SOVIET COOPERATIVES: TRANSIENT OR PERMANENT?

by

Hugh R. Whinfrey

Given the cyclical history of Soviet attempts at economic reform, the long-term stability of private enterprise in the USSR is an uncertainty in the minds of most interested parties. At the heart of the matter lies the reason for allowing private enterprise in an environment so ideologically hostile to it. Survival of these economic reforms in such an environment is necessarily conditioned upon the continuance of the reason for their existence.

In blunt terms, the reforms were forced upon the USSR by decades of ideological ignorance of freshman-level economics. In microeconomic terms, since Stalin's time the Soviets have been running a crude approximation to a third-world developing economy where abundant natural resources and abundant labor were the predominant inputs to production. The successes of Stalin's industrialization can be attributed to large marginal labor productivity gains resulting from increased capital investment, an underutilized factor input. Unfortunately, such a policy continued, and the marginal labor productivity gain from now overutilized capital investment finally hit zero in the early 1980's.¹ Depletion of easily extractable natural resources was on the horizon, and population growth had slowed in industrial areas. These inputs could no longer be increased quantitatively. The USSR had literally reached the limits of its own economic system.

Microeconomic theory gives two ways out of this dilemma, either the hasty discovery and implementation of new production processes, "scientific-technical progress" in Soviet jargon, or a general increase in labor productivity. The Gorbachev regime began in a tame fashion by systematically investigating these two paths in addition to other efficiency measures. By the middle of 1987, the systematic caution gave way to sheer panic as the realization crystalized that a general increase in labor productivity was the only viable alternative.

Part of this realization had its origins in an economic experiment authorized by the Central Committee in early 1984, prior to Konstantin Chernenko's election as General Secretary. This experiment in the consumer service sector was an attempt to discern whether both the quality and quantity of consumer services could be increased without allocating more resources. It supplied motivation by allowing the enterprise to dispose of its residual profits as it saw fit. The experiment promoted contractual obligations between enterprises, individuals, government ministries and work collectives. The contents of the contracts were to be negotiated by the parties involved.

The experiment began an July 1, 1984 in eight provinces of the RSFSR, being extended to other provinces and republics in 1985. The most significant result was that labor productivity had in every case expanded by at least 50 per cent,² and moreover the productivity increases had occurred almost overnight.

Spectacular successes were given much publicity and the experiment evolved into government policy with the 'Law on Individual Labor Activity', enacted November 19, 1986 and implemented May 1, 1987. On the surface, the law was a departure form Brezhnevian economics in that it recognized the failure of the command economy in the service sector. The deeper motivation for enacting the law was probably an attempt to control the underground economy, against which a Stalinistic campaign was being conducted in the latter half of 1986.

The 'Law on Individual Labor Activity' compromised traditional Soviet principles only at the margin, and represented no revision of basic ideology. Use of hired labor remained forbidden, individual self-employment was generally not acceptable as full-time employment, local authorities directed the issuance of business licenses according to their whims, and tax issues were left to the republics.

This law did however set some meaningful precedents. Private enterprise was allowed in a broad range of activities, not limited to just the service sector. The principle of 'what is not explicitly forbidden is allowable' was established. Ominously, both prices and central planning of production were not mentioned.

In practice the 'Law on Individual Labor Activity' generated some legal precedents and provided propaganda for both foreign and domestic consumption. Little else changed. One of the major obstacles was that material inputs for the allowed enterprises could usually be obtained only through the black market. Activities that required few material inputs were deterred from registering by the income taxes imposed. The lack of both a legal wholesale market and a neutral bureaucracy minimized the impact on the economy as a whole.

In response to the regime's increasing focus on labor productivity, the 'Law on Cooperatives' was adopted May 26, 1988 and implemented July 1, 1988. Its origins can in part be traced to another economic experiment, started in 1985 under Academician Tatyana Zaslavskaya in the Siberian Altai krai. This experiment with small autonomous work units produced excellent results in labor productivity. The motivation was supplied by a form of profit-sharing. Full financial accountability, elements of market pricing, and negotiated contracts were all components of this widely publicized experiment.

The 'Law on Cooperatives', unlike the 'Law on Individual Labor Activity', was a radical departure from traditional Soviet dogma and offered real changes. Minimum membership requirements were set at three individuals, full-time work in the cooperative was permissible, and no special permission was needed to form one. While hiring paid workers was still not allowed, cooperatives could hire individuals on a contract basis, reducing the wage labor issue to simply an ideological relic. The cooperatives were clearly intended to function in a market system and featured independent production planning, financial accountability, and democratic management. There was even a trial period prior to the adoption of the law in which some of the potential problems with it were debugged.

Initial popular reaction to cooperatives was massive and negative, despite much encouraging propaganda. Ideological incompatibility with socialism, huge earnings of cooperative members, high prices, and the obvious involvement of black marketeers were common complaints from the population. The bureaucratic criticisms were similarly negative.

The labor productivity of the cooperatives has been excellent, and in fact is beyond criticism. By the middle of 1990 cooperatives employed 5 million people and accounted for less than 7% of the GNP.³ Such slow growth has been frequently analyzed as disappointing, yet it is phenomenal considering the extraordinary difficulties posed by the hostile ideological environment, the general economic collapse, and the lack of an extensive legal framework.

Gorbachev's reforms have muddled the economy sufficiently to leave Draconian measures as the only alternative to private enterprise. The threat of a clamp-down from above is being treated in the West as credible, but the public response to the recent meddling in the Baltic well illustrated that extensive Draconian measures would result in civil war. Gorbachev's policy on ethnic nationalism within the USSR may well lead to it anyway. Civil war would only force the people to fend for themselves through private enterprise and further degrade the existing Soviet economy. All paths lead to private enterprise. The cooperatives are here to stay.

Seattle, June 1991.

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