Privatization and the Soviet economy

PRIVATIZATION AND THE SOVIET ECONOMY

Only the voices of the emerging ruling ideology in the Soviet Union are heard in the news and commentary columns of our establishment press. There are, however, analysts in the Soviet Union who see things differently. This article distills and addresses the thinking of a large number of Russian-language writers unknown in this country, except perhaps to some specialists who follow Russian newspapers and magazines. Because of the unfamiliarity of the writers discussed here, we have included more references than is normal in an MR article.

The reform debate, both inside and outside the Soviet Union, has largely assumed that the Soviet people must adjust to the requirements of a market economy instead of the other way around. The ubiquity of this opinion rests less on the soundness of the neoliberal arguments from which it derives than on the strength of the interests that these ideas serve. It is necessary, therefore, to turn the tables and to approach the reform from the perspective of the wage-earners whose interests normally go unrepresented in such discussions. My analysis takes as its point of departure the centrality of worker organizations, autonomous trade unions, and labor-oriented parties in the struggle to invent a post-Stalinist political economy in the Soviet Union.

Soviet Industry and the World Economy

Iurii Olsevich has described a familiar pattern emerging in the Soviet Union over the past few years. Liberalizing economic legislation is ratified in the Supreme Soviet to a round of rapturous applause, the reforms soon yield unexpectedly egregious results, and corrective counterlegislation is passed in "melancholy silence" (Olsevich 1989: 30). Until recently, the least challenged of extant myths was the belief underlying these decentralizing measures that market forces, freely introduced into any industrial structure, will automatically result in economic dynamism and innovation (Kern 1991: 118). The first stage of Soviet reform, and especially the collapse of the industrial base of the former German Democratic Republic (DDR), have brought home the fatuity of this belief. With all the advantages of integrating into the world's third leading industrial economy, the DDR fell from the thirteenth largest industrial producer in 1989 to the fiftieth by the end of 1990, with 39 percent of its labor force out of work (Kulczynski 1991: 7; Olsevich 1991b: 23).

Liberal dogma notwithstanding, whenever the weakest sectors of a former command economy must face unregulated competition, market forces will rapidly polarize the industrial terrain (Kern 1991: 118). The fragile islands of modernization and innovation existing within the old economy will soon be wiped out because they are not yet competitive on the world market. Shock therapy by itself can only lead to a pattern of specialization in technologically simple manufacturing, which itself can only be sustained by a reduction in the social wage sufficiently drastic to permit competition with the third world. The exposure of a backward industrial base to international market forces also reinforces existing productive patterns based on natural resource extraction, which maximizes exports in the short term (Bogachev 1991: 14). Such an outcome devotails neatly with capital's intention to insert the Soviet Union into the world economy in a manner consistent with continued Western hegemony. The West is primarily interested in having the Soviet Union remain a semiperiphery to which it can sell industrial goods and food in exchange for raw materials (Olsevich 1991b: 23). Such a trajectory is hardly in the interest of the Soviet people.

Belotserkovskii has been one of the few analysts who have situated perestroika in a global context by arguing that the international economic system is no longer capable of sustaining the emergence of a successful large capitalist country (Belotserkovskii 1990). All the major capitalist states achieved economic predominance in an era when their ruling classes could exploit their own citizens and colonial peoples mercilessly without competition from powerful rivals. He predicted that if the Soviet Union were to choose neoliberal recapitalization, it would soon slide uncontrollably into the ranks of the underdeveloped countries rather than climb into the ranks of the first world. The massive influx of foreign capital eagerly anticipated by some Soviet economists would almost certainly gravitate toward the service sector, communications, and other secondary activities rather than finished goods production, just as it had in the third world (Pushkov 1990). Semikhodskii concludes that, in any event, even the most lucrative injections of foreign capital would amount only to a "drop in the bucket" when measured against the enormous scale of the needed restructuring (Semikhodskii 1991).

The full consequences of a rapid integration of the Soviet economy into the world market are incalculable, and nobody can predict with any degree of confidence how much of the industrial base can survive (Olsevich 1991b: 23-24). As a result of the leadership's single-minded concentration on the arms race, the Soviet Union missed the third great technological revolution that has taken place in the past quarter-century. More than half of its basic productive assets are obsolete, and it would require about fifteen years to bring as much as a quarter of the industrial base up to competitive levels (Semikhodskii 1991). Soviet economists estimate that less than 30 percent of serial machine-building production can compete on the world market (Loginov 1989: 37). If such claims are borne out, the liberalization of foreign trade would set into motion a devastating de-industrialization which few enterprises will be able to survive. Forty percent of all Soviet enterprises cannot make a profit even today (Kulikov 1991: 43). At least half of them would probably go under if exposed to international competition, putting up to a third of the labor force out of work. Most profitable enterprises are "objectively unprepared" for autonomous decision-making because of the lack of a market infrastructure, the economic illiteracy of administrative cadre, the monopoly structure of production, and chronic supply difficulties (Lvov 1989: 32).

Militarization and Monopoly

The problem of economic conversion is compounded by the extraordinary scale of Soviet military expenditures in relation to GNP, which exceed the comparable levels in other advanced Western societies by two to five times (Iziumov 1991: 31). Many firms and regions depend heavily on military orders, and the prevalence of these "nonmarket branches" argues strongly against shock therapy (Belkin 1990: 65-66). Such unparalleled militarization has fostered unparalleled monopolization: Western sources put the number of goods produced by one supplier at 30 to 40 percent of all Soviet output, but the level of effective monopoly is probably closer to 70 to 80 percent (Weidman 1991: 404; Olsevich 1991b: 22). Fundamental restructuring must demobilize the command system from a virtual war product footing and commercialize the economy. Without this, privatization would merely produce new forms of monopoly and a different gallery of elite beneficiaries without providing any stimulus to increased efficiency, technical progress, or the expansion of production (Sapir 1990: 138). Real competition is out of the question in such heavily militarized economies, and attempts to foist it on such structures prematurely would result in "theatrical market relations" at best (Deriabina 1991: 63).

Economic Governability and Shock Therapy

The first stage of perestroika will probably be looked back upon as an historical parenthesis between the collapse of a failed orthodoxy and the recognition that structural realities preclude a free-market utopia. The Soviet Union lacks both the time and the margin of safety to allow market forces to lead development (Danilov-Danilian 1990: 196). Appeals for a more gradual transformation and justifications of the prolonged coexistence of old and new institutions could obviously be used by the apparatus as a ruse to perpetuate its own power and privileges, but as Danilov-Danilian has said, it is the irony of reform in neo-Stalinist economies that "the same command-bureaucratic system which previously specialized in the asphyxiation of the market must now be used to cultivate it." The principal economic trend of the Brezhnev era was the crumbling of central administrative authority and the diffusion of effective control to monopoly structures (Bogachev 1990: 125-26). The neo-Stalinist system was ultimately done in by the erosion of its steering capacity, and a statist economy can only be reformed through measures that strengthen coordinating mechanisms (Olsevich 1991a: 32-36). Price liberalization or a more precipitous shock therapy will only worsen these already serious control problems in an economy that sprawls across an enormous expanse of territory and has profound production imbalances, monopolization, widespread poverty, and technological backwardness. As paradoxical as it may seem, Bogachev contends that the first objective of perestroika should be to centralize economic control in a new democratized form as the only means of restoring governability to an economy which has disintegrated into cellularly autarchic power centers behind the facade of the old command pyramid (Bogachev 1990: 125-26). A reform government would have no choice but to employ administrative measures and a planned reorganization of the economy because truly competitive markets cannot be introduced in most sectors for years, perhaps decades (Valovoi 1991).

Soviet neoliberals follow their Western counterparts in viewing inflation as a purely monetary problem which can be wrung out of a system through punishing price reform. Kolodko considers it "naive and dangerous" to maintain that such a drastic price shock will soon lead to a market equilibrium and the elimination of deficits (Kolodko 1991: 158). Pent-up demand for a sampling of essential consumer items was found to be running at about 40 percent for meat, 50 percent for sugar, 30 percent for shoes, and 50 percent for toothpaste (Shprygin 1990). Free prices in conditions of a shrinking economy are likely to intensify a spiral of Infliatsita or supply-side inflation, which can only balance supply and demand at levels unacceptable to the Soviet people (Vernikov 1991: 158). The most drastic monetary or fiscal measures can only have a temporary effect in a severely unbalanced economy because price effects cannot alter the underlying structural situation (Shprygin 1991).

Loginov warns against the "dangerous illusion" that the collapse of the domestic consumer market is the result of excess liquidity, because Soviet wages have been deliberately restrained since the early 70s and are only now making up lost ground (Loginov 1991: 9, 18). In his view, the primary cause of inflation is the long-running undercapitalization of the consumer goods industries. Free prices could probably rise enough to balance supply and demand, but the social costs would be excruciating and probably not supportable within a democratic political framework. The first priority must be the rapid expansion and upgrading of resource-starved civilian branches, especially in the food industry and light manufacturing. If the "dog is buried in production," as this diagnosis suggests, the work of reconstruction must be shifted there (Valovoi 1991). The fundamental structural characteristics of the Soviet economy are its "extreme qualitative heterogeneity" and deliberately engineered sectoral imbalances, which both stem from the militarization of production (Iaremenko 1991: 5-6). Gorbachev estimates that the technological level of nonpriority industries trails the defense sectors by one to one-and-a-half generations, which makes free-market interaction between the two virtually impossible (Gorbachev 1991).

The Mechanisms of Privatization

A key problem in any reform project will be who is rewarded for the success of risky projects and who is punished for their failure (Rakitskii 1990: 12). Many neoliberal ideologues blame the irrationality of the command economy on state property that lacks a hands-on owner and remains an impersonal instrument to managers and workers alike. This diagnosis harkens back to an idealized era when entrepreneurial control was the dominant form of management and a single identifiable individual combined the roles of owner, manager, and inventor. Even granting the plausibility of this notion in an age when direct administration is routinely divorced from ownership, Bogachev and many other economists question whether there can be found in the Soviet Union a sufficient number of individuals with an entrepreneurial mentality who would be keen to submit themselves to "merciless self-exploitation with open-ended workdays and no vacations" (Bogachev 1991: 15). Bogachev observes that not even a Lithuanian government riding a tide of fervent nationalism has been able to coax the indigenous farm population into leaving the kolkhoz voluntarily and going into private production.

A rapid, massive privatization seeking to create a large entrepreneurial stratum runs the additional risk of diverting capital formation into propping up the old productive base instead of creating a new economic order (Murrell 1990: 9). Even some neoliberals voice concern that a hasty privatization will inevitably result in the transformation of the nomenklatura into the "direct owners of a significant part" of de-nationalized industrial assets or enable the shadow economy "mafia" to buy up most key holdings (Nikoforov and Kuznetsov 1991: 40; Koriagina 1991: 157). Either outcome would be sure to stoke seething popular discontent.

Even if privatization succeeded in rapidly creating a proprietary bourgeoisie, these new entrepreneurs would almost surely seek to assure a free flow of resources to sectors with rapid turnover, especially trade and speculative activity (Gaidar 1990: 13). In a chronically unstable business environment, these new commercial strata would understandably be wary of getting involved in long-term undertakings. Consequently, the sum total of rational individual decisions could easily produce continuing economic decline. The neoliberal project fails to address this reluctance of calculating capitalists to invest in productive endeavors, but such projects remain the key to reindustrialization. The more sober neoliberals are cautioning that the future of the fledgling private sector would depend to a large extent on the evolution of the state sector over the next fifteen or twenty years, and the "commanding heights" of the economy must remain under government control during this period (Nekipelov 1990). Neoliberal realists like Nekipelov have been trying to dispel the illusion that the private sector can soon become the main engine of an advanced industrial economy. Even if two thirds of Soviet industrial assets were privatized within the three years projected by the Shatalin Plan of 1990, the supportive infrastructure of commercial banks, communications networks, and essential regulatory agencies would not be in place for a long time to come (Kuznetsov 1990).

Some establishment Soviet economists state quite openly that privatization in fact means "capitalization," although most of them use language that defers to popular sensibilities (Evstigneev 1991: 65). Eastern European economists like Karel Kouba, a Czech, are less restrained about dismissing the notion of voluntary privatization as "illusory" because public indifference would cause the process of stock distribution to drag on for decades (Kouba 1991: 157-58). He instead advocates the compulsory administrative transfer of control over assets to politically insulated holding companies. If the Soviet public is unwilling to come across with any more than the 10 to 20 billion rubles advanced so far annually to purchase state property, it would require 75 to 150 years to auction off voluntarily the roughly 1.5 trillion rubles of industrial assets scheduled to be privatized (Iasin 1991: 105). This realization has prompted some of the more sophisticated Soviet advocates of privatization to recommend that firms be taken over compulsorily by consortia made up of representatives of large banks, contracting firms, and independent entrepreneurs (Bogomolov 1991). Bogomolov contends that by virtue of their fiduciary distance from the enterprise, these joint oversight bodies can install "competent and tough managers who will be able under any circumstances to conduct an optimal economic and technological policy even if this rubs some people the wrong way." Like Kouba, he supports undivided managerial control expressly to preempt experiments in collective ownership.

Others more wary of a volatile popular mood propose the public distribution of transferable shares to the entire citizenry. Yevgenii Iasin concedes the "very widespread popularity of the notion of collective property among workers," and counsels that the government humor public opinion to a limited extent (Iasin 1991: 103, 111). This neoliberal economist views the free distribution of 10 to 15 percent of state property as an opening gambit in a long process of privatization where a combination of market pressures and the free sale of individual shares could be relied upon to restrict collectively owned firms to a small fraction of industrial assets. Similarly, Polish neoliberals have no doubt that impersonal economic forces in the form of plunging living standards will induce most workers to sell their certificates to "genuine entrepreneurs," who will quickly coalesce into a dynamic bourgeoisie (Kolodko 1991: 158).

The reliance on fiscal control to steer development in effect cedes the determination of production priorities to bankers and the transnational capitalist financial institutions with which they will be closely affiliated. Most East European neoliberals and party-state modernizers view democratization as nothing more than the "end of the one-party system and the formation of a power elite through elections" (Staniszkis 1991). The program of the technocratic modernizers could be summed up in the reworking by one journalist of the 1917 revolutionary slogan: "All power to the managers" (Chichkanov 1990). This would translate practically into a "separation of powers," with the worker organizations confined to minor labor market matters while new professionalized managers assume absolute control over production (Lvov 1989). The property law passed by the Russian parliament limited the proportion of shares held by enterprise work collectives to 10 to 20 percent (Kurashvili 1991). The privatization formula was clearly designed to ensure that the controlling interest in the enterprise would pass to a class of stockholders or managers appointed by them.

Bringing the State Back In

At least in public, the neoliberals are backing off from their earlier flirtation with an authoritarian anarcho-capitalism along the lines of the Chilean model. This is in part a result of their growing skill in hiding their real political intentions. But the change of heart among theorists has been most strongly influenced by realignments within the reform-oriented strata which are coming to find corporatist solutions more palatable.

The more serious neoliberal theorists readily admit the need for a "strong executive regime" to implement their reform agenda (Kara-Murza 1990). For all its genuflections to the free market, the Shatalin Plan implicitly assumed that a strong state would be required to deal with all the vital questions that were studiously unaddressed in the 500-day program, such as unemployment, rapidly escalating social tensions, and the administrative maintenance of supply linkages (Kliamkin 1990). The market is a "myopic" lens focused on current prices, and lacks the capacity to implement long-term structural change that successfully integrates technological development, ecological imperatives, and social welfare needs (Kuznetsov 1990).

The main objection to neoliberal shock therapy in power elite circles stems from a growing realization that Soviet reformers are not treating the ills of a poorly functioning market economy, but of a qualitatively different statist system whose supply and demand are too far out of balance to be resolved simply by freeing prices. The ideological champions of the new managerial elite are abandoning their antistate populism and courting the extension of the "solicitous strong hand of a state which is both ready to correct and assist our entrepreneurs," in imitation of the NICs of Asia (Danilenko 1991). Neoliberal academics are warning their ultras not to ignore the vital role of state expenditures in economic stabilization during the transition to capitalism (Potapov 1991). An editorial champion of the new class of "entrepreneurs" conceded that Soviet state capitalist and private businesspeople are still too few and fragile to enter into real competition and thus will depend for a long time on the state for everything from orders and financing to supply procurement (Sokolov 1991). The Scientific-Industrial Association, an association of state enterprise managers, is bidding to become the ideological bellwether of this embourgeoisement and the "embodiment of the entrepreneurial apex of the triangle" of post-Stalinist corporatism (Vladislavlev 1991). Like Western big business, these modernizing segments of the managerial technocracy are already claiming that the "national interest in a civilized state must coincide with the interests of our national entrepreneurs." Neo-Machiavellians such as Mosca and Pareto made no pretense about polyarchical elites governing on the basis of anything more substantial than their own narrowly conceived interests, and this particularistic calculus rarely coincides with the broader social interest. This corporatist project is just another recrudescence of aristocratic politics, substituting technocratic myths for popular self-determination and solidarity. There is no reason to expect that the modernizing elites gradually displacing the old guard will of their own accord accommodate majoritarian needs any more than their predecessors did. Quite the contrary, the neoliberal model will broaden the objective basis for class conflict and coercion, because a reform government committed to this strategy must keep wages depressed and labor docile to attract foreign capital.

Conclusion

Gorbachev initiated perestroika to prevent the dominant class of the Soviet Union from committing collective suicide. He offered an alternative to the crumbling status quo. The failure of the August 1991 coup demonstrates the success of perestroika from above in promoting realignments within such elite groups as the military and police, which can no longer be treated as homogeneous blocs. The same holds true for the party-state machine, because at least half the new managers of the privatized firms and joint ventures are former middle-level apparatchiki (Osipenko 1991: 67). Partisan polemics have not prevented the economic strategies of the party-state modernizers and the neoliberals from converging in principle as a result of this commercialization of the nomenklatura. All elements of the Soviet power elite have embarked on a forward march to embourgeoisement, and alternative reform projects with different agendas will have to come from other quarters.

The monopoly structure of the economy and the ingrained dirigiste reflexes of the Soviet power elite strongly suggest that capitalism can only be restored as "bureaucratic capitalism with an authoritarian corporatist state," presided over by an economically liberal, growth-oriented dictatorship (Buzgalin and Kolganov 1991: 30). Such a strategy cannot permit nonentrepreneurial power centers to emerge that are able to offer effective resistance to market forces. With this political imperative in mind, a neoliberal journalist urged the government to begin sacking striking miners as a means of bringing to heel the increasingly assertive autonomous labor movement "behind which looms the spectre of class struggle and the final revolution" (Sokolov 1991). Soviet reformers anticipating eternal peace in a postindustrial society with a political culture bleached clean of radical opposition are likely to be rudely disappointed. The collapse of the Kriuchkov putsch has finally dealt the coup de grace to 1929 and the Stalinist institutional legacy. But the more astute Soviet modernizing elites are well aware that they still must either dispel or come to terms with the socialist emancipatory promise of 1917, which is still waiting to be redeemed in perestroika from below.

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Patrick Flaherty has Ph.D. in political science from Harvard University and writes frequently on the economics and politics of the Soviet Union and Eastern Europe. He has published a more detailed study of Soviet neoliberalism in the Socialist Register 1991.

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