

Gorbachev's full economic accounting system was supposed to end the automatic subsidies provided to loss-makers. It appeared to be the Soviet answer to the question of how to eliminate the "soft budget constraint" described by Janos Kornai as the primary contributing source of scarcity in a planned economy. However, centrally determined prices for inputs received by the firm and output sold by the firm made calculations of cost, revenue, and profit somewhat meaningless from an efficiency or economic accountability perspective. Centrally determined prices did not reflect scarcity, nor did they signal accurate information about the operation or performance of the Soviet industrial enterprise. Consequently, basing the full economic accounting system on these prices, in an environment of persistent and pervasive shortages, provided little opportunity to maneuver Soviet enterprises away from the production of shoddy goods and toward the production of goods that adequately captured the specifications or preferences of customers. Moreover, as planners maintained the bonus system that linked substantial monetary payments to the fulfillment of output targets rather than cost reductions, enterprise managers continued to over-order inputs and hoard labor in order to achieve the planned output targets. As planners continued to set output plan targets high relative to the firm's productive capacity, enterprise managers continued to disregard cost in efforts to fulfill planned output targets. In short, policies pursued by planners sustained the outcome that the extension to full economic accounting was to replace. The absence of bankruptcy law and established bankruptcy proceedings, plus the lack of a mechanism for one firm to acquire the assets of a second firm, also undermined the effectiveness of full economic accounting in improving enterprise operations.

See also: kornai, janos; perestroika; techpromfin-plan


Gorbachev, Mikhail. (1987). Perestroika: New Thinking for Our Country and the World. New York: Harper & Row.

Gregory, Paul R. (1990). Restructuring the Soviet Economic Bureaucracy. New York: Cambridge University Press.

Susan J. Linz

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