Sorry, Perestroika Isn't Enough

I RECENTLY returned from an extensive visit to the USSR and a series of meetings with managers, entrepreneurs, and state officials involved in reforming the Soviet economy. One US delegation went from traditional state-run factories in the Ukraine to private firms in the hi-tech city of Zolenograd. The major impression I came away with is that removing the institutions of a communist command economy won't be enough to transform Soviet society. In addition to developing the institutions associated with market systems, such as the protection of private property, Soviet managers need to acquire basic business skills consistent with a market economy. We take these skills and attitudes for granted in the West, but 70 years under a command system has extinguished them in the Soviet Union. They won't be learned overnight.

We need only look to our own experience with economic deregulation to understand the problem. Managers in regulated US industries, like airlines, became experts at dealing with government bureaucrats and regulatory red tape - much like their Soviet counterparts - but had no experience coping with a deregulated market. In many cases, these managers had to be replaced by those in other industries who knew how to set prices, determine consumer demand, and operate in a market economy. Now imagine the difficulty of making that transition in a country like the USSR where managers have no market experience, and everything is deregulated at once.

Except for a brief period of market influence in the 1920s, the Soviet economy has always run in a top-down fashion. Gosplan, the state planning system, determined what would be produced and in what volume; it also determined the materials needed for production, and the prices charged for all goods and services. Decisions were made by central planners according to political dictates, not consumer preferences. This information was transmitted through the ministries to managers whose job was simply to carry out the commands. It was against the law for managers to fail to meet Gosplan's targets. Those who innovated and discovered more efficient ways to meet production goals would find their resources cut in the next plan, so it was in the interests of these managers to be as inefficient as possible.

Traditional business skills, such as marketing, planning, and managing resources, never develop under such a system. For example, we met with a group of would-be Soviet entrepreneurs who wanted to sell Ukrainian language tapes to Americans interested in doing business with the Soviets. They had to be reminded that even in the Ukraine, business is conducted in Russian.

We also met with factory managers who are now allowed by the state to sell some proportion of their consumer goods on the private market. A shortage of capital prevented them from expanding output, even though there was a three-year waiting list for their products. It never occurred to the managers to raise their prices as a way of generating that capital.

And finally, we held several meetings with academics from management institutes who displayed new interest in teaching the rudiments of business. Concepts such as modern accounting and personnel management have not been taught before because no teachers in the USSR understand their complexities.

More important than business skills may be the absence in the USSR of a set of attitudes fundamental to the functioning of market economies. These include the notion that taking risks might be rewarded - an alien idea in an economy where the only rewards until recently came from waiting patiently (often until those above you died). The concept of reward tied to performance is another alien idea. Some managers we spoke to were prepared to agree that rewards for employees might vary with the performance of the enterprise, but none felt an individual's performance should influence his or her compensation. Indeed, the very notion that individual initiative is important is out of step with Soviet norms. The hostility sometimes directed by the general public against small-time entrepreneurs in farming or restaurants is based largely on the view that entrepreneurial activities are illegitimate.

It's not surprising that the main repository of entrepreneurial skills in the Soviet economy lies with a group that was never socialized into the command system - black market operators. These individuals were by definition criminals existing outside the economic system. Clearly some part of Soviet society's resistance to entrepreneurial activity stems from the fact that such endeavors are still associated in the public's mind with the criminal element.

The absence of attitudes and skills necessary to operate a market system is one reason there's been so little restructuring. Despite major media coverage of entrepreneurs in the USSR, their numbers are few. The only extensive market economy appears to be the apartment repair business in Moscow. About 100,000 workers left state construction last year for jobs as independent contractors. Outside Moscow, most entrepreneurial activity is in cooperative restaurants (owned by three or more people) which, along with apartment repair, is one of the simpler functions in an economy. The apparent explosion of joint ventures with foreign businesses, which could signal more sophisticated business operations, is largely a smoke and mirrors exercise. Some 16,000 joint venture agreements have been signed, but most are simply agreements to talk. Experts can name only five that are actually operating (in fast-food). Also, such agreements tend to benefit state enterprises by manipulating bureaucratic rules without responding to market demands. Thus, the role these joint ventures could play in shifting the economy to a market one is minimized.

The other countries of the Eastern bloc, like Hungary, Poland, and Czechoslovakia, have a distinct advantage in making the transition to a market system because they still have a generation with some memory of the skills and attitudes needed. One of the easiest and most useful ways for the West to help the Soviets is to provide assistance in learning business skills and market orientations through exchanges and other programs. But a system of thinking antithetical to market approaches that dominated all aspects of society for 70 years will not be transformed overnight.

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