Ratchet Effect

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RATCHET EFFECT

The ratchet effect in the Soviet economy meant that planners based current year enterprise output plan targets on last year's plan overfulfillment. Fulfilling output targets specified in the annual enterprise plan, the techpromfinplan, was required for Soviet enterprise managers to receive their bonus, a monetary payment equaling from 40 to 60 percent of their monthly salary. Typically, output plan targets were high relative to the resources allocated to the enterprise, as well as to the productive capacity of the firm. If managers directed the operations of the enterprise so that the output targets were overfulfilled in any given plan period (monthly or quarterly), the bonus payment was even larger. However, planners practiced a policy of "planning from the achieved level," the ratchet effect, so that in subsequent annual plans, output targets would be higher. Higher plan targets for output were not matched by a corresponding increase in the allocation of materials to the firm. Consequently, over-fulfilling output plan targets in one period reduced the likelihood of fulfilling output targets and receiving the bonus in subsequent periods.

Planners estimated enterprise capacity as a direct function of past performance plus an allowance for productivity increases specified in the plan. Knowing that output targets would be increased, that is, knowing that the ratchet effect would take effect, Soviet enterprise managers responded by over-ordering inputs during the planning process and by continually demanding additional investment resources to expand productive capacity. For Soviet enterprises, cost conditions were not constrained by the need to cover expenses from sales revenues. In other words, Soviet managers faced a "soft budget constraint." The primary risk associated with excess demand for investment was the increase in output targets when the investment project was completed. However, the new capacity could not be included as part of the firm until it was officially certified by a state committee. By the time this occurred, the manager typically had another investment project underway.

In response to the ratchet effect, Soviet enterprise managers also tended to avoid overfulfilling output targets even if it were possible to produce more than the planned quantity. Several options were pursued instead. Managers would save the materials for future use in fulfilling output targets, or unofficially trade the materials for cash or favors to other firms. Managers would produce additional output, but not report it to planning authorities, and then either hold or unofficially sell the output. Due to persistent and pervasive shortages in the Soviet economy, and the uncertainty associated with timely delivery of both the quantity and quality of requisite material and technical supplies, the incentive to unofficially exchange materials or goods between firms was very high, and the risk of detection and punishment was very low. Despite the comprehensive nature of the annual enterprise plan, Soviet managers exhibited a substantial degree of autonomy in fulfilling output targets.

During perestroika, policy makers lengthened the plan period to five years in order to eliminate the pressures of the ratchet. However, in an environment without a wholesale market, enterprise managers were dependent upon their supplier enterprises to meet their plan obligations, and fulfilling annual output plan targets remained the most important determinant of the bonus payments. In practice, lengthening the plan period did not eliminate the ratchet effect.

See also: enterprise, soviet; hard budget constraints