Communism, Economic Organization of
Communism, Economic Organization of
Communism, Economic Organization of
I. OverviewAbram Bergson
II. AgricultureJoseph W. Willett
III. Public FinanceFranklyn D. Holzman
IV. International TradeA. Nove
“Communism” is a term with various meanings. When we speak of a modern state as communist, however, we usually mean that political power there is concentrated in a single party, which is typically controlled from above through a bureaucratic structure and has gained, and ultimately maintains itself in, power by authoritarian means. Elections to public office, so far as they are held, are thus apt to have only a relatively formal character. Power was often seized initially, however, with appreciable popular support and the ruling party adheres to a social philosophy derived from Marx. The nature of this ideology is subject to continuing reinterpretation (and in a manner which would sometimes have surprised Marx), but access of the party to power has in fact been followed by extensive nationalization of private property, and much of the means of production, at least in the more strategic sectors, such as industry and transport, comes sooner or later to be publicly owned. The party also seeks to direct economic life generally.
These are cardinal features of the contemporary communist state, though persons considering themselves communists would no doubt find fault with this characterization. Curiously, in communist theory strict usage also dictates that a society that we would designate communist should be referred to otherwise. Depending chiefly on the degree of economic advance in it and the extent of socialization as measured by public and cooperative ownership, such a society is called either socialist or a people’s democracy. As for the term “communism,” this is reserved to describe a stage of social development which admittedly is yet to be achieved. This is the stage depicted long ago by Marx (Marx & Engels [1875–1891] 1938, p. 10), one which will be realized “after the enslaving subordination of individuals under division of labor, and therewith also the antithesis between mental and physical labor, has vanished; after labor from a mere means of life has itself become the prime necessity of life; after the productive forces have also increased with the all-round development of the individual, and all the springs of cooperative wealth flow more abundantly.” Only at this stage “can the narrow horizon of bourgeois right be fully left behind, and society inscribe on its banners: from each according to his ability, to each according to his needs.” [See Marxism.] In this sense communism represents a form of Utopia where there is free sharing of material goods. Such a society has also been called communist in the West, but our concern here is with the modern communist state and particularly with the organization of economic life in such a state.
The Soviet model
Communism first came to hold sway in a modern state in Russia after the revolution of November 1917. Moreover, other countries where this social system has since come to prevail have tended in economic affairs to emulate the U.S.S.R. They have also diverged from the Soviet model, sometimes radically, but the organization of economic life in the U.S.S.R. remains of particular interest.
In the U.S.S.R. public ownership of the means of production is indeed extensive. Such property was nationalized in a wholesale way shortly after the revolution, and public ownership has been extended even further since that time. Thus, a pervasive feature is the legally defined public enterprise (predpriiatie), which administers a publicly owned plant or other works in behalf of the government. Moreover, even where ownership is not public, the difference almost inevitably tends to be perfunctory. To a marked degree this is true even of the collective farm, which with its mixed public and cooperative ownership represents by far the chief departure from public ownership as such.
Ownership other than public, however, also exists in the nonfarm sector, on which attention is focused here, and is sometimes of some magnitude. Thus, the so-called consumers’ cooperatives conducted 28.1 per cent of all retail trade in 1964. Familiar to all tourists to the U.S.S.R. is the collective-farm market, where the government allows the collective farm to sell surpluses which it does not distribute to its members and the members in turn to sell such as they wish of distributed supplies and of the produce from small household plots assigned them. The collective-farm market thus has much of the character of a peasant bazaar and represents another departure from public enterprise in retail trade. Housing is usually thought of as a consumer good rather than a means of production, but it should be observed that the government has also permitted extensive private ownership of such property.
Given public ownership of the means of production, economic life in a communist state might still be organized in various ways. The economic system of the U.S.S.R. has long been characterized by three other basic features. The first is the pervasive bureaucracy. Public enterprises are directed by an extraordinarily complex administrative apparatus beginning with the hierarchy of general organs of government conducting public affairs in all spheres: the Council of Ministers in Moscow, associated legislative and judicial organs of the all-union government, and corresponding bodies in 16 constituent republics and subordinate local administrations. In the administration of public enterprises in different economic sectors use has also been made of further complexes of specialized agencies. In industry, for example, authority over public enterprises has been vested at different times in such agencies as all-union and republican branch ministries and their subordinate departments and all-union, republican, and regional economic councils. Sometimes several enterprises are administered through a further agency, the firm.
The above are agencies through which general organs of government exercise operational control over public enterprises in different sectors. In the administration of such enterprises, use is also made of still other complexes of agencies of a more functional or staff nature, though inevitably these often have duties not very different from those of agencies exercising operational control. Among the more important bodies with such staff and functional responsibilities are the State Planning Committee of the U.S.S.R., or Gosplan, which, together with corresponding republican and local agencies, has major responsibilities for formulating and observing the fulfillment of economic plans; the Central Statistical Administration, which compiles and publishes statistical data; and the Ministry of Finance and the State Bank, which are concerned with money and finance.
While directing public enterprises in different sectors, general organs of government also oversee cooperative and in some degree even private economic activities. For this purpose, they rely on Gosplan and other agencies with functional and staff responsibilities in the public sector and sometimes, though not always, on those exercising operational control over the public sector. Consumers’ cooperatives, however, are nominally administered by an apparatus of their own, at the apex of which is Tsentrosoiuz.
The second basic feature of the Soviet economic system is the all-embracing complex of plans which are intended to guide the economy. The most famous of these is the Five-Year Plan, the first of which went into effect in October 1928. But the Five-Year Plan is only one of a number of programs that the government has employed in directing economic affairs. From time to time it publishes plans of a very long-run sort, the most recent of these being the twenty-year program that avowedly is to establish “a material basis for communism” by 1980. Among plans of shorter duration, the last that was promulgated for a five-year interval was to have run from 1956 to 1960. This was superseded by the Seven-Year Plan, which was formulated for the years 1959 to 1965. Long-term plans are supposedly reflected in the plan drawn up for still another interval, the year. It is the latter plan that bears most immediately on current operations. For purposes of administration, however, the annual plan is further broken down into quarterly and, at least in some spheres, monthly installments.
Whatever the planning interval, ordinarily there is not one program but a complex of programs of varying scope and detail affecting operations at different bureaucratic levels. Thus, in industry there are programs for the U.S.S.R. as a whole, for different regions and branches. Finally, there is also a plan for each enterprise, that for the year being the tekhpromfinplan, or “technical-industrial-financial plan.”
The third feature is perhaps not nearly as noteworthy as the first two, but it too is basic. This is the monetary regimen. Transfers of goods and services not only between households and enterprises but between one enterprise and another ordinarily take place at established money prices. The household, in other words, is paid money wages for its labor by the enterprise employing it, and the household in turn is charged money prices for the consumer goods supplied it, though some goods, chiefly education and health care, are by and large supplied the household without charge. Similarly, each enterprise pays other enterprises for goods it obtains from them and is paid, in turn, for goods it supplies. Within the enterprise, records are kept of costs and income, and it is considered not at all incongruous that in a communist state the resulting profit is also calculated.
Though they are largely supplied the household free of charge, education and health care generally are of such a nature that they might also have been made available at money prices. In addition to such “communal services,” however, there are various “collective goods” (defense, internal security, etc.) which because of their nature must be made available to the community at large without direct charge. In the Soviet Union the government finances all such activities through various money taxes and other levies on both public and other enterprises and households. Of these, the chief levy by far is the notorious turnover tax (nalog s oborota). While imposed in different ways, this is in effect a sales tax. The government has also seen fit to finance other activities through its budget rather than through the monetary regimen. Principal among these is much of the new investment of public enterprises.
The monetary regimen described represents but a facet of a larger phenomenon, the system of khozraschët, or economic accounting. This system, other features of which will be discussed below, provides a basis for a distinction that otherwise might be difficult to make, that between economic agencies that may be viewed as institutions constituting the government as such and economic agencies acting on its behalf in the conduct of the public sector. Thus, under the khozraschët system the public enterprise usually is expected to finance out of its own revenue and hence without recourse to the government budget much or all of its current expenditures. Sometimes this has also been true of agencies immediately superior to the public enterprise, but generally such organizations have their current expenditures financed by appropriations from the government budget. As a rule, these budgetary organizations seem properly viewed as government institutions as such, while the former extrabudgetary organizations are seen as agencies acting on the government’s behalf. In the U.S.S.R., extrabudgetary organizations are often referred to as being on khozraschët, or as khozraschët organizations.
How the system functions
Given the foregoing cardinal features, how does the system work and how well? The manner in which the economic system of the U.S.S.R. functions is a large, complex, and still often obscure theme. We can do little more than suggest the more significant patterns of operation that may be discerned.
An outstanding feature of the economic system is the notable centralization of decision making, but authority is unavoidably dispersed in some degree. The economic plans become increasingly detailed as they descend the administrative ladder, but even the agency at the bottom, the public enterprise, must be allowed some discretion in their implementation.
Furthermore, contrary to a common supposition, the plans are not simply the creation of Gosplan, presented in final form for implementation to subordinate agencies exercising operational control. Nor, though this is somewhat nearer the mark, are the plans simply the creation of Gosplan with due regard to directives of the party leadership and the all-union Council of Ministers. Rather they are the product of an intricate administrative process in which not only Gosplan, the party leadership, and the all-union Council of Ministers but all subordinate agencies concerned participate. Targets formulated for each administrative level are subject to negotiation between those in posts of responsibility, their superiors, and, especially at higher levels, Gosplan. Sometimes administrators at one level take the initiative in proposing targets to superiors. It is also the task of administrators at any level to elaborate general directives into more detailed plans.
So far as decision making is decentralized, it must, of course, be subject to controls. Among these controls, first and foremost are the plans themselves. The annual plan particularly serves as a “success criterion” for managerial performance at all levels, and managerial personnel, by all accounts, act accordingly. Among the many targets in the plan, management has focused chiefly on that for total output, for apparently it has been especially in terms of performance in this respect that success has been judged. By fulfilling and overfulfilling the target for output, the manager of the enterprise and his chief assistants might earn sizable bonuses. Since 1959, however, priority has often been accorded another, related target, that for the reduction in costs per unit of output, and bonuses for management of the enterprise have been determined correspondingly.
Whether the concern has been with output or costs, managerial personnel understandably have sometimes been more interested in fulfilling than in overfulfilling the target, for with overfulfillment they may only be confronted with still higher targets in the future. Understandably, too, zeal in fulfillment of the plan does not carry over into its formulation. A recurring complaint in the U.S.S.R. concerns the “safety factor,” which the management of the enterprise seek to establish for themselves by negotiating for low plan targets. The agency superior to the enterprise may try to counter this proclivity, but this agency too has reason to seek to establish a safety factor in negotiating with agencies at still higher levels.
As a plan target, total output usually must be calculated by the aggregation of a variety of products in terms of their prices, and such calculation must also underly that of the further target for the reduction in cost per unit of output. In seeking to fulfill the plan, therefore, enterprise management has had to consider the relative prices of different products, and, as will be discussed below, such prices have their limitations. Partly for this reason, as incessant complaints in the Soviet press testify, the resultant assortment is very often odd. Enterprises have reportedly produced, for example, an inordinate output of small-sized men’s shoes relative to large-sized boys’ shoes, of bandage cloth relative to shirt cloth, of large electric bulbs relative to small, and so on. Assortment of course is itself subject to plan targets, but managers apparently find it expedient to subordinate such targets in the interest of fulfilling that on total output or on cost per unit of output.
Quality too is a variable subject to controls, but these have been especially difficult to enforce. In the U.S.S.R. complaints about defective quality are hardly less numerous than those on violations of the assortment plan.
Reference has been primarily to the public sector and to industry, but working arrangements of a broadly similar sort usually prevail in the nonfarm sphere generally.
At superior levels, especially in Gosplan, a cardinal concern must be with coordination. This is a task with many facets, of which one of the chief is industrial materials supply, the coordination of targets for industrial goods used as materials in industry. For important products of this sort, Gosplan applies its famous “method of balanced estimates.” Essentially a balance is drawn up of supplies and requirements for each good. Supplies are calculated to reflect provisional targets for production on the part of supplying enterprises and for other availabilities. Requirements similarly are calculated to reflect provisional targets for production on the part of consuming enterprises and for other dispositions. Where supplies and requirements are found not to balance, the plan is suitably adjusted to remove the disparity. Such adjustments for any one product, of course, might necessitate further adjustments for others, and these might do so for still others. But adjustments apparently are imposed primarily where such secondary effects will be avoided: on supplies allotted to final uses, on production targets of supplying enterprises without any accompanying change in material inputs, or on material inputs of consuming enterprises without any accompanying change in their production targets.
In the latter cases, the adjustments in effect entail changes in material input coefficients. Under khozraschët such coefficients are supposed to take into consideration the possibilities of economizing money costs through the substitution of one material for another, and so far as this is done in practice, the coefficients must depend on the relative prices charged for different goods. Yet prices of industrial materials tend to be fixed simply to cover average costs in a branch (including, under Soviet accounting practice, charges for labor, materials, and depreciation, but not for interest on fixed capital), together with a small “planned profit,” and when once fixed are changed only infrequently. To some extent, however, such prices are varied in ways to restrict disparities in supplies and requirements. In effect, while coordination is achieved primarily by direct administrative controls, the task is sometimes eased by use of indirect market controls.
Unavoidably, however, market controls have a more important place in certain other spheres. The numerous and sometimes draconian restrictions which the government at different times has imposed on the workers’ freedom of choice as to occupation and place of work make a story in themselves, but such of these as survived the war were very largely abandoned by 1956. Since then the worker has enjoyed substantial freedom in these choices, though there are still some impediments (for example, administrative assignment of college graduates to jobs during an initial three-year period). In order to recruit workers in required numbers in different occupations and branches, therefore, the government relies chiefly on a money wage system under which rates of pay are systematically differentiated between occupations, depending on such features as skill, complexity, and arduousness, and between branches, depending on their social importance. The worker, of course, also has much discretion over the effort he exerts in any pursuit. To control this aspect, the government makes extensive use of piecework (in 1961 about 60 per cent of the workers in industry were remunerated on this basis) and premium systems.
Similarly, in distributing among households goods for which money prices are charged, the government has relied on rationing during protracted intervals, but the last such period was brought to a close in December 1947. At that time the government re-established an open market where households could choose freely among different consumer goods, and such a market has prevailed ever since. At the same time the government relies on prices to limit consumer demand to available supplies. However, for various reasons the government has more often than not held prices below clearing levels. Hence, such familiar features exist in the U.S.S.R. as unavailability of supplies, queues, and the premiums over official prices prevailing in the collective farm market. In the collective farm market, prices are unregulated by the government and thus tend to be fully responsive to pressures of demand.
Technology and production capacity
In addition to coordination, superior agencies are largely responsible for the determination of technology, including the crucial aspect of capital intensity and of production capacity in different branches. Capital intensity has been settled on various bases and, for a long time, often without reference to any interest charge on capital. If by additional investment a given output could be produced at less cost, exclusive of interest, the investment supposedly was to be made, at least so far as the available supply of capital permitted. Recently, however, increased use has been made of an interest-like criterion, though under another name. Thus, for any two projects under consideration, a coefficient of capital effectiveness is calculated by comparing the difference in their respective capital requirements with the corresponding difference in current operating costs. The project requiring the greater volume of capital is chosen only if the coefficient of effectiveness exceeds some rate taken as a norm. While the reciprocal of the coefficient of effectiveness is referred to in the U.S.S.R. as a “period of recoupment,” this differs from the payoff period familiar in Western business practice insofar as in the Soviet Union operating costs include depreciation expense.
The responsible authorities must somehow take into account also that, fixed in the manner described, prices of industrial materials in terms of which capital outlays and operating costs are calculated fail to reflect “scarcity values.” This is also true of the prices of durable capital goods, which are fixed similarly. In addition to the coefficient of effectiveness, therefore, administrators have been told in a methodological handbook issued by the Academy of Sciences to consider pertinent “physical indicators, characterizing the productivity of labor …, expenditure of fuel, power, materials, utilization of equipment and productive space, application of progressive construction designs, and so forth” (Bergson 1964, p. 263).
The principles applied in the determination of production capacity in different branches are not very clear. Among industrial branches producing substantially for household consumption, the responsible agencies apparently consider the divergence of prevailing retail prices from proportionality to average branch costs, though such a divergence may be viewed as “normal” (for example, for children’s things prices are viewed as properly low). The degree to which supplies to households have fallen short of their demand at the prevailing prices is also considered. Recently, consideration has been given to “rational norms” of consumption for “healthy, culturally developed people,” which have been worked out by the Nutrition Institute of the Academy of Medical Sciences and by other agencies.
The criteria used elsewhere must be similarly varied and often, too, not very incisive. Among basic industrial branches, for example, steel manifestly has long been an unquestioned favorite, but in November 1962 Khrushchev attacked Gosplan for allowing “steel blinkers” to blind it to economies that might be realized by use of competing materials, especially plastics, and apparently the latter products are now receiving more attention— though Khrushchev has been criticized in turn by his successors. There are reasons to think that at one time Gosplan also wore “coal blinkers,” but for some years now the Russians have been shifting to the more extensive use of oil which their resource position permits.
Last but not least, the share of the community’s total output that is allotted to capital formation is also determined by superior agencies. Indeed, the very highest authorities seek to reserve this matter almost exclusively for themselves, and on the whole probably succeed. A cardinal concern obviously has been to provide the wherewithal for rapid growth and in this way to permit realization of the Soviet imperative “to overtake and surpass” the advanced capitalist countries. Pursuit of this goal avowedly reflects various more basic concerns. Thus, according to its latest (October 1961) program, the party seeks in economic affairs “to develop the production of material goods for the highest satisfaction of all needs of Soviet man,” “to win the economic competition with capitalism,” and “to maintain the defenses of the country at a level allowing us to smash any aggressor” (Khrushchev 1961, p. 3).
How the party has weighed these diverse aims in practice must be judged from facts such as the following: under the Five-Year Plans the Soviet economy has indeed grown rapidly, though, according to independent calculations, not so much as official claims suggest. During the period from 1928 to 1960 the gross national product of the U.S.S.R. grew at an estimated average rate of 4.5–6.3 per cent a year, or by 5.2–7.3 per cent if the entire growth is imputed to the 28 peacetime years. Of the total output measured in constant prices, the share devoted to investment rose over the same period from 12 per cent to perhaps 35 per cent, while that devoted to personal (as distinct from communal) consumption declined from 80 per cent to about 45 per cent. Though the share of consumption has thus fallen sharply, with output as a whole increasing as it has, the Soviet household has been able to realize a marked increase in standards. For the most part the increase has occurred only very recently, since the years under Stalin were years of denial. The average Russian in 1962 still enjoyed a per capita consumption of but $485 per year.
While seeking rapid growth, the U.S.S.R. has also sought to limit its dependence on foreign countries, particularly capitalist ones. Since Stalin this policy of autarky has been relaxed, but in 1962 exports still represented but 2.7 per cent of the national income. Hence, the U.S.S.R. must produce at home the great bulk of the capital goods required to realize the high rates of capital formation. Also production capacity must vary correspondingly as between consumer-goods and investment-goods branches. As the rate of investment has risen, therefore, the output of investment goods necessarily has increased more than that of consumer goods. In the U.S.S.R. this disparity of tempo has been described as an economic law. Often, however, the reference is actually to divisions within industrial output rather than within total output.
As the foregoing bare bones only begin to suggest, superior agencies in the U.S.S.R. bear onerous responsibilities. That the patterns described sometimes seem of a rather arbitrary sort must be read partly in this light. Indeed, as the activities of the superior agencies are examined more closely, arbitrariness only becomes the more manifest. In a modern, complex economy such as that of the Soviet Union, the responsibilities might have been onerous in any case, but they become the more so because of the pervasive limitations in money prices. Given these limitations, superior agencies must somehow digest and react to even more information than would confront them otherwise, information not only of a summary, monetary sort but of a detailed physical sort. Alternatively they must risk miscalculation by relying on the former alone, and this too occurs.
Labor theory of value. In the economy generally, to what extent have operational patterns conformed to the labor theory of value? [SeeValue, labor theory of.] In the U.S.S.R. the government has been held to be the master rather than the servant of “economic laws,” and among the laws in question is Marx’s “law of value.” Yet the law has a place, though apparently now a diminishing one. Consider, for example, the practice of calculating costs without any allowance for interest on fixed capital and also the related practice of neglecting such a charge in the choice of technology, though here ideology seems by now to have been largely vanquished by scarcity. The labor theory is often not especially incisive regarding economic calculation, but it has tended to stand in the way of its more incisive competitor, marginal value theory as now understood in the West.
In economics, how well an economic system works usually is taken to turn primarily on its efficiency, or the effectiveness with which available resources are used to produce wanted goods and services. The Soviet economic system manifestly must often leave something to be desired from this standpoint. This is true of the nonfarm sector, and needless to say, the performance is no better when agriculture, particularly that part under the notorious collective farm, is considered. But the chief rival system, Western private enterprise, has its limitations, too. These include, perhaps most notably, monopolistic business practices; trade union restrictions; distorting government measures, including farm controls, sales and income taxes, and tariffs; and cyclical and other extrafrictional unemployment. Which of the two systems is the more efficient?
In speculating about this complex question, we may consider, in addition to the sources of waste in the two systems, some related quantitative evidence: in 1960 the net national product of the U.S.S.R. per unit of factor inputs, including labor and reproducible capital, was less than one-half that of the United States. Depending on the method of measurement, the Soviet output per unit of factor inputs might be less than one-third that of the United States. Reference is to the net national product less certain items for which a satisfactory comparison of productivity is infeasible: personal services in education, health care, government administration and the like, and housing services. Correspondingly, the labor and capital employed in providing these services are omitted from factor inputs.
However, factor productivity and economic efficiency are not the same thing. Without any difference in economic efficiency, two economies might differ in factor productivity as calculated because of differences in labor skill, quality and quantity of farmland, and so on. Then, too, comparative data on factor productivity reflect the comparative volume of output but not how desirable it is in structure. The comparison of factor productivity has been held, however, to create a presumption that Soviet communism is less efficient than Western private enterprise, at least as the latter is experienced in the United States (Bergson 1964, pp. 340 ff.).
In the U.S.S.R., however, has not the cardinal concern been growth rather than efficiency? And from this standpoint is not the Soviet performance impressive after all? As we saw, the Soviet economy has grown rapidly under the Five-Year Plans. At least this was so until around 1958; since that year the tempo has fallen. But for the inefficiency, however, the government might have been able to invest and hence expand output still more, though the intense pursuit of growth no doubt has sometimes been itself a cause of inefficiency. Even from the government’s standpoint, therefore, efficiency is the more basic standard. What goods are wanted and to what extent depends, of course, on the ends sought, and hence so must efficiency. But the Soviet economy must often fall short of its potential to produce goods of any sort that might be desired. Moreover, the ends sought in the U.S.S.R. are special, but not so much as is sometimes supposed. Thus, the government values investment goods highly, but obviously it also values consumer goods in some degree.
Rapid growth, of course, does not itself signify efficiency—though it is sometimes maintained that it does. Rather, growth in the U.S.S.R. has been induced by various factors different from, though not unrelated to, efficiency. The high tempo at most testifies not that efficiency is high but that it probably is rising from an initially low level. Among the chief growth-inducing factors are the high rate of investment, which has been the more potent because of the relatively limited capital stock initially available; the extraordinary opportunities to borrow Western technology, which have compounded still more the effect of the high rate of investment; and probably the opportunity to raise labor quality rapidly from an initially low level.
Is not the economic system, however, in the process of change? And are not new measures even now being introduced or considered that will raise its efficiency? The Soviet economic system has always been in flux, but lately it has been especially so. While we have sought to describe it as it has prevailed recently, interesting changes are in progress and further ones no doubt are in the offing. Among other things, in order to facilitate planning, the government is beginning to use mathematical techniques and electronic computers. Also, industrial enterprises are being given greater autonomy, with sales and profitability becoming major criteria of their success. The government is also reforming financial practices and industrial prices. But how such changes might affect efficiency is a question which must be left for the future to answer.
In addition to efficiency, how well an economic system works is usually judged in terms of the equity of income distribution. Here too the precise standard to be applied depends on the ends. Moreover, while the degree of inequality of incomes is of interest from the standpoint of almost any ends, this is a matter that is difficult to judge in the case of the U.S.S.R. because of the government’s secrecy regarding earnings, especially of the more favored groups. As we have noted, however, wages are differentiated in a manner more or less similar to that obtaining under private enterprise. Sizable differences in earnings have been reported in many spheres. The inequality of incomes generally must be less than in, say, the United States, but at least if account is taken of taxes and perquisites, one wonders whether the difference is really very marked.
The merit of an economic system such as that of the U.S.S.R., where public ownership is predominant, has long been a subject of theoretic debate in economics. So far as we may judge from the Soviet experience to date, critics of this system would seem closer to the mark than proponents. As research proceeds, it may be hoped that we will gain further insight into this weighty theme.
The U.S.S.R. has served as a model in economic affairs for other communist countries, though they have sometimes diverged markedly from it. Among the more important of such countries, those in eastern Europe—with the exception of Yugoslavia —have economic systems that are broadly similar to that of the U.S.S.R. However, private enterprise in agriculture in the form of peasant farming is still predominant in Poland. This is also true in Yugoslavia, where, in addition, decision making is relatively decentralized. Correspondingly, there is greater reliance than in the U.S.S.R. on indirect market controls. Reforms entailing increased decentralization and reliance on markets are also being introduced elsewhere in eastern Europe and reportedly are to be especially sweeping in Czechoslovakia and Hungary. Despite doctrinal differences with the U.S.S.R., China continues to organize its economy in a manner often similar to that of the U.S.S.R., but the complex and rapidly shifting scene there defies easy summarization.
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Until very recently agriculture has nearly always been ranked toward the bottom in the ordering of priorities in communist economies. The leaders of communist states have generally decided that rapid economic growth and the development of economic power required a concentration of resources in industry, and especially in heavy industry. In pursuing their goal of rapid growth of heavy industry, they have demanded great sacrifices from their peoples and have tended to neglect the development of agriculture, which produces consumer goods and raw materials. Capital for the development of industry has been obtained from agriculture by confiscation of land and compulsory deliveries of farm products to the state, often at prices below cost. Exports of agricultural commodities have been used to pay for imports of industrial equipment. Investment and current inputs into agriculture have been severely restricted, and the movement of the better educated and more productive labor from the countryside into industry has been fostered.
In recent years, the communist leaders have made some revisions in their economic priorities. In the Soviet Union the stagnation of agriculture had become a threat to the future rate of industrial growth by the time of Stalin’s death, and during the period 1954–1958 Khrushchev sought to achieve better balance between agriculture and industry. The proportion of total investment going to agriculture was increased, the prices the government paid farmers for their products were raised, and a number of changes in the organization of agriculture were made. Similar changes were reflected in the policies of the European satellites.
In the Soviet Union a large share of the increased resources devoted to agriculture during this period went into the expansion eastward into the new lands. These measures, together with good weather, brought about a substantial increase in Soviet agricultural output by 1958. However, since 1958 there has been little increase, and in 1961 and 1962 further reorganizations of the agricultural administrative apparatus were undertaken in an attempt to stimulate the lagging agricultural sector.
In Communist China a drastic drop in farm output after 1958 and the spectacular collapse of the “great leap forward” in 1960 brought about the adoption of more realistic measures, with a shift in priority from the development of heavy industry to the improvement of agriculture. Collectivization was relaxed, and measures were undertaken to provide greater incentives for farm production.
Domestic importance and foreign trade. Agriculture is a major sector of the economy in all countries under communist rule. In the Soviet Union agriculture uses about 45 per cent of the total labor force and in recent years has received about 15 per cent of the total investments, while producing about a fourth of the national income. In the European satellites the proportion of the labor force engaged in agriculture ranges from about 18 per cent in East Germany to over two-thirds in Rumania, while agriculture’s contribution to the national income ranges from less than 10 per cent in Czechoslovakia to one-third in Bulgaria. In Communist China more than 80 per cent of the labor force is occupied in agriculture, which produces about 50 per cent of the national income. North Korea and North Vietnam are also primarily agricultural countries.
Farm products and products manufactured from raw materials produced by agriculture are important in the trade of the communist countries. In the period 1955–1961 agricultural commodities accounted for about 21 per cent of the Soviet Union’s total exports and 25 per cent of its total imports. Grains and cotton have made up the bulk of the Soviet Union’s exports of agricultural commodities. Although normally a large grain exporter during the postwar period, mainly to the European satellites, in 1963 the Soviet Union became a net importer of grain. This was a result of a very poor grain crop following several mediocre harvests, which probably had caused a decline in stocks of grain.
China has exported farm products and products manufactured from agricultural raw materials to pay for imports of machinery and heavy industrial equipment. Until the ideological break with the Soviet Union the trade of Communist China had been oriented mainly toward the Soviet bloc. However, the Soviet Union’s imports of farm products from China declined 90 per cent between 1959 and 1961. Since 1960 China has been forced by serious food shortages to import large amounts of grain, mainly from Western countries.
Organization in the Soviet Union. Between the revolution of 1917 and the year 1928 small-scale peasant farming predominated in the Soviet Union, with only a very small proportion of farm labor working on state and collective farms. In 1929 Stalin initiated mass collectivization of agriculture, which was carried through rapidly by various means of coercion, including mass deportation and heavy taxation. In the early 1930s the present forms of agricultural organization became dominant. The collectives were given a legal basis by the Collective-Farm Statute of 1935, which remained essentially unchanged until 1956.
Agriculture in the Soviet Union is made up mainly of the world’s largest farms (the state farms and the collective farms) and some of the world’s smallest agricultural enterprises (tiny private plots that belong for the most part to farm workers). There is a less important group of medium-sized farms owned by factories and other government organizations.
The collective farms, which occupy nationalized rent-free land, are nominal cooperatives with elected chairmen and management committees. However, the state and party exercise close control over the collectives, and party officials can readily determine the “election” of the chairman as well as reprimand or dismiss him (Nove 1961, p. 47).
The collective farm is the dominant form of agricultural unit in the Soviet Union. However, the proportion of the total sown area encompassed by collective farms declined from 84 per cent in 1953 to about 60 per cent in 1960 because of the conversion of collectives to state farms and to the predominance of state farms in the new lands to the east. As a result of the amalgamation into larger farms and the conversion to state farms the number of collective farms also declined, from more than 250,000 in 1950 to 53,400 in 1960. In 1960 the average collective farm encompassed nearly 6,800 sown acres and was worked by the labor from nearly 400 households.
The collective farmers are not paid wages as are workers in state-owned enterprises, but rather are residual claimants to the income of the collectives after the state’s claims, production expenses, and investment needs have been met. The share which the collective farmer receives varies with the skill required in the work he performs. In recent years steps have been taken to distribute the collective farmers’ share in quarterly or monthly payments rather than in a single annual payment.
Until 1958 most of the farm machinery used on the collectives was operated by state-owned Machine Tractor Stations (MTS), which supervised much of the collective farms’ activities and performed machinery work on contract. The farms paid for the machinery services of the MTS with produce. In January 1958 it was decided to liquidate the MTS and sell their machinery to the collectives (the kolkhoz).
The state farm, or sovkhoz, which is considered in the Soviet Union to be ideologically the most desirable form of organization for agriculture, is becoming more important, accounting for a third of the total sown area in 1960. The state farms are owned by the state, and the farm workers are paid wages like factory workers. State farms tend to be more specialized than collective farms. They have a higher labor productivity, mainly because they have received most of the investment which the state has made in agriculture (Walters 1963, p. 8), have not been burdened with excess labor, and have offered higher incentives than have the collectives. The state farms are huge organizations, with an average in 1960 of nearly 22,500 sown acres and about 750 workers per farm.
The private plots which the farm workers are permitted to cultivate and the livestock which they own are remnants of legal private enterprise in the Soviet Union. The plots are considered to be ideologically undesirable but are tolerated for pragmatic reasons. Although they occupy only a little more than 3 per cent of the total sown area, they produce a significant share of the total output of some important items of food. The farmers and their families consume part of the produce from the plots, and the remainder, when sold—largely in free markets—contributes a significant share of the farmers’ money income. The ideological unpalatability of the private plots and their competition for the labor time of the farmers have at times prompted the authorities to limit their operation through acreage restrictions, taxes, and other means.
Organization in eastern Europe. With the exception of Yugoslavia and Poland, the organization of agriculture in eastern Europe is generally patterned after that of the Soviet Union. In Yugoslavia and Poland, although collectivization of agriculture remains a long-run goal, 85 to 90 per cent of the farmland still is privately farmed. In the rest of eastern Europe a drive to complete the collectivization of agriculture, which had lagged in several countries, has been undertaken in recent years, and by 1962 the collectivized sector encompassed about 90 per cent or more of the arable land. Collectivization has been accomplished by the expropriation or purchase of privately owned land, taxes on private farmers, and a preferential policy toward the collectivized sector in the allocation of inputs and in the prices paid by the state for farm products (U.S. Department of Agriculture … 1964, p. 100).
Agriculture was socialized slowly in Poland, and despite great effort less than one-fourth of the total agricultural area was socialized by the middle of 1956. After the disturbances of October 1956, most of the collective farms were dissolved and the total area in state farms was reduced.
In Yugoslavia forced collectivization was abandoned in 1951. Most of the collective farms were disbanded by the end of 1953, and by 1962 the socialist sector occupied only 12 per cent of the arable land. Peasants’ farms averaged less than 12 acres in size in 1962. They were limited by law to a maximum of 25 acres. Expansion of the socialized area in Yugoslavia is accomplished by means of the purchase of privately owned land by collective and state farms.
Organization in Communist China. The agricultural policy of China has been designed to increase agricultural output (both for export and for feeding the growing urban population) with minimum state investment, while maintaining central political control over the countryside. The Chinese communists have made strenuous efforts to achieve a breakthrough in agricultural as well as in industrial production. During the decade from 1950 to 1960 the leaders experimented with various combinations of centralized and decentralized control of the rural areas. China’s problem was more difficult than that facing the Soviet Union before collectivization in that Chinese agriculture did not produce substantial surpluses which could readily be expropriated by the state.
By 1952 the landlord class was essentially eliminated and their land was distributed to poorer peasants. In 1954 and 1955 compulsory delivery quotas were established to provide the state with more farm products, and by the winter of 1955 the regime had decided on full collectivization.
In 1955 and 1956 private farmland was abolished and cooperatives were established with party cadres in charge. It was expected that the cadres would ensure the meeting of the state’s needs for agricultural commodities, set aside larger shares for investment, and make effective use of seasonally unemployed labor in the construction of roads, irrigation works, and other projects. It was thought that collectivization would permit more rapid introduction of improved technology and more efficient use of the land (Perkins 1964, p. 219). Also, collectivization was desirable for political and ideological reasons.
Although regulations permitted the continuance of private plots, their size and the time available to work them were reduced, and the free market was closed. The output and availability of products from the private plots fell so drastically that the free market was soon reopened, however, and the size of private plots was increased. During 1957 some of the larger cooperatives were reduced in size and some authority was shifted to the subunits, the production brigades.
The net effects of the collectivization and centralization were unimpressive. In addition to the fostering of bureaucratic mismanagement, the incentives of the individual farmers to produce had been affected adversely.
In 1958 the regime embarked on the rapid establishment of the communes, a more radical form of organization of agriculture. Where the average co-operative had two hundred families, the typical commune had four thousand to five thousand. The communes took on additional functions, including responsibility for expansion of large-scale rural construction projects and control over local commercial, credit, and manufacturing establishments. Private plots and the free market were eliminated.
The communes were not subjected to effective financial or administrative restraints while the campaign atmosphere prevailed, and the pressure for spectacular results was such that ill-considered projects and procedures were widely adopted. Extreme demands were made on the farm people, and fantastic claims of success were made. Responsibility for the collection of statistics on agricultural production was given to the communes, and the statistics became extremely unreliable. The communes widened the distance between the workers’ efforts and their rewards even further than did the cooperatives because wages were established on the basis of the income of the entire commune (Perkins 1964, p. 231).
Despite the shortcomings of the communes, the harvest of major crops in 1958, aided by excellent weather, was good. However, the regime later admitted that early claims of agricultural production were greatly exaggerated. The unusually good harvest of 1958 and the lack of reliable statistics made it difficult to ascertain the effects of the establishment of the communes, but by early 1959 the regime decided that output of the products formerly grown on the private plots had been seriously affected. The rural markets were reopened, but with tighter controls than formerly, and in 1960 private plots were restored.
The revolutionary development of the communes ended with the restoration in 1961 and 1962 of agricultural ownership and control to lower levels and with a decision to cut back on investment in heavy industry in favor of agriculture. Controls over production decisions and wage units were passed down to the subunits of the communes, until the rural institutions and levels of authority were essentially similar to those existing before the establishment of the communes. Although the communes remained as paper organizations, they had been stripped of their significant functions (Perkins 1964, p. 234).
Marketing and prices. In essence, communist economies are guided by central authorities toward centrally determined goals. However, managers of enterprises must necessarily have a degree of autonomy, especially in day-to-day operations. Although the managers are generally not free to react to prices to maximize profits, prices are expected to provide incentive and thus to assist in guiding the performance of the economy. But the function of prices is severely restricted, and, with the exception of limited free markets, prices are not free to respond quickly to supply and demand conditions.
The agricultural price systems of the communist countries are complex and have gone through numerous modifications.The analyst constructing even a simple index of output is forced to make a number of quite arbitrary choices of prices for weights. The economist attempting to evaluate the performance of communist economies must constantly keep in mind the limited functions of prices and the specific peculiarities of the price system relevant to the problem with which he is concerned. For agriculture, one peculiarity of the price system arises from the communists’ refusal to permit land rent to perform its allocative function. There have at times been attempts to vary the requirements for compulsory deliveries to the state as a substitution for differenial rents, but these variations have been too crude to be effective. One of the effects of the elimination of rents is to penalize the farms with poorer land.
The use of a system of compulsory deliveries at very low prices and a system of multiple prices for the same product, with little logical relation between the prices of various products, greatly diminishes the value of prices as a measure of economic performance. The shortcomings of the agricultural price system have prevented the managers from developing useful cost-of-production estimates as guides for the allocation of resources. Since a large proportion of payments to collective farmers have been made by distributing commodities, it is extremely difficult, if not impossible, to measure labor costs. In addition, the costs of farm machinery and other inputs often have little relation to their value on the farm.
After a few years of free prices in the NEP (New Economic Policy) period, the Soviet Union established a system of compulsory deliveries of farm products to the state at very low prices, constituting in effect heavy taxes on the farm sector. Quantities over the compulsory quota were sold for higher prices. Prices paid by the state for most food commodities changed very little until 1953, although the prices of some industrial crops were raised during the period and were much more favorable to the farmers. During the period 1953–1955 the prices paid farmers were greatly increased, but the system of compulsory deliveries at low prices and over-quota sales at higher prices was continued. In addition, the farms paid the Machine Tractor Stations (MTS) in commodities for the performance of machinery operations.
In 1958, in connection with the abolition of the MTS, the entire agricultural price system in the Soviet Union was overhauled. The state now pays each farm a single price for each product, with regional variations in the prices. The regional variations in prices are intended to reflect, in part, differences in average production costs, and thus they are, to some degree, land-rent differentials. The tax element in the prices for a number of products was reduced or eliminated, that is, there remained little difference between the price paid the farmers and the retail price, after deducting handling costs. However, grain and sugar beets were still purchased at below value prices. In 1962 and 1963 further increases were made in the prices of grain, potatoes, sugar beets, livestock products, and cotton.
The agricultural price system in eastern Europe has generally been patterned after that of the Soviet Union, although there are variations from country to country, and the Soviet Union’s restructuring of farm prices in 1958 has not been copied uniformly. The state pays low prices, in many instances below cost, for compulsory deliveries of fixed quantities of agricultural products. The state also contracts with producers for the delivery of additional products at fixed, but sometimes higher, prices. After the compulsory quotas and contracted quantities are delivered, the producer sells his remaining available products to the state, at prices which are sometimes higher, or on the free market, at prices determined by supply and demand. In Yugoslavia compulsory deliveries of farm products to the state were abolished in 1953. Although the state and the purchasing agencies agree on the maximum prices which they will pay, the ceilings are sometimes ineffective when supplies are short (U.S. Department of Agriculture … 1964, p. 113).
In Communist China from 1950 to 1953 the state bought agricultural products from the peasants at centrally determined prices and collected an agricultural tax in kind, 90 per cent of which was paid in grain. Compulsory quotas were later introduced for most of the major crops. It was necessary to reduce quotas in 1956 in order to leave enough to the peasants for seed and feed as well as for their own consumption. In 1956 and 1957 the purchase prices were adjusted in an attempt to control the relative production of major crops, but the results were disappointing.
Because the cooperatives generally had to pay their own way they had a considerable incentive to adjust production in response to changes in purchase prices, although other factors often severely limited the adjustment. However, when the communes were established allocations were made directly to the communes from state budgetary funds and the credit available to agriculture was greatly expanded. The increased availability of funds, together with the campaign atmosphere of the commune drive, encouraged the local commune authorities to ignore economic criteria and concentrate on the production of a few key commodities emphasized by the campaign. For these and other reasons the production of subsidiary products fell sharply.
Trends in output. The collectivization drive in the Soviet Union started in 1928. The peasants resisted by slaughtering their livestock as well as in other ways, and, after adjustment for territorial changes, agricultural output exceeded the 1928 level in only two of the years between 1929 and 1951. In 1952 agricultural output was only six per cent greater than in 1928 on comparable territory.
After Stalin’s death in 1953, concern over the impact of the stagnation in agriculture on future industrial growth stimulated a series of measures, including the development of the new lands and an expansion of the area planted to corn to support a desired expansion of the livestock industry. The expansion of acreage together with a good harvest of grain in the Ukraine in 1955 and a good harvest of wheat in the new lands in 1956 brought about substantially increased output. In 1958 excellent weather and increased output of livestock products resulted in the largest total agricultural production up to that time.
The seven-year plan, initiated in 1958, called for a 70 per cent increase in agricultural output by 1965, but the years after 1958 were disappointing, bringing little increase. The failure to increase production, while demand continued to rise, apparently caused a decline in grain stocks. Poor weather in 1962 and 1963, together with the perennial shortcomings of Soviet agriculture, caused agricultural output to fall sharply in 1963. Grains, especially wheat, were the hardest hit. The Soviet Union in the latter part of 1963 and the early part of 1964 contracted to buy more than 10 million tons of wheat and flour, mostly from Western countries. Though some of the imported grain was to be reexported to eastern Europe, this trade situation was in sharp contrast to the 1959–1962 grain-exporting position when between 4.8 and 6 million tons were exported annually.
In East Germany and Czechoslovakia agricultural output had still not regained prewar levels by the early 1960s. However, output in the rest of the eastern European satellites was somewhat above the prewar level. Per capita agricultural output in all of east Europe other than the Soviet Union barely exceeded the prewar level in 1961 and 1962 and fell below it in the following two years.
Communist China apparently had a record harvest in 1958, although the early extravagant claims were later admitted by the regime to have been exaggerated. The authorities have released no official data on agricultural production since 1959, but production has apparently failed to keep pace with population growth. Mainland China has had chronic food shortages since 1960 and has been importing 5 to 6 million tons of grain annually.
Labor productivity. Although lack of information makes it impossible to calculate reliable measures of agricultural labor productivity for most communist countries, it is clear that the productivity is quite low. It has been estimated that before World War ii the net agricultural production per person depending on agriculture was about 4.5 times as large in the United States as in the Soviet Union (Jasny 1949, p. 442). By the early 1960s this ratio of comparative labor productivity had widened to perhaps 7 or 9 to 1 (Walters 1963, pp. 4, 13). The Soviet Union’s attempt to reduce the labor committed to agriculture has met with only moderate success. The number of people defined as the agricultural labor force declined slowly between 1940 and 1953 but rose for a period after 1953 in connection with settlement of the new lands. It has resumed its decline since then.
One of the reasons for the low labor productivity in Soviet agriculture as compared with the United States is the relative scarcity of capital. Although investment in agriculture has increased during the last decade, the stock of capital equipment has remained relatively small. For example, despite the fact that the Soviet Union has about 60 per cent more land in crops than does the United States, in 1962 Soviet agriculture had only one-fourth as many tractors, one-half as many grain combines, and slightly more than one-fourth as many trucks. Soviet agriculture is especially wasteful of labor in animal husbandry, in part because of poor management and labor-wasting practices and in part because of a lack of labor-saving equipment.
Although its labor force is very large, Soviet agriculture suffers from seasonal labor shortages. Especially during the harvest, peaks of demand for labor create shortages, and the Soviet press often stresses the need for young farmworkers, especially for skilled operators of equipment. A large part of the agricultural labor force consists of older persons and women with families—people who cannot readily be adapted to other kinds of work or transported to distant jobs.
The agricultural labor situation varies widely among the other east European countries. In East Germany the loss of agricultural labor to the cities and to West Germany has been at too great a rate to be adequately balanced by the increases in labor-saving machinery, although the number of tractors tripled between 1950 and 1961. The shortage of labor has been so great that members of the armed forces and urban workers have been required to help with the harvest.
In Czechoslovakia the agricultural labor force declined about one-third from 1950 to 1961, while agricultural output rose about 10 per cent. Agriculture occupied about 38 per cent of the total labor force in 1950 and 23 per cent in 1961.
In Rumania, up to the early 1960s, the agricultural labor force remained at about the level of 1938. However, during the harvest season it is necessary to obtain additional labor from factories, schools, and the armed services.
In Communist China the rural-to-urban shift in population has had little impact on the farm labor force, although between 1950 and 1956 the population of the cities rose by more than 30 million, or 55 per cent. After the collapse of the “great leap forward,” the lack of jobs in the cities and the desperate need for food impelled the regime to institute a campaign to return people to the countryside.
In their pursuit of rapid industrialization, China’s leaders attempted to make use of their relative abundance of rural labor by embarking on a campaign to establish large numbers of industrial enterprises in rural areas. The program was intended not only to make use of surplus rural labor but also to compel the people to work harder than ever before. The most spectacular enterprises in rural industrialization were the back-yard furnaces built during 1958–1959 to produce pig iron. But the demands of this program on the health and strength of the people were excessive, and most of the product was worthless. The program was largely abandoned in 1960.
Problems of analysis. The study of the economics of agriculture in communist countries is complicated by several serious difficulties [see ECONOMIC DATA]. There are large gaps in the available statistics, which often are of questionable reliability. The limited functions of prices or their function as taxing devices—as in obligatory deliveries at low prices—often results in their being of little use as criteria of economic rationality or performance or as weights for the construction of indexes. The ideologically determined refusal of the communists to charge explicit land rent complicates the analysis of most agricultural economic problems. Finally, because centralized decision making is dominant in communist countries and because the decision makers are often much more concerned with political rather than strictly economic goals, an economic analysis sometimes may be largely irrelevant or at least peripheral to the heart of the problem.
The interpretation of official data has always presented major difficulties for students of Soviet agriculture. A number of prominent statisticians were purged in the Soviet Union in the late 1920s, and agricultural statistics became largely subordinated to the goals of the central policy makers. From 1933 to 1953 the official statistics on agricultural output were generally seriously biased upward, being based on estimates of the crop in the field, which did not, as is normally done, take account of losses in harvesting. Indexes were customarily published without any indication of what prices were used as weights, thus making the indexes impossible to reconstruct and extremely difficult to evaluate. Important data often were not published at all. For example, although the publication of statistics on agricultural production increased somewhat after the death of Stalin in 1953, the statistics on the size of grain harvests continued to be restricted as a state secret until 1958. The official estimate of the disastrous grain harvest of 1963 has not been released to date.
Although the present official estimates of crop production in the Soviet Union apparently are intended to be in terms of “barn yields,” there are serious questions as to the comparability and validity of some of the data. These questions arise in part from a lack of precise information about the procedure and concepts behind the statistics. Another reason for considerable skepticism about some of the statistics on the agricultural output of the Soviet Union in recent years is the amply reported incidence after 1957 of increased statistical malpractices at lower levels. Greed and the pressure of unfulfillable goals apparently motivated many officials to falsify production data reported to higher levels. Such practices are especially prevalent in the agricultural sector because it is impossible for central authorities to verify many of the statistics on agricultural production (Willett 1962, p. 97).
While the agricultural data for the other east European countries present problems similar to those of Soviet data, the data for Communist China are generally even less satisfactory in quality and much more limited in quantity. The problem of measuring the performance of Communist Chinese agriculture with any degree of precision is made impossible by the lack of reliable data, both for the communist and the precommunist period. In fact, none of the major statistical elements required for evaluation, such as population, food consumption, acreages, or yields, can be considered satisfactory. The data for the years before 1950 are meager and, especially the national aggregates, can be used only with major reservations. From October 1949, when the communist government was set up, through 1952 the agricultural-output statistics were produced by extremely unreliable procedures. Although the establishment of the State Statistical Bureau in 1952 probably brought about some improvement in procedures, the “great leap forward” of 1958 and the accompanying decentralization of statistical control caused a virtual breakdown of the state statistical system. The decentralized local operations produced highly exaggerated statistics on national agricultural production. Although the State Statistical Bureau’s system was re-established in 1959 and 1960 and agricultural output surveys were introduced on a national scale in 1959, the operations of the system were placed under party committees at the local levels. The system was to operate under the “partisanship” principle, which required that the statistical work be programmed and developed to serve the political objectives of the party. There are no official data available on agricultural production since 1959.
Joseph W. Willett
[See alsoAgricultureand Economic growth.]
Conference on Soviet agricultural and Peasant Affairs, Lawrence, Kansas, 1962 1963 Soviet agricultural and Peasant Affairs. Edited by Roy D. Laird. Slavic Studies, No. 1. Lawrence: Univ. of Kansas Press.
Jasny, Naum 1949 The Socialized Agriculture of the USSR: Plans and Performance. Stanford Univ. Press.
Karcz, Jerzy F. 1964 Quantitative Analysis of the Collective Farm Market. American Economic Review 54:315–334.
Li, Choh-ming 1962 The Statistical System of Communist China. Berkeley: Univ. of California Press.
Mitrany, David 1951 Marx Against the Peasant: A Study in Social Dogmatism. Chapel Hill: Univ. of North Carolina Press.
Nove, Alec (1961) 1966 The Soviet Economy: An Introduction. Rev. ed. New York: Praeger.
Perkins, Dwight H. 1964 Centralization and Decentralization in Mainland China’s Agriculture, 1949–1962. Quarterly Journal of Economics 78:208–237.
U.S. Department of Agriculture, Economic ResearcH Service, Regional Analysis Division 1964 Agricultural Policies of Foreign Governments, Including Trade Policies Affecting Agriculture, by Montel Ogdon et al. Agriculture Handbook No. 132. Washington: The Department.
Volin, Lazar 1951 A Survey of Soviet Russian Agriculture. U.S. Dept. of Agriculture, Agriculture Monograph No. 5. Washington: Government Printing Office.
Walker, Kenneth R. 1965 Planning in Chinese Agriculture: Socialisation and the Private Sector, 1956–1962. Chicago: Aldine.
Walters, Harry E. 1963 Agriculture in the United States and the Soviet Union. Washington: U.S. Department of Agriculture, Economic Research Service.
Willett, Joseph W. 1962 The Recent Record in Agricultural Production. Part 2, pages 91–113 in U.S.
Congress, Joint Economic Committee, Dimensions of Soviet Economic Power: Hearings … . Washington: Government Printing Office.
The fiscal systems of the communist countries are in some respects similar to those of comparable capitalist nations, while quite different in other respects. The similarities and differences stem largely from similarities and differences in economic and social institutions and in economic and political goals. The communist countries as a group, however, have many institutions and goals in common and have, therefore, very similar fiscal systems. These similarities are, furthermore, probably even greater than they would otherwise have been, because the budgets of the smaller communist nations were originally patterned after that of the Soviet Union. The discussion which follows will concentrate, therefore, on the Soviet budget as prototypical.
General characteristics. A major difference from the capitalist systems derives from the fact that the central governments of the communist nations are, relative to state and local governments, so much more powerful than the central governments of many Western nations. Furthermore, the governments of the communist nations use this power to centrally plan most of the economic activity which takes place within their borders. Correspondingly, the fiscal emphasis in these nations is also centralized. The Soviet state budget, which is ratified by the Supreme Soviet each year, is not just the budget of the “union,” or central government, but rather represents a consolidation of the budgets of all political units in the Soviet Union: the union, republican, and numerous levels of local budgets. Whereas in the United States, for example, the federal, state, and local governments each operates its budget in substantial independence of one another, in the Soviet Union the consolidated over-all budget is the major instrument of central government policy.
The budgets of the communist nations tend to be larger and broader in coverage than those of capitalist nations. The Soviet budget is almost one-half as large as Soviet gross national product (GNP), or roughly double the proportion to GNP of the sum of U.S. budgets at all levels of government. This is explained by the fact that almost all investment, education, health, and research in the Soviet Union are controlled by the state and financed through the budget, whereas in capitalist nations a large part is privately controlled and financed. Furthermore, each of these activities involves a claim on national resources which is relatively larger in the Soviet Union than in most capitalist nations.
Because all industry in the Soviet Union is nationalized and its activity planned by the state, one might be led to assume, by analogy with capitalist practice, that the Soviet budget would be larger than it is. In capitalist countries, the gross receipts and expenditures of government enterprises (such as the post office) are often included in the budget. This was true also in the Soviet Union in the period of “war communism,” from 1918 to 1920. Since then, however, most state enterprises have operated on an independent financial basis (a so-called khozraschet basis) in which they sell their products for money and use the resulting receipts to finance normal operating expenditures, neither the receipts nor expenditures ever appearing in the budget.
The nationalization of industry does change, in a fundamental way, the significance of taxes which are collected from industrial enterprises and which are of overwhelming importance in the communist countries. In capitalist nations, the fiscal process can be viewed as one in which the state divides the tax burden between households and private businesses (and their owners). Where industry is nationalized, taxes paid by state-owned enterprise cannot be viewed realistically as taxes on an independent sector. It appears most appropriate to view such taxes, when they are levied on enterprises producing consumers’ goods, as sales taxes on the population, since their entire incidence is to raise the prices of such goods and to reduce the real purchasing power of household earnings. Taxes on capitalist enterprise are also partly on the consumer (to the extent that they are shifted) but fall on businesses (as legal entities) and their owners (a special class of households) as well. It is perhaps worth noting that Soviet economists do not view taxes paid by nationalized industry as taxes on the household at all but rather as a transfer to the state of surplus value created by rising industrial productivity.
One final important difference between the fiscal systems of planned and unplanned economies should be indicated. In the communist countries, the state economic plan sets forth the level and distribution of economic resources necessary for the fulfillment of national objectives. The financial plan, including the budgets, is a reflection of the economic plan and is designed to ensure that the economic plan is implemented without inflation or other undesirable consequences. Financial factors do not, however, in any substantial way constrain the operation of the plan. In capitalist countries, on the other hand, and particularly in peacetime, budgetary factors must be taken into account in the formation of economic policies. Insufficiency of funds, because it is not possible to increase either taxes or the public debt, is an important variable in the policy makers’ considerations.
Budget revenues. Revenues of the consolidated state budget of the U.S.S.R. for the years 1955 and 1960 are presented in Table 1.
|Table 1 – Revenues of the consolidated state budget of the U.S.S.R. (billions of post-1961 rublesα)|
|a. In 1961 the Russians revalued the ruble to reduce all prices, wages, and other financial magnitudes to one-tenth their previous values. Following Soviet practice, these figures are presented in the new 1961 rubles.|
c. Described in text.
|Indirect or commodity taxes||37.1||53.6|
|Deductions from profits of state enterprises||10.3||18.6|
|Direct or income taxes||4.8||5.6|
|Sales of state bonds to population||3.1||b|
The outstanding feature of the Soviet tax structure is the predominance of indirect or price-increasing taxes. These taxes amount to more than 60 per cent of the budget revenues of every eastern European nation.
The Soviet turnover tax has the impact of an excise or sales tax, as it applies at present only to consumers’ goods (with a few minor exceptions like petroleum and petroleum products where the turnover tax substitutes for explicit rent payments). The tax is, however, usually levied at early stages in the production process of consumers’ goods and is therefore largely hidden from the consumers’ view. The rates are highly differentiated, ranging from 1 per cent of selling price on some commodities to as much as 90 per cent on others. Since 1955 the average rate of turnover tax in the Soviet Union has varied from 40 to 50 per cent of price. The turnover tax is the major source of budget revenue in every European communist country.
The deduction from profits is not a tax on state enterprise for reasons noted above. However, the deduction from profits, since it is part of profits over and above costs, adds to the price paid by the consumer. In this respect, it does not differ from the turnover tax and can properly be considered a tax on the household. Profits are used to make payments into the Directors’ Fund (a profit-sharing incentive-type fund used for bonuses, workers’ housing, and so forth) and to finance part of the investment in fixed and working capital planned for the enterprise. Any surplus of profits above these needs is deducted into the budget. In recent years, about two-thirds of total profits have been paid into the budget.
The payroll tax, or “social insurance markup” as it is called by the communist nations, is derived by adding to the cost of commodities some 5 to 10 per cent of the wage fund of each enterprise. The receipts from this tax are presumably earmarked for sickness and old-age insurance.
The current extensive use of these indirect taxes by communist nations is surprising in view of the fact that Marxist and early Soviet writings excoriated the use of such taxes as regressive, hence socially inequitable. The fact that such taxes are nevertheless relied upon attests to their superiority for the purpose of the planned economies. At least two important advantages of indirect taxes over direct taxes should be mentioned. First, the indirect taxes are cheaper to administer and more difficult for the population to evade. They are collected from thousands of enterprises rather than millions of households. This was particularly important in the early stages of development of these nations before the administrative apparatuses of the government were adequately developed and before literacy was widespread.
A second factor has to do with the so-called “money illusion” hypothesis which argues that workers are more conscious of the impact on their economic position of changes in wages than of the impact produced by changes in prices. A corollary to this is the hypothesis that workers are more sensitive to changes in direct taxes (take-home pay) than to changes in indirect taxes (reflected in higher prices). The money illusion, therefore, would cause an income tax of given size to have a greater negative impact on work incentives than an indirect tax of equal revenue. This is important for two related reasons. First, the communist nations, like Western nations, rely very heavily on differential wages to allocate labor. Second, as indicated above, the direct role of government in communist nations is so much greater than in capitalist nations that the rate of taxation is necessarily much higher. In the U.S.S.R., for example, taxes presently take about one-half of household income; in earlier years, taxes were even higher. If the U.S.S.R. relied largely on income taxes to maintain monetary stability, and these taxes were progressive as income taxes almost always are, it seems clear that the monetary incentives created by the differential wage structure would be largely blunted—take-home pay would be substantially equalized. On the other hand, the indirect taxes probably have a much lesser disincentive effect. They are not progressive and are largely invisible.
Direct taxes on the population have never been very significant revenue earners and are, in fact, presently scheduled to be abolished in the U.S.S.R. gradually over the next few years. The major direct tax is the income tax on the urban population. At one time this tax was considered important as an instrument of class policy, in the sense that it was differentiated to discriminate very heavily against occupations the government wished to discourage. Thus, while workers and salaried employees paid a very low rate of tax, which progressed to a peak of only 13 per cent, doctors and lawyers with private practices, priests, artisans not belonging to cooperatives, and petty entrepreneurs paid at higher rates which reached peaks of from 55 to 65 per cent.
The rural counterpart to the income tax, a so-called agricultural tax, is levied on collective farmers. The tax is progressive, reaching a peak rate of 48 per cent. That its major purpose is to discourage collective farmers from spending too much time on their private plots of land at the expense of their work on the collective is suggested by the fact that income from working on the collective farm is exempted from the tax.
Until 1957 sales of so-called mass-subscription bonds to the population brought in almost as much revenue to the budget as did direct taxes. In fact, these bonds may well be considered to have been another form of direct levy on the population. Considerable social pressure was brought to bear on the population to subscribe from two to four weeks’ wages a year, the appropriate amount being deducted, like the income tax, every month from wages at the place of work. Social pressure was necessary to get subscriptions because the standard of living was low, prices were rising rapidly (until 1948), the interest rate on bonds has been only 3 to 4 per cent in the postwar period, and the bonds were basically inconvertible until maturity. In later years, in an effort to increase the attractiveness of the bonds, bond holders did not receive interest as such, but instead, lotteries were held in which the few winners received all the interest in the form of large prizes. In 1957 sales of mass-subscription bonds were discontinued; at the same time, a moratorium on repayment of 20 to 25 years was declared. At present, small amounts of lottery bonds are sold annually on a purely voluntary basis. Until their discontinuation, the mass-subscription bonds were looked upon by the state as a regular source of revenue with none of the deficit-covering implications of government borrowing in the West.
The budget receives revenue from a number of other minor sources, many of which are unspecified. Profits taxes are levied on industrial and agricultural cooperatives (the collective farms). In 1960 receipts from these organizations amounted to 2 per cent of total revenue. Customs and other receipts from foreign trade operations are still another source of revenue. Other income sources are a fee for inheritance certificates (there is no explicit inheritance tax), sales of state property, fees for commercial forestry and fishing, income from revaluation of inventories, various small local fees and taxes, and gross receipts of organizations, like the post office, which are not on an independent financial basis.
No mention has been made, so far, of taxation in kind of agriculture, because it never directly provided the state with funds nor appeared explicitly in the budget. The tax in kind takes the form of compulsory deliveries of agricultural products by collective farmers and peasant farmers to government procurement agencies. These deliveries are based on units of tillable land and numbers of animals. While the farms and farmers are not uncompensated for their deliveries, until recently the prices paid by the state were usually far below costs of production. At the same time they were only a fraction of the retail price at which the state resold agricultural products to the urban population. The high retail price was achieved by superimposing a turnover tax on the procurement price plus costs of processing and distribution. The portion of the turnover tax collected by virtue of below-cost procurement price can be viewed as the monetary equivalent of the tax in kind on agriculture rather than as a sales tax on the urban household. In recent years the tax in kind equivalent of compulsory deliveries (now contractual deliveries) has been sharply reduced as a result of the much higher procurement prices which the state now pays for agricultural products.
Budget expenditures. Expenditures of the consolidated State Budget of the U.S.S.R for 1955 and 1960 are presented in Table 2. The largest item of budget expenditure is “Financing the national economy,” to be expected where most economic activity is nationalized. The major expenditure (roughly half) in each of the listed subsectors is for investmend
|Table 2 – Expenditures of the consolidated state budget of the U.S.S.R. (billions of post-1961 rubles)|
|Financing the national economy||23.5||34.1|
|Industry and construction||11.0||15.6|
|Trade (domestic and foreign)||1.1||3.6|
|Transportation and communications||2.0||2.8|
|Municipal economy and housing||.9||3.2|
|Education and science||6.9||10.3|
|Health and physical culture||3.1||4.8|
ment in and repair of fixed capital. Other important expenditures are for the expansion of working capital, subsidies to cover losses, training of workers, experimentation and design, geological prospecting, and stockpiling of material reserves.
Expenditures for “Social-cultural measures” are next in importance to “Financing the national economy.” Outlays for scientific research have risen rapidly in recent years and in 1960 amounted to almost one-third of the expenditures listed under “Education and science.” “Social welfare” includes social security and insurance, aid to mothers, and other such transfer payments. These have been increasing rapidly of late as a result of the recent increase in size of pensions and because of the forthcoming extension of social security and insurance to the collective farm sector.
The “Defense” category is defined by Russian textbooks to include the expenditures of the Ministry of Defense for wages and material allowances of personnel, purchase of supplies and repair of combat equipment, support of military institutions and schools, military construction, and so forth. Presumably some of what might legitimately be considered part of the Soviet defense effort is not included in the explicit “Defense” item. For example, defense-connected research is probably financed under the science part of “Education and science,” and it has been suggested that expenditures for atomic energy are included under “Financing the national economy.” Finally, it is possible that some unspecified military expenditures are included in the “Other,” or residual items, two of which appear in Table 2.
“Administration” includes, as in most countries, the support of the traditional political, judicial, and other such departments of the government. The final “Other” category is known to include internal security outlays, loan service, and some reserve funds.
The pattern of Soviet budget expenditures indicated above has been followed fairly closely by almost all the communist nations. There were some deviations, however. Almost all the nations devoted about 10 per cent more of their budgets to “Financing the national economy” and from 5 to 10 per cent less to “Defense” than the Soviet Union. An exception was Outer Mongolia, whose budget expenditures on the national economy amounted to only about one-third of the budget and whose defense expenditures were about as large a proportion as that of the Soviets. The importance of “Social-cultural measures” expenditures in the budget was relatively low in China (12 per cent) and Bulgaria (21 per cent) and relatively high in Czechoslovakia (39 per cent) and in the German Democratic Republic (38 per cent). As in the Soviet Union, “Defense” was much larger than “Administration” in Czechoslovakia, Rumania, Bulgaria, Albania, and China but much lower in Hungary and the German Democratic Republic. The significance of these comparisons is reduced to the extent that they may result in part from differences in expenditure classification.
Budgetary imbalance and monetary stability. Success or failure of the budgetary policies of the communist nations cannot be judged by observing the budget accounts in isolation. Although the budget is undoubtedly the most important financial institution, it is not the only one, and its policies must be viewed in the context of over-all financial policy. There seems little doubt that the budgets of the communist countries are designed to have a deflationary impact on the economy. With the exception of the years 1941–1943 for the Soviet Union, and 1950 and 1955–1956 for China, the budgets of the communist nations have returned surpluses for all years for which data are available. In part, these surpluses may be explained by the practice of including income from sales of government bonds as a regular item of budget revenue. However, as noted above, this is appropriate in circumstances where sales of bonds are compulsory, the bonds are not convertible until maturity and are not purchased by banks through printing of money.
Most of the communist nations have had strong inflationary pressures which, despite the existence of deflationary budgets, have not always been under control. This suggests that in the other financial institutions of the communist nations, offsetting inflationary policies have been pursued. The major culprit in the Soviet economy has been the Cos-bank, or state bank. The state bank finances through short-term loans the expansion of the temporary working capital needs of state enterprises. One major source of its funds is the surplus deposited with it by the state budget. To the extent that short-term loans outstanding increase by more than the budget surplus, the state bank creates money (abstracting from other items in the bank balance sheet). If the amount of money created is large relative to the increase in output and if other (real) factors are conducive to inflation, then upward wage and price pressures tend to develop.
In recent years, the price levels of the communist nations have substantially stabilized relative to the earlier years. In the Soviet Union, two decades of inflation ended with the currency reform of 1947 and prices have been stable or declining ever since. One cause of this relative stability has to do with budgetary policy: it is the fact that the budget surplus has risen relative to the expansion of short-term bank credit. Second and third causes, perhaps as important, if not more so, are the facts that the Soviet government now has better direct control over rising wage levels than it had in the past and that the pressure on resources of overfull-employment planning has apparently been eased in the postwar period.
Franklyn D. Holzman
Davies, Robert W. 1958 The Development of the Soviet Budgetary System. Cambridge Univ. Press.
Ecklund, George N. 1966 Financing the Chinese Government Budget. Chicago: Aldine.
Holzman, Franklyn D. 1953 The Soviet Budget: 1928–1952. National Tax Journal 6:226–249.
Holzman, Franklyn D. 1955 Soviet Taxation: The Fiscal and Monetary Problems of a Planned Economy. Russian Research Center Studies, No. 16. Cambridge, Mass.: Harvard Univ. Press.
Holzman, Franklyn D. 1957 The Tax System of Outer Mongolia, 1911–1955: A Brief History. Journal of Asian Studies 16:221–236.
Holzman, Franklyn D. 1960 Soviet Inflationary Pressures, 1928–1957: Causes and Cures. Quarterly Journal of Economics 74:167–188.
Komissarov, V. P.; and Popov, A. N. 1960 Den’gi, kredit, i finansy evropeiskikh stran narodnoi demo-kratii. Moscow: Izdatel’stvo Sotsial’no-ekonomicheskoi Literatury.
Kwang, Ching-wen 1963 The Budgetary System of the People’s Republic of China: A Preliminary Survey. Public Finance 18:253–286.
Plotnikov, K. N. (1953) 1959 Gosudarstvennyi biudzhet S.S.S.R. Moscow: Gosfinizdat.
Suchkov, A.; Sviderskii, IA.; and Paevskii, V. (1949) 1960 Gosudarstvennye dokhody S.S.S.R. Moscow: Gosfinizdat. → Suchkov was the sole author of the 1949 edition.
Until communist regimes established themselves or were established in a number of countries in the aftermath of World War ii, the Soviet Union was the only country claiming to be “socialist” (communist), and naturally, its trade was wholly with the “capitalist” world. However, the principles upon which it based its foreign trade and the organizational structure of its trade have changed little and have greatly influenced the procedures of other communist countries.
Historical development. After the seizure of power in 1917, the communist regime took all foreign economic transactions into its own hands, declaring a state monopoly of foreign trade. This principle meant at first simply that no private firm or individual could trade with foreign countries without specific authorization by state organs. It was a necessary reaction to the chaos of war and civil war, a means of preserving the pitifully small reserves of gold and foreign exchange and of combating black-marketeering and speculation. During the “war communism” period, from 1918 to 1921, the state nationalized all industry and trade, but there followed a period of relative economic liberalization, the New Economic Policy (NEP), during which some private industrial and internal trading activities were again allowed. However, foreign trade was deemed to be part of those “commanding heights” which it was essential to preserve in the hands of the communist state.
In 1920 a people’s commissariat for foreign trade was created, and foreign trade deals were almost wholly the responsibility of this ministry and of the specialized trading departments which were created under it. It is true that so-called cooperatives were allowed to engage in trade and to maintain representatives in foreign countries (e.g., Amtorg in the United States and Arcos in Great Britain). However, these were mere devices to cope with such problems as nonrecognition of the Soviet government by the United States or prejudice against dealing with Soviet trade officials. It made no practical difference to the planning of foreign trade. Whenever possible the Soviet authorities established trade delegations with diplomatic status which were associated with Soviet embassies in foreign countries. These included representatives of the principal specialized trading departments most concerned in trade with that country.
This pattern has continued. The people’s commissariat of trade, like other commissariats, was renamed “ministry” in 1946. There is such a ministry in each communist country; each has trading departments or corporations specializing in imports or exports (or both) of particular commodities, ship chartering, or other dealings abroad. With few exceptions this ministry and its organs exercise the monopoly of foreign trade as the sole intermediary between state enterprises and foreign countries. In other words, a doctrine which was designed to prevent private entrepreneurs or private traders from buying and selling abroad is now interpreted to mean something rather different: that state-salaried directors of domestic economic enterprises may not engage in deals with any foreign country, including, as we shall see, any communist country.
To explain why this has come about, let us return to the experience of the Soviet Union. By 1929, private enterprise in industry and trade had been virtually wiped out, and the Soviet Union was launched upon its industrialization and collectivization programs. There developed a planning system which, in essentials, survives to this day. All state enterprises are told by the planning organs what to produce, to whom to deliver and at what prices, and from whom to buy and at what prices. Material balances are drawn up of all principal commodities, both for the current year and for use in planning future growth. It is then determined whether, now or in the future, the country’s needs for particular items can be met out of domestic production or whether imports are necessary. Similarly, material balances show export availabilities. Naturally, in the process of planning constant adjustments are made in the internal plans as well as in the foreign-trade plans. Sometimes domestic users have been deprived of much-needed commodities, which were then used to pay for urgent imports. A well-known example is the export of wheat to pay for capital equipment in the early 1930s, a time when many were hungry or even starving. This was a matter of political decision about priorities, which was reminiscent of trade planning in “capitalist” countries in wartime.
In such circumstances it is natural that all trade deals are centralized under a specialized ministry, which works closely with the planning organs. As will be shown this version of the principle of the “monopoly of foreign trade” leads to many practical
|Table 1 – Growth of foreign trade and national income in the eastern European countries and the Soviet Union, 1960 to 1965|
|VALUE IN 1962||PERCENTAGE INCREASE IN VALUE FROM CORRESPONDING PERIOD OF PREVIOUS YEAR|
|(millions of current dollarsi)||1960||1961||1962||First half 1963||1963 plan||Planned annual rate to 1965b|
|a. Plan data for trade and all data for national income ar e at constant prices, except those for East Germany.|
|b. The periods covered are 1959–1965 for the Soviet Union and East Germany, 1960–1965 for Rumania, 1961–1965 for other countries. Some of these plans were in process of revision when table was constructed.|
|c. Not available.|
|d. Estimate by the Secretariat of the Economic Commissionfor Europe.|
|e. First quarter.|
|g. Excluding Albania.|
|h. National aggregates converted to a common basis of valuation by applying official exchange rates; they should be regarded as no more than indicators of the trend.|
|i. The lower figure was written into the plan as a target for trade with socialist countries. The higher figure represents an aspiration expressed by the Minister for Foreign Trade (Pravda, February 18, 1959).|
|Source: Adapted from Economic Bulletin for Europe, vol. 15, no. 1, p. 24.|
|Seven eastern European countries|
|Eastern Europe and Soviet Uniong|
difficulties. However, it is a logical and integral part of the system of internal planning established under Stalin, and it has not proved easy to reform the system after his death.
In the Stalin period Soviet trade policy was greatly influenced by the need to achieve self-sufficiency, especially in capital goods. This could be explained by military security considerations, especially in the 1930s. This tendency toward autarchy, which continued, though not to so marked an extent, into the postwar period, affects in varying degree all communist countries. It has two
|Table 2 – External trade of six eastern European countries, by main regions, 1960 to 1962|
|a. Total is not sum of subitems, because of exclusion of the rest-of-the-world category.|
|b. Estimate by the Secretariat of the Economic Commission for Europe.|
|c. In general, “less-developed regions” includes all trade for which origin and destination are not specified. The spectacular rise in exports to that category in 1961 and 1962 was largely due to the inclusion of Cuba (e.g., Soviet exports to Cuba multiplied by four in 1961 alone).|
|d. Details may not add to total because of rounding.|
|e. Excluding Albania.|
|Source: Adapted from Economic Bulletin for Europe, vol. 15, no. 1, p. 25.|
|Value in 1962, millions of current dollors||Annual percentage increase||Percentage share||Value in 1962, millions of current dollars||Annual percentage increase||percentage share|
|Other eastern European countries||213||17.8||25.7||10.0||27.6||183||18.0||5.4||–1.4||23.4|
|Asian planned economies||5||8.9||5.7||–50b||0.7||6||6.2||46.2||–20.0b||0.8|
|Other eastern European countries||715||12.9||11.3||13.0||32.6||648||21.4||20.0||1.6||31.3|
|Asian planned economies||26||–1.6||–63.3||–46.6||1.2||45||–1.8||–47.4||–20.3||2.2|
|Western Europe of which, EEC||340||6.3||10.3||–5.2||15.5||359||21.1||8.0||–2.5||17.3|
|Rest of the world of which, less-developed regionsc||284||25.0||19.9||–2.9||13.0||237||16.7||48.1||–22.5||11.5|
|Other eastern European countries||368b||10.7||26.1||4.0b||33.4b||366b||26.1||–4.2||19.2b||31.9b|
|Other eastern European countries||390||15.3||9.2||5.6||23.7||579||5.5||17.4||22.1||30.7|
|Asian planned economies||23||10.8||–41.6||–36.0||1.4||32||–12.1||–51.0||16.0||1.7|
|of which, EEC||(171)||(4.4)||(11.8)||(11.4)||(10.4)||(134)||(11.3)||(–9.0)||(–2.1)||(7.1)|
|Rest of the world||191||14.1||31.0||–1.4||11.6||262||27.4||34.9||–7.7||13.9|
|of which, less-developed regionsc||(142)||(17.5)||(35.8)||(–7.1)||(8.6)||(129)||(40.4)||(4.4)||(13.6)||(6.8)|
|Other eastern European countries||195||54.9||–10.9||15.0||23.8||233||28.3||21.2||10.5||24.7|
|Asian planned economies||11||18.6||–65.6||–29.1||1.3||15||–9.5||–11.6||–40.2||1.6|
|of which, EEC||(126)||(87.0)||(22.0)||(9.8)||(15.4)||(157)||(119.0)||(30.3)||(28.5)||(16.7)|
|Rest of the world||77||48.1||43.3||29.4||9.5||60||27.4||53.3||32.2||6.4|
|of which, less-developed regionsc||(72)||(49.7)||(31.3)||(33.5)||(8.8)||(52)||(4.6)||(75.8)||(33.7)||(5.5)|
|Other eastern European countries||3,971e||5.7||9.6||16.1e||56.5e||3,588e||11.9||8.7||17.0e||55.6e|
|Asian planned economies||495||–14.5||–40.0||–14.4||7.0||695||–17.6||–28.7||–2.7||10.8|
|Western Europe||1,078||10.8||2.1||8.8||15.3||1,143||27.4||– 1.4||17.2||17.8|
|of which, EEC||(439)||(6.9)||(9.6)||(7.4)||(6.2)||(537)||(56.2)||(–0.8)||(17.0)||(8.3)|
|Rest of the world||1,491||4.3||98.6||47.8||21.2||1,024||46.1||31.6||–4.9||15.9|
|of which, less-developed regions0||(1,357)||(–5.2)||(115.6)||(56.7)||(19.3)||(817)||(29.5)||(37.8)||(–6.7)||(12.7)|
explanations. The first is fear that the foreign country may upset the plan by acting in some unpredictable way; thus a communist partner may alter its internal plan and cancel trade deals (this has happened several times) or a Western country may impose some unexpected embargo, or import duty, or add a desired item to a list of banned “strategic” goods. All this makes it seem easier to rely on supplies from within the country. Second, the same tendency is encouraged by the bureaucratic complexities encountered by attempts to import. These, in turn, are contributed to by the chronic and sometimes critical shortage of foreign exchange, which persistently plagues all communist countries.
After World War ii trade between the Soviet-bloc countries grew rapidly, stimulated particularly by Western restrictions imposed at the time of the Korean War, but trade with China fell very sharply after 1960. After Stalin’s death trade with most Western countries and also with the underdeveloped countries rose very fast from very low levels. An important exception is the United States, which, unlike its European allies, has continued a severely restrictive policy. Tables 1 and 2 show the pattern as it has developed.
Analysis of policies. In analyzing trade policies and problems, it is best to consider separately three kinds of transactions: those with the industrialized West, with underdeveloped countries, and with other communist states. While there are some questions common to them all, there are some peculiarities which it is necessary to dwell on. In addition it is important to bear in mind one further distinction, that between the U.S.S.R. and China on the one hand and the other communist countries on the other. The U.S.S.R. and China cover immense territories and are to a considerable extent self-sufficient. By this is not meant that foreign trade is unimportant. It is undeniably a source of essential materials, machinery, and know-how. However, the total volume of imports or exports represents a very small proportion of their gross national product, in the case of the U.S.S.R. about 3 per cent. Consequently, foreign trade is not among the most important factors governing growth, and domestic policy and economic organization are unlikely to be decisively influenced by foreign-trade considerations. For example, it is hardly likely that Soviet economic reforms would occur merely because the existing arrangements are inconvenient for foreign trade. By contrast, the smaller countries—notably Czechoslovakia, Poland, Hungary, East Germany, and increasingly also Rumania—depend greatly on foreign trade, which for them is the bottleneck in any plan of economic growth. Therefore the inconveniences of the “traditional” Soviet trading system matter very much more for them, and the pressures for change are greater.
Trade with Western industrialized countries. The U.S.S.R. and its allies buy machinery and equipment and also a number of minerals and semimanufactures from Western countries. In addition heavy imports of grain have been necessary, especially in years in which weather adversely affected the harvest. There is reluctance to spend scarce foreign exchange on manufactured consumer goods. Exports to Western countries have, of course, increased, but there have been serious problems in the way of finding more of the right goods to export. This has been partly a matter of availability of goods of the right type or quality but is also due to Western restrictions. These affect a wide range of agricultural products which these countries could export, as well as Soviet and Rumanian oil and many other products. Some of these restrictions are of a discriminatory character, that is, they apply only to goods from the Soviet bloc, and this is the subject of bitter complaint, understandably enough. Discrimination against trade with communist countries has been introduced on the following grounds. First, it was feared that the communist traders would resort to “dumping” and so disorganize the market. This fear does not, as a rule, go with the belief that the dumping and disorganization are intended. On the contrary, it is appreciated by most serious analysts that the Soviet, Czech, and other traders are under instructions to sell as dear as possible to maximize foreign currency earnings. However, they are also under instructions to sell, and, if faced with the need to cut prices, would undercut Western commercial competitors. A second reason for Western caution is fear of excessive dependence on supplies which might be cut off in the event of political trouble. This fear also affects, for equally valid reasons, the trading policies of communist countries. The canceling by the Germans, in 1963, of contracts for steel pipe, although this item was not on the list of strategically restricted Western exports, must have sharply reminded Soviet planners of this risk. A third cause of difficulty is the Western strategic list, which, though considerably pruned, still includes some items of no direct military significance which the Soviet bloc wishes to buy. Since the American interpretation of what is “strategic” is more stringent than western Europe’s, snags arise when British or German chemical machinery happens to include some American-patented part or process. Fourth, discriminatory measures in Western countries are due to the belief that they are being discriminated against. Since state organs are the only buyers, it is open to the communist authorities, by unpublished interoffice memoranda, to tell their traders to buy in one market rather than another. The result is that Western negotiators press for quotas for their goods, especially “less essentials,” in elaborate bilateral negotiations while imposing quotas on a range of “communist” goods of types which enter from elsewhere without quantitative restriction.
Trade with developing countries. Soviet-bloc trade with developing countries may be divided into two parts. The first, traditional in character, consists in the purchase of raw materials (e.g., rubber, cocoa, tin), often with sterling obtained from a favorable trade balance with Great Britain. The second, which became significant in and after 1956, is closely connected with aid programs and credits. Manufactures, and especially capital goods, are mainly involved, although the U.S.S.R. has also exported grain, timber, and oil to Egypt and a number of other countries. The credits are, as a rule, repayable in the goods normally exported by the recipient country, and so the Soviet bloc has been greatly increasing its imports of Egyptian cotton, Indian tea, and so on. The limiting factor on the expansion of this trade-with-aid has been, and is, the availability of resources within Soviet-bloc countries, which are heavily committed to these countries’ own plans of economic growth. So far the bulk of trade-with-aid has been concentrated in a few countries. India, Indonesia, and Egypt have had the lion’s share.
Trade within the Soviet bloc. In 1949 the Council for Mutual Economic Assistance (COMECON, or CMEA) was set up to coordinate the Soviet and European communist economies. China and other Asian countries sent observers, though since 1961 China and Albania have absented themselves, while Mongolia has become a member. COMECON virtually did nothing until 1955. Bilateral arrangements were the rule, with Soviet influence predominant. Unequal trade treaties were imposed, as may be surmised from the execution of officials in Bulgaria and Czechoslovakia on a charge of trying to strike too hard a bargain with the Soviet Union. Ex-enemy countries (Rumania, East Germany, Hungary) had to make large reparation deliveries. A number of joint companies were set up, under virtual Soviet control. After Stalin’s death a gradual evolution began toward a less subordinate role of the Soviet Union’s European allies. This process was greatly speeded up by the shock of the 1956 events in Poland and Hungary. Paradoxically, the period of direct political subordination to the U.S.S.R. was also one in which there was very little systematic effort at economic coordination. It was increasingly recognized that by failing to plan their investments and their trade so as to achieve rational economic specialization, the countries of the Soviet bloc, and particularly the smaller countries, were suffering unnecessary economic loss. Therefore, questions of joint planning came to the fore, and COMECON began to be more active. Since 1956 a number of agreements have been concluded under the aegis of COMECON. These include specialization agreements, especially those covering some branches of the machinery and vehicles industries, some joint investment projects, an effort to standardize components and trade nomenclature, and arrangements for the joint use of railway wagons and for international electricity transmission lines and oil pipes. A COMECON bank came into existence in January 1964. The point was not lost on Khrushchev that the Common Market in western Europe showed that, contrary to doctrine, economic integration between capitalist states seemed to be advancing more rapidly than between socialist ones. Nonetheless there has still been relatively little joint planning, the COMECON organs have no executive authority, and actual trading arrangements remain almost wholly bilateral.
The special problems of trade between communist countries are the following: first, since in each country all major investment and resource allocation decisions are taken by the central planners, all matters relating to international specialization and therefore to trade become a matter for decision at the highest government and party levels. In the West most of the specialization is a consequence of a large number of decentralized arrangements between firms. This is impossible in the communist countries so long as their internal planning system is what it is. Effective joint planning under the circumstances requires a supranational authority which could oversee the requirements of the entire bloc and which could take appropriate and enforceable decisions. There is no such authority. In its absence the concentration of trading decisions in the hands of specialized trading organizations cuts off the enterprises from contacts with their markets and their customers and makes it difficult to study the requirements of users or to undertake market research.
Second, since prices in the various countries are fixed by government order and bear little relationship to relative scarcities or to need, they cannot be used as a guide as to whether anything should be imported or exported, nor as a basis of comparing costs. In practice the prices used in trade between Soviet-bloc countries are those of the capitalist world market (very roughly, since they are sometimes frozen for several years and seem on average to be rather higher than capitalist prices). These artificial foreign-trade prices have little or no connection with internal costs or with intrabloc exchange rates. This makes it difficult to find mutually acceptable objective criteria for specialization. The less-developed countries of the bloc, notably Rumania, have been strongly pressing their own ambitious industrialization plans, and it has proved virtually impossible to advance effective counterarguments in the name of rational specialization.
Third, while it is realized that bilateralism causes economic loss, it has so far proved incurable. Trade negotiations have amounted to a kind of barter: each country exchanges with the other country goods worth the same amount, and the quantities in question are then incorporated in the plans and material balances of each country. Any considerable surplus convertible into a claim on a third country may not enable the holder of the surplus to convert it into the sort of goods that it wants, since there has been no provision in the plans of that third country to make these goods available. Theoretically it is possible to envisage multilateral barter, but in practice there has been very little of this. Since planning is essentially in terms of physical quantities, the multilateral facilities of the new COMECON bank are hardly relevant in this situation.
So long as each country continues to plan its own investments and resource allocation and so long as COMECON plays a purely advisory or consultative role, it is hard to see how the situation could improve. On political grounds the conversion of COMECON into a supranational organ is not practicable. The theoretical alternative solution would be to so decentralize the planning of each country that enterprises would be free to purchase their inputs from suppliers both within and outside the borders of the given country instead of having them allocated administratively. This may be the long-term solution but would plainly require some major changes in the internal arrangements of each country.
Meanwhile the volume of exchanges, bilateral it is true, between the communist countries in Europe has been steadily increasing. While the difficulties mentioned above are very real and are the cause of much worry to the planners of the countries concerned, one should recall the fact that the trade practices of many Western countries are far removed from the traditional principles of economic rationality and that developing countries such as India have been compelled to impose trade restrictions based on a political determination of priorities and not on a necessarily static analysis of comparative costs. Yet when all this has been allowed for, the special weaknesses of foreign trade of communist countries remain. Not the least of them is the almost total failure to develop any theory of foreign trade or to devise a pricing policy or a method of assessing costs which could be followed in intercountry comparisons. It is not by any means always necessary to determine the pattern of trade by reference to such comparisons, but one should surely start by knowing these elementary economic facts of life.
Economic Bulletin for Europe. → Published since 1949 by the Economic Commission for Europe. See especially Volume 15, No. 1 and Volume 16, No. 2.
Kaser, Michael 1965 COMECON: Integration Problems of the Planned Economies. Oxford Univ. Press.
Nove, Alec; and Donnelly, Desmond 1960 Trade With Communist Countries. London: Hutchinson.
Pryor, Frederic L. 1963 The Communist Foreign Trade System. Cambridge, Mass.: M.I.T. Press.
U.S. Congress, Senate Committeeon Foreign Relations 1964 East/West Trade: A Compilation of Views of Businessmen, Bankers and Academic Experts and Statistical Appendix. Washington: Government Printing Office.