Perestroika

Economic Policy October 1988 Printed in Great Britain
Perestroika
Domenico Mario Nuti
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Summary
Reform is almost as old as the history of socialist economies. Indeed

the typical pattern is one of reform followed by reversals and recen-
tralization, with pressure for reform mounting again as the system's
shortcomings re-emerge. Is the current wave any different from the
others? Many signs indicate that Perestroika is deeper if not outright
revolutionary.
The need for reform is intimately linked to the systemic difficulties
of socialist economies. These difficulties are primarily due to a
generalized failure to provide the incentives required to operate an
otherwise quite perfected planning process. Neither enterprises, nor
workers, nor planners have the incentive to offer the best response.
As a result, centrally planned economies are typically good at achiev-
ing a single objective, but have failed at pursuing multiple targets
and more balanced growth. Indeed, the overall economic performance
of the last two decades is seriously disappointing.
What distinguishes perestroika from previous reforms is its radical
nature, a change apparently designed to move several countries away
from the visible fist of the command economy to the invisible hand
of markets and quasi-markets. This includes a serious dismantling
of central planning, and a concerted effort to introduce competition
and to increase individual economic and political responsibilities.
It is too early to tell whether this reform will succeed. This article
provides markers for early detection of how perestroika will fare.
The New Deal
V
HOW'M l "D0IN7'
International Herald Tribune, December 21, 1987. Copyright 1987 Universal Press
Syndicate. Reprinted with Permission. All rights reserved.
Perestroika: transition from central
planning to market socialism

Domenico Mario Nuti
European University Institute, Florence
1. Introduction
In principle there are many alternative blueprints for a socialist economy
and society. All of them involve a combination of varying degrees of
social ownership, planning, equality and participation in decision mak-
ing. It turns out that the Marxist-Leninist model, as established in the
USSR, has dominated the socialist experiment to the point of being
identified with 'realized socialism'. This is not a claim to the exclusive
and true realization of an ideal but a plain statement of the fact that
we know no other. The basic features of the Soviet-type system are well
known: public ownership (mostly state but also collective), centralized
planning by administrative bodies transmitting commands mostly in
physical terms to one-man-managed enterprizes also conceived as
administrative units, and communist monopoly of political power
pervading the state and the economy at all levels.
The whole history of socialist economies is characterized by repeated
attempts at reform in order to improve shortcomings or to adapt the
model to other countries and to changing internal and external condi-
tions. By 1921 War Communism, at first saluted as the real implementa-
tion of the socialist project, had degenerated into economic anarchy
and was replaced by the mixed private-state market system known as
New Economic Policy (NEP). External threats and concern for systemic
survival led to the parallel strengthening of political centralization
(especially the banning of factions within the Communist Party, i.e. the
birth of so-called 'democratic centralism'). This contradictory combina-
tion of central authority and private markets was bound to be institu-
tionally unstable. Moreover, NEP failed to deliver full employment
I am grateful to Renzo Daviddi for research assistance; to Murray Feshbach, Seppo Honkapohja,
George Yarrow and other Panel participants for helpful comments; errors, omissions and opinions
should be attributed solely to the author.
356 Domenico Mario Nuti
(there were 1.5 million unemployed in the USSR in 1926) and indus-
trialization. The centralized model was restored in a more developed
form, retaining money and consumption markets but reasserting central
planning over physical allocation through sectoral Ministries. Central
planning delivered-at a cost - industrialization and victory in war.
When the system was extended to Eastern European countries it

appeared to be less suited to their economies, many of which had already
achieved a great deal of industrialization. In addition, the autocratic
features of the model, the birthmark of the tsarist tradition, had no
place in several of the other East European countries. Shortly after its
break with Moscow in 1948, Yugoslavia worked towards 'associationist'
socialism: a combination of market, public ownership and workers'
participation in enterprise decision-making and net revenue sharing.
Stalin's death in 1953 was followed by a round of reform attempts in
the USSR (with the decentralization of regional economic councils or
sovnarkhozy in 1957), Poland (1956-58) and Hungary (1956, crushed
by Soviet military intervention). Thereafter, a repeated pattern of
recentralizations, new starts and reversals of the reform process fol-
lowed, against a background of a steadily deteriorating economic per-
formance. Reformed models have tended everywhere to revert, sooner
or later, to a version of the basic centralized model.
Today we witness extensive, indeed spectacular, attempts at reform
in the USSR, with the perestroika ('restructuring', 'transformation',
also defined as 'revolution') promoted by General Secretary Mikhail
Gorbachev since his coming to power in March 1985 (Aganbegyan,
1988). Perestroika is now said to have entered its second stage of
implementation. Foreign trade can be conducted directly (though still
subject to licensing) by a number of Ministries and enterprises. Non-state
activities have been legalized and encouraged. The promotion of joint
ventures with Western partners also contributes to greater economic
diversity. Current plans include price reform (1990), the revamping of
money and credit, membership of G A T T and the IMF, rouble converti-
bility and - most importantly - the relaxation of the Party's grip on the
state and the economy. Renewed impetus for reform has come from
the Extraordinary Conference of the Communist Party in late June
1988, which consolidated Gorbachev's political power and - bypassing
the Central Committee - directly endorsed the course of perestroika.
With varying degrees of intensity, similar processes have already
taken place in Hungary since 1968, in Poland since 1980 in spite of a
spell of military rule, and in China. Bulgaria is catching up rapidly with
Soviet perestroika. Czechoslovakia, after introducing watered down
versions of the new Soviet laws, now appears to be making progress.
On the other hand, the GDR seems satisfied with its vertically integrated
Perestroika 357
sectors, each replicating a small centrally planned economy and
Romania's family rulers are rejecting reform.
For some it is all deja vu. The very frequency of reform attempts is
seen as an evidence that the system is not reformable: the Soviet model
is specially constructed 'not to change, to resist every imaginable social,
technical, and human pressure, both internal and international'; it 'is

so perfect that it is impossible to remove a single stone without destroy-
ing the entire edifice' (Tatu, 1987). For others, current developments
are viewed as a total departure from socialist principles. Thus, in Soviet
folklore today the question 'What is socialism?' has been given yet
another answer, that 'socialism is the longest road from capitalism to
capitalism'.
What has been missing so far is not the ability to change but the
ability to invent and implement a coherent new model and to stabilize
institutional change. A major obstacle to such stabilization has been the
political rulers' unwillingness to relinquish to markets their monopoly
of power. In addition, the dominant soviet position has strictly con-
strained the range of feasible institutional change in other countries
(as demonstrated for instance in Hungary in 1956, Czechoslovakia in
1968 and Poland in 1981). Major changes will have to be introduced
and accepted in the USSR before a new model can be stabilized. The
deterioration of economic performance throughout the socialist bloc
since the early 1960s has provided both renewed pressure for reform
and, at the same time, an environment unfavourable to the success of
reform. A reform process is inflationary and unlikely to succeed unless
exogenous factors improve or deflationary measures are simultaneously
taken. Austerity, however, requires a measure of political consensus,
hard to obtain from the population in the absence of democracy.
The only genuinely new model - i.e. different from the various ver-
sions of the basic Soviet-type model - already in existence, is the Yugo-
slav model. Another socialist mutant is now in the making, which we
can label 'market socialism'; it is implicit in official blueprints for reform,
for instance in Hungary and Poland and now the USSR, but the model
has not been implemented and it is incomplete in its design if it is to
differ from social-democratic capitalism.
The present round of attempts at economic reform differs from
earlier ones in many important respects. The lead comes from the
USSR, with Gorbachev's perestroika, and it is accompanied, in the
USSR, by the necessary emphasis on political renewal (glasnost). It is
characterized by the toleration and encouragement of individual and
cooperative enterprises, in the USSR and elsewhere. There is a recogni-
tion that some traditional tenets of socialist policy may have to be
relaxed, such as unconditional commitment to price stability, the
protection of job rights and full employment itself. From Hungary to
China, from Bulgaria to Poland and the USSR, the reform is extended
to monetary and financial relations, with generalized remonetization
and the activation of some capital markets. There is greater opening
to foreign trade with other economic systems and to foreign investment
(even with a majority stake in mixed companies, and even in banking)

while the commitment to servicing a large external debt forces the
maintenance of these conditions. On the negative side domestic excess
demand persists, which is aggravated by stagnant productivity and
presently falling terms of trade. This excess demand could, however,
be reduced by a more decisive relaxation of the traditional systemic
commitment to stable prices and by the savings in military expenditures
which could follow the Reagan-Gorbachev agreement. While there is
no certainty that this round of reform will succeed at last, there has
never been at any other time a more favourable combination of circum-
stances. This is what makes interesting, indeed exciting, the analysis of
the process of transition between central planning and a market social-
ism yet to come.
This article is structured as follows. First, the main features of the
traditional Soviet-type model are summarized (Section 2); its expected
and actual performance are briefly reviewed (Section 3) and its main
advantages and drawbacks, basically springing from the system's single-
mindedness and over-ambition, are investigated: on the positive side,
its ability to concentrate its limited resources in the pursuit of a priority
target, on the negative side the inability to coordinate more complex
tasks, assess and optimize trade-offs between alternative targets, achieve
equilibrium a n d - a b o v e all-innovate and adjust (Section 4). The
alternative between marginal improvement of the existing system and
radical reform towards market socialism is investigated in detail (Sec-
tions 5-6). Obstacles to reform are reviewed (Section 7) and conjectures
are formulated (Section 8) about alternative scenarios with and without
a successful radical reform.
2. The conventional centrally planned economy
2.1. Production, income and saving
In the traditional Soviet-type model (described for example by Ward,

1967 and Bornstein, 1979), production is organized as a single giant
firm, a monopolistic corporation entirely owned by the state. Individual
production units are administrative subdivisions dependent on branch
Ministries and acting exclusively on central instructions. Production
Perestroika 359
tasks are worked out at a central level for the whole economy and stated
in a national plan, then broken down by branch and by enterprise as
a result of a few (at most half a dozen) iterative rounds of two-way
consultations between the centre and the productive units. Workers are
employed by state enterprises at a money wage and have a right/duty
to work. In practice they are entitled to keep their post or to be

redeployed by (or even within) their enterprises. Private enterprise is
forbidden or restricted to the use of small amounts of (own or state-
rented) land or equipment with the assistance of family labour. House-
holds' money incomes can be spent freely in state shops at state-fixed
prices. Quantities supplied being also state-fixed, markets do not
necessarily clear.
2.2. Money and finance
Money is primarily an instrument of accounting and control. Financial

flows are compartmentalized between enterprises and households, with
a bank money circuit for inter-enterprises transactions, and cash (or
cash-convertible accounts) for transactions involving households as
buyers or sellers (Grossman, 1968). These financial flows are adjusted
passively to planned physical flows by a single bank monopolizing the
functions of commercial as well as central banking (dubbed 'Monobank'
in Western literature). Households' savings (whether voluntary or
involuntary) can take the form of a small range of durables including
some production goods, or cash or a limited range of financial instru-
ments (deposits, bonds, insurance, lottery tickets). The balance of
revenues and expenditures is closely monitored and forms the basis of
cash issues. Ideally it is balanced ex ante through price and incomes
policy. Enterprises can only use finance for purposes specified in plan
documents. This is what Berliner (1976) calls a 'documonetary'
economy.
Investment is centrally decided and allocated in real terms while
finance is provided automatically, interest-free from the state budget.
Straight line amortization charges are transferred back to the state
budget along with any realized surplus (alternatively further transfers
cover planned losses). Credit is mostly short-term, and is automatically
available to finance the enterprises' working capital requirements
necessary to fulfil their planned tasks; it is granted by the Central Bank
at an almost symbolic interest rate designed to cover banks' administra-
tive costs. Trade credit between enterprises is forbidden. Thus, money
in the traditional system is the unit of account, a two-tier medium of
exchange (conditional upon plan conformity), a store of value in compe-
tition with inventories of goods rather than with alternative financial
or productive assets. Money is an instrument for monitoring and con-
trolling plan implementation ('control by the rouble' is emphasized in
Soviet literature), not an instrument for economic management, except
when planners lose control over financial balances, in which case
monetary policy can be an important instrument for restoring
balance. Fiscal policy takes primarily the form of diversified (i.e.

residual) turnover tax rates or subsidies on commodities; income tax
is spurned as an unnecessary internal transfer within the state sec-
tor. A modest government surplus is the customary budgetary stance;
government deficits, when they occur, are effectively instantly
monetized.
2.3. International relations
Traditionally centrally planned economies are regarded as having a

propensity for autarkic or quasi-autarkic structure. The plan first esti-
mates the import requirements by commodity groups. Then export
plans are adapted to the foreign currency requirements of the import
plan; if a deficit emerges, over what can be financed out of reserves or
fresh borrowing, output plans are scaled down, unless import substitu-
tion can fill the gap. Exports are regarded as a 'necessary evil', a
withdrawal from the domestic market. Trade is undertaken through
large import-export state enterprises, specialized by commodity group,
not on behalf of producers but on their own account. Domestic
currencies are not convertible into commodities (outside the sphere of
consumer purchases by nationals), let alone into other currencies.
Exchange rates have a purely accounting role, with equalization sub-
sidies and taxes tending to make all planned exports equally profitable
to producers and imports competitive with domestic substitutes,
whenever they are available. The economy is effectively insulated from
fluctuations in international prices and exchange rates. National plans
are coordinated to enforce trade integration within the socialist trading
bloc. CMEA, or Council of Mutual Economic Assistance (also called
Comecon, but only in Western literature), includes the USSR, the East
European Six (EE6), Mongolia, Cuba and Vietnam. Even within CMEA,
however, trade flows tend to be bilaterally cleared (moreover within
groups of hard and soft commodities) and there is no common currency,
balances in the so-called transferable rouble being neither convertible
into Soviet commodities nor transferable to countries other than the
Soviet Union, without prior mutual agreement. Intra-CMEA trade
prices are usually indexed to a moving average of international prices
in convertible currencies. All in all, foreign trade transactions are
administratively determined and no automatic mechanism transmits to
Perestroika 361
producers signals about trade opportunities or induces them to take
advantage of any such opportunities.
3. Expectations and performance

3.1. Expectations
The promoters of socialist planning expected a number of advantages.

First, the ex-ante coordination of economic decisions - especially over
time - in place of the 'anarchy' of capitalist markets stressed by Marx.
Accordingly the benefits were to be equilibrium, greater efficiency and
the end of both inflation and economic fluctuations. Second, labour
was to be fully employed by mobilizing workers in any form of produc-
tive employment, at zero cost since they had to be supported anyway
by the system. Third, capital would be accumulated beyond the level
acceptable by myopic capitalists, generating higher growth and thus
offsetting any of the possible disadvantages of centralization. Fourth,
equality of incomes could be achieved and enhanced by a large share
of public consumption and the abolition of rentiers. Actual results to
date have been mixed and official Soviet and East European self-criticism
of the system's drawbacks is now sharper and more extensive than that
of most Western observers.
Full employment was implemented in the USSR in 1928-29 as a
result of massive mobilization and redeployment of labour regardless
of skills and locations. It has remained a systemic feature of the Soviet
and other centrally planned economies. While the existence of some
labour hoarding by state enterprises is admitted, the universal picture
is one of apparent labour shortage. Presumably full employment of
labour has been a continued major concern for the Party and central
planners. However, it has not had to be pursued at the expense of other
policy targets, since it has been a byproduct of ambitious policies of
capital accumulation and growth.
3.2. Performance
Until the mid-seventies the socialist system was credited with relatively
high macroeconomic rationality, achieved at the expense of micro-
economic inefficiency. The very notion of efficiency had been redefined
as 'systemic efficiency' incorporating the society's preferences concern-
ing technical efficiency, growth and other broad targets. The good
performance of early post-war periods had been taken as an indication
that in the long run the associated microeconomic inefficiencies could
be neglected. Since then, the marked slowdown has tipped the balance
against the socialist system, especially since it has occurred in countries
which either were net energy exporters such as the USSR and Poland,
or benefited from stable energy prices and supplies within the socialist
bloc, and which should have reaped - at a time of world-wide crisis - the
benefits expected of central planning and of socialist division of labour.
Economic growth performance had been very impressive in the Soviet

Union from 1928 until about 1960, and in East-European countries
from the completion of post-war reconstruction to the mid-sixties, at a
cost of large and rising shares of capital accumulation in national income.
The slowdown (zamedlenie, which in Gorbachev's policy is to be
reversed through the uskorenie or acceleration expected of perestroika)
was significant and occurred in spite of continued accelerated capital
accumulation. It has been accompanied by hidden or open inflation
and mounting foreign debt, evidence of technological inefficiences and
broadening technological gaps relatively to the West. The overall picture
in the last 15 to 20 years is one of generalized deterioration of economic
indicators, reaching the dimension of 'pre-crisis' in the USSR (to use
Gorbachev's words) right down to total collapse in Poland 1980-83.
The slowdown of the USSR is clear from Table 1, regardless of
whether official data or recent CIA numbers are used. Trends in
consumption per head, shown in Table 2, are even worse due to
population growth and the frequent compression of consumption
needed to make room for accumulation and defence. In a recent speech
Gorbachev stated that, regardless of official statistical evidence, there
has been no actual growth in Net Material Product (NMP) in the last
two five-year plans. The picture is similar for the other East European
countries. Table 3 gives both National Material Product indices accord-
ing to official data and definitions, and GNP at factor cost according to
SNA conventions (the latter numbers from Alton, 1988, are generally
lower but have consistently similar trends). Table 4 shows that the
slowdown and the divergence between plan and performance are par-
ticularly evident for gross industrial output (with the exception of peaks
and over-fulfilment in Poland and Romania in 1971-75 related to
above-plan external borrowing). This performance is particularly disap-
pointing in view of the high rates of capital accumulation, rising
throughout the 1960s and 1970s (with the exception of Poland in the
second half of the 1970s) then falling-but still about one quarter or
more of N M P - i n the early 1980s to make room for external debt
service (Table 5). All of this results in adverse productivity trends for
both labour (in spite of some acceleration in the early 1970s in Poland,
Hungary, Czechoslovakia and the GDR) and capital (Table 6). Addi-
tional evidence indicates that the technology gap with the West widened,
and that the USSR and East European countries have become more
Table 1. USSR: GNP and factor productivity (average annual growth rates, %)
3
1966-70 (b) 1917-75 (b) 1976-80 (b) 1981 1982 1983 1984 1985 1986 1987 (a)
Net material product a

planned 6.8 6.8 4.7
actual 7.8 5.7 3.8 3.3 3.9 4.2 2.9 3.5 4.1
Gross national product (c) 5.0 3.1 2.2 1.0 2.7 3.3 1.4 0.7 3.9 0.5
Combined inputs (d) 4.2 4.3 3.6 3.2 3.2 3.0 2.9 2.6 2.5 2.5
workhours 2.0 1.7 1.2 0.9 1.0 0.7 0.5 0.4 0.4 0.4
capital 7.4 8.0 6.9 6.4 6.3 6.3 6.3 5.8 5.4 5.3
land 0.0 0.1 -0.1 -0.1 -0.1 0.1 -0.1 -0.7 -0.1 0.0
Total factor productivity 0.8 -1.2 -1.3 -2.1 -0.5 0.2 -1.4 -1.9 1.4 -1.9
workhours 3.0 1.3 1.0 0.2 1.7 2.5 0.9 0.4 3.5 0.1
capital -2.2 4.6 -4.4 -5.0 -3.4 -2.9 -4.6 -4.8 -1.4 -4.6
land 5.0 3.0 2.4 1.2 2.8 3.2 1.6 1.4 4.0 0.5
Source: Net material product: statistical yearbook; GNP estimates: CIA-DIA, 'Gorbachev's Economic Program: Problems Emerge'. 24
March 1988.
Notes: (a) preliminary; (b) for computing average annual rates of growth, the base year is the year prior to the stated period; (c) roubles
by sector of origin at factor cost; (d) inputs of workhours capital and land are combined using weights of 56.5%, 40.5%, 3.0% respectively
in a Cobb-Douglas (linear homogenous) production function. These weights represent the distribution of labour costs (wages, social
insurance deductions and other incomes), capital costs (depreciation and a calculated capital charge), and land rent in 1982, the base
year for all indexes underlying the growth rate calculations.
oo
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Table 2. USSR: Average annual growth of per-capita consumption (%)
1956-60 1961-65 1966-70 1971-75 1976-80 1981 1982 1983 1984 1985 1986 1987 (a)
Total consumption 3.9 2.5 5.0 3.0 2.0 1.3 -0.9 1.3 2.1 0.1 -2.0 0.7
Food 3.1 1.8 4.2 2.1 1.1 -0.1 -1.4 1.4 1.5 -3.2 -8.0 -0.9
Soft goods 5.6 2.2 7.2 2.7 2.8 2.1 -1.5 0.6 2.4 3.2 2.3 0.6
Durables 10.4 3.9 9.5 9.7 5.4 6.3 -2.6 1.7 4.6 5.2 7.0 2.8
Services 3.2 4.6 4.1 3.0 2.0 1.5 1.9 1.4 1.9 1.8 1.6 2.7
housing 3.0 2.4 2.0 1.6 1.2 1.4 1.9 1.9 1.6 1.6 1.7 1.9
utilities 4.7 7.8 5.4 5.3 3.8 2.7 3.1 3.2 4.1 3.3 3.0 3.1
transportation 9.3 9.0 8.2 6.4 2.2 3.2 1.1 1.4 1.6 1.4 2.2 1.1
communications 5.4 6.7 7.6 5.4 3.8 3.5 1.3 2.5 3.7 3.7 4.6 4.9
repair and
personal care 3.7 5.0 6.4 4.4 4.1 3.4 2.1 3.5 3.1 3.5 3.1 8.2
recreation 5.3 3.6 2.6 4.1 1.2 1.8 0.6 0.5 1.0 1.1 0.2 2.0
health 3.4 2.2 3.2 1.6 0.9 0.1 1.3 1.0 1.3 0.8 -0.5 0.2
education 1.4 5.2 3.0 1.5 1.4 0.1 2.4 -0.1 1.0 1.2 1.1 1.5
Source: CIA-DIA, 'Gorbachev's Economic Program: Problems :', 24 March 1988.

Note: (a) preliminary.

Table 3. Eastern Europe: GNP and NMP (average annual growth rates, %)
Eastern
Bulgaria Czechoslovakia GDR Hungary 'oland Romania Europe
GNP growth rates

1950-55 5.0 3.0 6.4 4.7 4.6 7.2 5.2
1955-60 7.8 6.3 5.0 4.6 4.5 4.4 5.1
1960-65 6.5 2.0 2.9 4.3 4.1 5.2 3.8
1965-70 4.7 3.5 3.2 3.1 3.8 4.6 3.7
1970-75 4.5 3.4 3.5 3.4 6.6 6.2 4.8
1975-80 1.2 2.2 2.4 2.3 0.9 3.9 2.0
1980-85 0.9 1.4 1.7 0.9 1.2 2.0 1.4
NMP growth rates
1950-55 10.8 7.7 2.2 4.8 8.8 11.9
1955-60 10.6 7.1 7.8 7.4 6.7 7.8
1960-65 7.0 1.3 3.5 4.4 5.9 8.9
1965-70 8.6 6.8 5.3 6.8 6.0 7.6
1970-75 7.8 5.7 5.5 6.3 10.0 11.1
1975-80 6.1 3.7 4.2 3.2 1.4 7.3
1980-85 3.7 1.9 4.5 1.3 0.1 4.5
Source: GNP: 1950-60, JEC 1970, p. 61; 1960-65, JEC 1974, p. 270; 1965-70, OP-89; 1975-86, OP-95, updated. NMP: statistical
yearbooks and plan fulfilment reports of the respective countries. T. P. Alton 'Comparison of overall economic performance in the East
European countries; 'The economies of Eastern Europe under Gorbachev's influence, Brussels', NATO, March 1988, p. 17 (mimeo).
Note: five-year rates are calculated by least squares fit to annual observations, except for GNP for the GDR, Romania, and Eastern
Europe, 1950-60, which are calculated as compound rates between endpoints.
OS

Table 4. Gross industrial output (average annual growth rates, %)
1966-70 1971 -75 1976-80 1981 -85 1986-90
actual plan actual plan actual plan actual plan
Bulgaria 10.9 9.6 9.1 9.0 6.0 5.1 4.3 4.9

Czechoslovakia 6.8 6.0 6.6 6.2 4.7 2.9 2.7 3.0
GDR 6.5 6.0 6.5 6.0 5.0 5.1 4.1 3.9
Hungary 6.2 5.9 6.3 6.0 3.4 3.8 1.3 2.8
Poland 8.3 8.3 10.4 9.3 4.7 4.5 0.4 3.0
Romania 11.9 11.5 12.9 10.8 9.5 7.6 4.0 7.9
USSR 8.5 8.0 7.4 6.3 4.5 4.7 3.7 4.6
Source: UN-ECE Economic Survey of Europe.
Table 5. Investment ratios
1966-70 1971-75 1976 -80 1981 -85 1986-90
Actual Actual Plan Actual Plan Actual Plan
Bulgaria 35.1 35.1 36.8 35.4 31.2 34.4 36.4

Czechoslovakia 31.1 33.7 34.0 33.7 29.4 29.9 28.4
GDR 27.6 28.7 29.3 30.6 25.7 25.0 —
Hungary 32.9 35.9 33.6 37.2 33.1 31.0 27.4
Poland 25.3 36.4 31.5 30.7 — 24.6 26.5
Romania 28.8 34.1 40.9 41.3 39.8 36.4 29.0
USSR 27.0 29.9 28.8 30.3 28.3 29.8 29.7
Source: UN-ECE Economic Survey of Europe.

Note: gross fixed capital formation as % of net material product.
reliant on technology transfer through the purchase of modern

machinery (over US$100 billion in the 1970s), licenses and joint ventures
(Amann and Cooper, 1986; Marer, 1986).
As in capitalist countries the slowdown has been accompanied by the
appearance of negative growth rates in income, consumption, invest-
ment, etc. From the early minor case of Czechoslovakia in 1963 to the
large scale income drop of one-third in three years in Poland 1980-82,
these phenomena are only partly attributable to exogenous shocks.
Adjustment to the higher than planned slowdown (and to a sequence
of shocks such as changes in terms of trade, world trade decline, interest
rates increases, and occasional natural disasters) has been sluggish and
inadequate. Domestic absorption basically continued in the 1970s over
and above domestic resources, raising external debt (see Table 7) from
Perestroika 367
Table 6. Labour productivity and capital productivity (average annual growth
rates, %)
1966-70 1971-75 1976-80 1981-85
Labour productivity (a)

Bulgaria 8.1 6.2 4.4 3.5

Czechoslovakia 5.5 5.9 3.7 1.3
GDR 5.0 6.2 4.4 4.3
Hungary 5.1 6.1 4.5 2.3
Poland 4.0 7.3 4.3 -0.1
Romania 7.3 6.2 5.8 4.0
USSR 6.3 5.8 2.8 3.1
Capital productivity (b)

Bulgaria n.a. -0.6 -3.6 -3.1
Czechoslovakia n.a. 1.1 -1.5 -3.4
GDR n.a. 0.1 -1.0 -0.4
Hungary n.a. -1.5 -4.3 -3.1
Poland n.a. 1.0 -4.2 -3.4
Romania n.a. -0.3 -0.8 -4.2
USSR n.a. -1.1 -2.9 -2.7
Source: ECE-UN, Economic Survey of Europe, various issues.

Notes: (a) net material product per employee in the material sphere; (b) net material
product per fixed assets in the material sphere.
a modest US$5.5 billion in 1971 to a dangerous level of almost US$100

billion in 1988, in spite of a drastic belated squeeze in the early 1980s.
Only Romania has rapidly reduced its exposure, but at the cost of brutal
contraction in private consumption and social services. Despite a sub-
stantial trade surplus in excess of US$1 billion a year since 1983, and
foreign remittances on the same scale, Poland has defacto defaulted.
The external debt of Poland, Hungary and Yugoslavia is traded at
substantial discounts in secondary markets. In Poland the US dollar is
gradually officially displacing the zloty as the primary store of value
and medium of exchange and payment. The price stability achieved
everywhere in the socialist bloc since 1950 has been upset by bursts of
open inflation (with frequent peaks of two and - in Poland - even three
digit open inflation; see Table 8). Hidden and repressed-inflation has
also appeared and progressed in the last 15 y e a r s - a t least for limited
periods and commodity groups - everywhere in the socialist bloc, to the
point of identifying the economics of socialism with 'the economics of
shortage'. Estimates of the size of internal imbalances differ, but there
is agreement about their widespread presence (Kornai, 1980; Nuti,
1986).
Table 7. Estimated net hard currency debt (a) (Million U S $ )
1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986
Bulgaria 723 909 997 1,360 2,257 2,756 3,169 3,710 3,700 2,730 2,272 1,947 1,267 705 1,499 3,400
Czechoslovakia 160 176 273 640 827 1,434 2,121 2,513 3,070 3,640 3,369 3,128 2,582 2,070 2,490 3,400
GDR (b) 1,205 1,229 1,876 2,592 3,548 5,047 6,159 7,548 8,950 11,750 13,114 10,978 8,711 6,727 6,936 7,960
Hungary 848 1,055 1,096 1,537 2,195 2,852 4,491 6,532 7,300 7,510 7,799 7,222 6,920 7,306 9,468 12,550
Poland 764 1,150 2,213 4,120 7,381 10,680 13,532 16,972 21,500 24,500 24,708 25,530 25,170 25,350 28,105 32,100
Romania 1,227 1,204 1,495 2,483 2,449 2,528 3,388 4,992 6,700 9,180 9,859 9,466 8,370 6,558 6,265 5,400
EE6 4,927 5,723 7,950 12,732 18,657 25,297 32,860 42,267 51,220 59,310 61,121 58,271 53,020 48,716 54,763 64,810
USSR 582 555 1,166 1,654 7,451 10,115 11,230 11,217 10,200 9,500 16,984 15,707 11,917 10,733 14,703 24,000
Total 5,509 6,278 9,116 14,386 26,108 35,412 44,090 53,484 61,420 68,810 78,105 73,978 64,937 59,449 69,376 88,810
Source: CIA, Handbook of Economic Statistics and OECD, Financial Market Trends.
Notes: (a) gross debt net of Eastern deposits in Western banks; (b) debt in convertible currencies and intra-German debt.

Perestroika 369
Table 8. consumer prices (annual growth rates, %)
1970 1975 1980 1981 1982 1983 1984 1985 1986
Bulgaria (a) -0.4 0.3 14.0 0.4 0.3 1.4 0.7 1.7
Czechoslovakia (b) 1.7 0.6 3.4 0.9 4.7 1.1 0.9 1.3 0.4
GDR (c) -0.3 — 0.4 0.2

Hungary 1.3 3.8 9.1 4.6 6.9 7.3 8.3 7.0 5.3
Poland (d) 1.2 3.0 9.1 24.4 101.5 23.0 15.7 14.4 18.0
Romani 0.4 0.2 2.1 2.0 16.9 5.2 1.1 0.4 —
USSR (e) — — 1.0 1.0 3.0 1.0 -1.0 1.0 —
Yugoslavia (f) 9.6 23.4 30.9 39.8 31.5 40.2 54.7 72.3 70.3
Source: National statistics and plan fulfilment reports. Yugoslavia: IMF, International
Financial Statistics, yearbook, 1987.
Notes: (a) retail prices in the state sector; (b) cost of living index for workers and
employees; (c) including fees and charges of various kinds; (d) cost of living index for
workers and employees in the socialist sector; (e) retail prices and service charges in
the socialist sector; (f) consumer price index.
3.3. The slowdown: systemic efficiency
While there has been a debate on whether the Soviet slowdown was
due to slower technical progress or to low elasticity of substitution
between capital and labour at a time of demographic slowdown, it is
now a generally accepted view, among Western observers as well as in
official Eastern European pronouncements, that the slowdown is due
to the aggravation of systemic inefficiency. In principle the inefficiency
could be linked to the greater equity associated with socialist distribution
policies. However, this effect should not be exaggerated, since the earlier
commitment to equity had already been diluted by Stalin's concern for
the negative effects of equalization (uravnilovka), prompting higher
rewards for shock workers and other performance-related incentives,
mostly left to the employer's discretion (Lane, 1982).
Inefficiency takes many forms. First, material intensity is high and
capital and labour productivities are low relatively to other economies
using similar techniques or at a similar stage of development. For
instance, in 1980, in seven East European countries the energy/GDP
ratio was 2.3 times higher than in 18 European OECD countries (Slama,
1986). Second, too wide an investment front results in excessively long
gestation of investment projects. Third, equipment is often already
obsolete by the time of installation. Fourth, capacity is unused due to
structural mismatching of plants or to the scarcity of labour and impor-
ted inputs. Fifth, excessive subsidies result in the accumulation of
inventories of unwanted goods or waste in the consumption of
necessities (Gorbachev reports the case of children playing football with
cheap bread; peasants are known to use it as animal feed). Sixth, is the
coexistence of labour hoarding and labour shortage. Seventh, we
observe absurd biasses in the quality and assortment of output according
to measurement units used in central targets. Eighth, time is wasted in
queueing (reported officially to be of the order of 35 million man years
in the USSR). Ninth, there exist glaring shortages in crucial areas of

public consumption, especially health (with the recent rise in infant and
adult mortality in the USSR and other East European countries). Finally
comes ecological deterioration and catastrophe. (One could also add a
widespread waste of political repression, i.e. the use of authoritarian
means of coercion when a measure of tolerance would have been
sufficient to retain power.)
4. Advantages and drawbacks
4.1. Planning and priorities
The main, perhaps the only, advantage of centrally planned economies

has been the ability to concentrate resources on single priority targets
(such as industry and heavy industry, or survival and victory in war).
Otherwise the system is incapable of recognizing possible trade-offs
between alternative desirable targets and allocating resources accord-
ingly. The recognition of trade-offs requires that shadow or actual prices
be used in decision-making by enterprises and households and competi-
tively adjusted to ensure balance. Actual prices in Soviet-type
economies - with a few exceptions such as kolkhozian markets for food-
stuffs - have never been market prices: for consumption goods they are
instruments of distribution, not of resource allocation; for production
goods the payment of a price only entitles to resources if it conforms
with administrative plans. Moreover, there is a strong incentive for
managers to conceal from the centre their true production capacity
and input requirements, in order to make easier the fulfilment of
plans, and for workers to withhold greater effort if it goes unrewarded.
Hence, the system's inability to discover and quantify the existing
opportunities for trade-offs between commodities or between govern-
ment targets.
For these reasons the system is good at handling priority but not
priorities. In its single-minded endeavours the system can be inefficient
in a technical sense-using more resources for its achievements than
engineers might estimate on the base of existing technology - but not
necessarily in the economic sense - using more resources than an
alternative economic system. Yet, the system's limitations inexorably
Perestroika 371
assert themselves as the very success of the economy's singlemindedness
and the more articulated preferences of the leadership bring about a
more complex economic and technical structure.
Quite different is the earlier debate between Ludwig von Mises and
Oskar Lange on the socialist economy's ability to coordinate efficiently
economic activity. T o recall, the issue was whether the (then) theoreti-

cally unmanageable practical complexity of the task in the absence of
decentralization (Hayek, 1935; Mises, 1935), could be met by successive
rounds of trial and error price adjustments through a dialogue between
the central planner and state enterprises (Lange, 1936, 1937). Such a
system, often referred to as 'market socialism', is only a quasi-market
in which enterprises are supposed to answer truthfully and faithfully,
and to execute the plans as endorsed by a central planner. If Lange
was right in arguing that private ownership was not an essential
ingredient of market-guided allocation, he effectively evaded the prac-
tical difficulties of constructing and implementing a central plan. In
fact, if enterprises' messages to the centre were truthful, and if central
commands were exactly implemented, the informational problems of
central planning might not be so difficult to manage. Indeed, from a
purely technical point of view, the combination of programming
methods and decentralization procedures, aided by improvements in
computational capacity and information transmission, has certainly
made the construction of consistent and reasonably efficient central
plans a realistic possiblity.1 In addition, some of the more obvious
distortions can be removed fairly easily: for instance, biasses deriving
from gearing incentives to gross output indicators, or to net value
measurements aggregated at other than actual prices, can be removed
by the use of net value indicators at market prices.
1
The similarity between successive rounds of consultations (between centre and firms) and matrix
inversion by iteration is well understood. The sequence of such consultations can exploit
triangular or quasi-triangular features of the technology matrix; some bottlenecks may be
identified a priori and output targets set to maximum capacity from the start, opportunities for
substitution between excess and deficit products can be exploited during the consultation process,
inventories and foreign trade can absorb remaining imbalances. The decomposition principle
allows the treatment of capacity constraints (in addition to labour constraints) and of multi-
product firms (Ward 1967). Increasing returns can be tackled by a non-price planning routine
in which firms are given quantitative targets instead of price information by the centre, subject
to reshuffling of resource allocation and quantitative targets on the basis of information about
resource productivity generated by firms and passed on to the centre. This work has confirmed
Lange's basic proposition that the construction of consistent and efficient plans - among which
planners could chose the one which was best from the government's viewpoint - came up against
the same difficulties as those of competitive market tatonnement converging to a general
equilibrium and responding to government policies.
4.2. T h e information deadlock
There are, however, three major problems which have proven intract-
able so far. The first is deliberate information withholding or distortion
on the part of firms, aggravated by central planners' attempts at
anticipating and offsetting it. Concealment of capacity reserves, overesti-
mates of current input requirements, underestimate of costs in new

plants, hoarding of labour and stocks of materials, are familiar and well
documented characteristics of firms' behaviour. Planners' reactions
result in ratchet effects, such as the steady automatic rise of planned
tasks over achieved levels over time, scaling down of input requests,
insurance planning by higher levels (assigning tasks to lower units so
that they add up to more than 100% of one's task). As a result actual
plans are a hybrid product of central ambition (indeed overambition,
see next paragraph) and lower level obstruction, which bears no
resemblance to the outcomes of textbook procedures.
The second problem is the built-in bias towards overambition present
both at the central and the lower levels. This is due to a number of
different factors: the deliberate attempt, at the central level, to offset
enterprises' defensive reporting and to mobilize the enthusiasm and
effort of producers (managers and workers); the lack of budgetary
constraints forcing conflicting agents to reconcile their targets ex ante;
the underpricing of resources and the simultaneous commitment to
price stability.2 Some overambition may be useful but beyond a point
it becomes counterproductive. A possible solution, 'optimum tautness'
(Hunter, 1961; Keren, 1972), has proven to be hard to identify and its
operational usefulness consists simply in the awareness that even
enthusiasm is a scarce resource and that overambition must be moder-
ated. The essential implication of overambition is the divorce between
scarcity and pricing. As prices lose their information content planners
are simply unable to choose between butter and guns, between domestic
production and imports, or the correct factor inputs: they simply do
not know what are the alternatives.
The third most serious problem arises from the system's inability to
adjust and innovate. Events beyond the control of central planners, and
for which no contingency provision is laid out in central plans, occur
all the time: good or bad harvests, natural calamities or felicities,
1 I
2
The introduction of programming methods and the parallel development of computers raised
hopes that perfect competition might be replaced by 'perfect computation' (Lange, 1967). This
dream turned out to be far fetched, because of the slow diffusion of computers in centrally
planned economies (not to speak of their connection or even compatibility) and the informational
distortions in the aggregation and disaggregation process (there are also linguistic problems in
the categorization of commodity characteristics by different planning levels).
Perestroika 373
fluctuations in the volume of world trade or in terms of trade, military
threats, the pace of technology, households' behaviour affecting working
time and effort intensity or consumption, or simply the implementation
of planned targets. In principle plans could adjust faster than markets,
just as manual control sometimes best overrides automatic mechanisms.
In practice the planner's frequent response to unexpected change is

no action, by default rather than by specific choice, or because of failure
to perceive change. For example, the world oil price rises, diffused to
intra-CMEA trade through pre-fixed indexation formulae, were slowly
perceived and practically ignored by producers and consumers, leading
to overintensity of energy use, and external imbalance of non-oil-
producers (hence the rise in their external debt). Similarly, labour
shortages are not met by changes in wages, in labour costs to firms or
in labour allocation. Thus, planning failures arise regardless of informa-
tional problems, because the lack of incentives leads to the absence of
adequate microeconomic response, or to erratic or even perverse
responses. Additionally existing commitments (e.g. full employment,
price stability, CMEA integration) restrict the possible policy trade-offs.
4.3. Technical innovation
Of particular interest is technical innovation, because it involves generat-

ing and steering the process of change. Central planning had raised
great expectations: large-scale investment in education, research and
development would produce new useful knowledge. Furthermore, this
knowledge being freely accessible would be better diffused than in a
market system where research effort is fragmented and diffusion
impeded by patent law. Yet unsatisfactory performance in this area has
been a serious cause for concern. Research and development have
tended to be academically oriented and detached from the needs of
both industry and teaching; the innovation decision has remained by
and large an administrative decision; long investment gestation has led
to intolerable delays in the introduction of new techniques.
What is worse, several reasons appear to provide a positive disincen-
tive for enterprise managers to innovate. First, innovation may tem-
porarily reduce a firm's performance. Subsequent, overcompensating
improvements will be ignored by managers rewarded by short-term
incentives. Second, the resulting superior economic performance may
well lead to a deterioration in measured performance, as captured by
physical output or other success indicators governing the system of
rewards. Third, successful innovation recognized by the incentive sys-
tem may induce central planners to an upward revision of targets or
an instant cut in current inputs. Fourth, the monopolistic position of
Ministries and enterprise associations produce a seller's market which
does not encourage product innovation. Finally, there is little incentive
to scrap old equipment: emphasis on physical indicators of gross output
induces managers to retain all capacity regardless of its technical
specifications. It is not surprising, therefore, that R&D and productivity
trends have been quite disappointing outside a few sectors such as space

and military industries where the administrative management of change
has been accompanied by privileged access to resources and an alterna-
tive system of incentives (Bornstein, 1985).
The positive counterpart of this poor ability to manage change is the
system's resilience: once established, a given structure (including output
levels, intersectoral deliveries, international links) can reproduce itself
with ease and reestablish itself even after a strong disturbance. The
inability to adapt and innovate, however, has a cost which becomes all
the greater when shocks occur, plans are not fulfilled and technical lags
develop. Over time this cost tends to cumulate. The outcome is a
pressure for economic reform which mounts over time. The resulting
institutional changes either take the form either of small steps in the
improvement of the present system (Section 5), or of a drastic revision
of the basic premises of the socialist model towards an as yet
undeveloped market socialism (Section 6).
5. System improvements
5.1. Areas of reform
A consequence of large inefficiencies is that there is great room for

improvement. Kantorovich (1965) estimated the order of magnitude
of wasted national resources in the USSR as one-third! 'Further develop-
ment and the perfecting of the economic system of planning and
management' is a formula which arose first as a euphemism for reform,
then as a moderate alternative to 'radical reform' towards market
socialism. A large number of possibilities have been considered. The
first one is the u s e - o r a more extensive u s e - o f mathematical tech-
niques and programming methods in economic planning. This had
been already advocated by the so-called theory of the 'optimally func-
tioning economic system', developed in the 1960s primarily at two
institutes of the Soviet Academy of Sciences: the Moscow Central
Mathematical Economic Institute (TsEMI) under the leadership of
Academician Fedorenko, and the Siberian Institute of Economics and
Organization of Industrial Production under the direction of Abel
Aganbegyan - now Gorbachev's leading economic advisor (see
Perestroika 375
Aganbegyan, 1988; a similar approach had been developed in Hungary
by Kornai and others who advocated further reforms). These models
were effectively used - in the Soviet economy and elsewhere in Eastern
Europe - to draw material balances for increasing (from 29 to over 200)
numbers of intermediate inputs, fixed capital and labour. Other applica-
tions concern the optimization of large scale sectoral tasks, the maximiz-

ation of consumption levels of given composition, the implications of
alternative hypotheses about material and capital-intensity or labour
productivity, and the simulation of alternative courses and the forecast-
ing future developments (see Aganbegyan, 1988 appendices 1 and 2).
This school went beyond the application of mathematical methods and
advocated also measures of institutional change.
Other approaches involve the payment of actual interest rates on
loans, or taxes on state-funded capital and the application of discounted
cash flow methods (Nuti, 1971), or the payment of rent charges on land
and buildings, including a scarcity price for natural resources. Another
possibility is to modify the way firms' performance is assessed, replacing
physical indicators by value indicators, net of outlays instead of gross.
This includes net profit - as asserted by the industrial economist Liber-
man, who promoted a lively discussion in the early 1960s.
Greater enterprise autonomy has also been advocated and has taken
many forms: the redeployment (i.e. sale and purchase) of existing capital
assets and inventory surpluses, amortization, and small-scale investment
financed out of profit retention. Greater direct inter-enterprise links
have led to mergers and regrouping of enterprises into larger units
(like the Polish 'large corporations' of 1974, which gave rise to accusa-
tions of 'size fetishism', or the Soviet enterprise associations of 1979).
Often, however, these moves have been dictated not by efficiency con-
siderations but by administrative convenience, taking decision-making
away from both the centre and the firms, towards an intermediate level.3
The use of international prices whenever tradables were involved
has been a recurring element of reform in Hungary, Poland, and the
USSR. However, given existing price equalization subsidies and taxes,
and with trade opportunities restricted, these prices could only be used
as shadow prices, likely to be at odds with the indications and stimuli
produced by actual prices. This exposure to international prices has
increased with two recent developments. First, enterprises are now
allowed to trade directly on their own account instead of through
specialized state agencies (as in Hungary since 1968, Poland since 1982
3
In the GDR, in order to reduce the scale of the planning problem and stabilize output levels,
the regrouping of firms has taken the form of vertically integrated concerns.
and now in the USSR-though still subject to licensing). Second, they
may retain for their own use and that of their domestic suppliers a
substantial fraction of their export earnings (in Poland in special
accounts, which are now more widely transferrable within the state
sector and can even be sold at auction at a premium).
Net value incentives and opportunity pricing are expected to lead to

substantial resource savings (intensifikatsiia). In general, reforms often
try to introduce greater price flexibility and realism such as the introduc-
tion of contractual prices (either free or subject to limits: a Soviet price
reform is due between 1990 and 1991) or the liberalization of wage
payments, subject to progressive taxation of excess payments over and
above a government fixed norm. The list of possible reforms should
also mention direct government commissioning to firms (for basic public
consumption goods, important intermediate goods and essential private
consumption), as well as the introduction of quality control which
appears to have been effectively introduced in the USSR with Gos-
pryemka, indeed so effectively as to have been partly responsible for
the deterioration of performance indices. Finally, non-state (private or
cooperative) production is tolerated or even encouraged on a scale still
modest but large enough to make a perceptible contribution to the
quality and availability of consumer goods and to reduce some of the
shortages. In Poland, for example, where private enterprises are most
developed, over 1 million persons are employed in the private sector
outside agriculture (which employs another four million in small farms)
out of a labour force of 17 million. In the USSR private hiring of
workers is still forbidden, though cooperatives and the exercise of
personal labour are being promoted by new legislation, and private
plots and long-term leasings are anticipated in Soviet agriculture.
5.2. The limits of reform
Each of these provisions opens the possibility of an improvement, but

they do not amount to a radically new system. They can be easily
changed or even reversed, and administrative discretion continues to
rule. The use of mathematical methods requires informational honesty
and compliance with rules of the game on the part of enterprise
directors, which is at odds with their incentives. The continuation of
planning practices forces managers to divide their loyalty between
traditional indicators and net values. The use of individualized para-
meters for enterprise control leads to what has been called in Poland
'indirect centralization'. Continued single-minded campaigns are super-
imposed on market indications. Credit discipline is softened or
destroyed by the rescue of inefficient producers by branch Ministries
Perestroika 377
or the Central Bank: even if there can be bankruptcies there are still
subsidies on a large scale. There is not enough redeployment of resour-
ces across enterprises and sectors. Decentralized investment is frustrated
by shortages. Export promotion discourages import substitution. Large
firms behave monopolistically as soon as they gain some autonomy.
Price criteria and formula conflict with, indeed negate, market clearing.

Furthermore, these improvements have their own drawbacks. For
instance, a greater reliance on prices while administrative controls are
not dismantled may lead to abnormally high demand elasticity for
intermediate outputs (Portes 1969). Income inequality is raised by
performance-linked bonuses, not always related to above-average effort
or managerial capacity. Sudden export drives disrupt domestic supply
lines (in Poland a decree in May 1988 reversed the export drive, making
export incentives applicable only to enterprises which continue to supply
their domestic markets with at least as much as the previous year).
Inflationary pressures and/or unemployment may appear. Combined
with preoccupations about the danger of lessening socialist commitment,
these drawbacks jeopardize the permanence of improvements.
6. Radical reform in action

The latest round of reforms has escalated in the USSR since the June
1987 Plenum, in Hungary with the new banking laws and capital markets
(January 1987), in Poland with further liberalization of access to foreign
exchange (1987-88) and banking proposals. New legislation and reform
plans indicate a significantly greater scope and depth of change, back
from the visible fist of the command economy to the invisible hand of
markets and quasi-markets.
6.1. Away from central planning
Central planning, defined as a set of detailed physical commands to

enterprises and sectors, is dismantled. This change is signalled by the
demotion and the drastic personnel reduction of the Central Planning
Commission, the nature and coverage of planning documents and the
legislation on enterprise autonomy (such as the new Soviet Law on the
State Enterprise of June 1987, followed by the July decrees on the new
role of the central organs-Gossplan, Gossnab, the Ministries, etc.).
Strategic decisions are still taken at the centre but enterprises only get
guidelines from above. As a corollary, firms acquire their means of
production directly on a wholesale market instead of through central-
ized supply channels (although still subject to the State Committee for
Material and Technical Supply, or Gossnab). Direct horizontal (i.e.
non-hierarchical) links between enterprises at contractually fixed prices
are allowed, though supplemented by government contracts.
Branch Ministries are replaced by a single Ministry for Industry and
Trade (as in Hungary and, since 1987, in Poland), or at least their
number is substantially reduced in their number (a reduction is expected
in the USSR and will be a visible sign of the progress of reform when

it occurs). State enterprises are allowed to move into any sector or
commodity group, instead of being confined to the product range for
which they had been established. This is not yet anticipated in the
USSR, though it can be done by Polish or Hungarian firms subject to
official authorization which is usually granted as long as the enterprise
undertakes to maintain existing production lines.
Similar approaches also concern the financial sector where the func- j
tions of central and commercial banking are separated. The ultimate
objective is to have a number of commercial banks competing among
themselves to grant credit to enterprises, not automatically but accord-
ing to credit-worthiness. This has already happened in Hungary (with
the participation of Western capital in joint banks), has been announced
in Poland and Bulgaria, and its necessity has been maintained in the
USSR by leading reformers (a first step in the USSR has already been
taken in July 1987 with a decree setting up six new specialized banks).
6.2. Increasing competition
Competition between enterprises is enhanced by anti-monopoly legisla-

tion (Poland and Hungary) and above all by the breaking up of enter-
prise associations and of large multiplant enterprises unless concentra-
tion is required by technological factors (this is yet to come). The
corollary of competition is the possibility of failure. A number of
procedures for the liquidation of enterprises - already in existence in
Yugoslavia though rarely applied-have now been introduced in
Hungary, Poland and the USSR. These procedures concern the case
of persistent loss-making and allow for bankruptcy when outstanding
liabilities exceed the present value of assets. The first cases of application,
widely reported, involve primarily construction firms, whose workers
and productive assets can be more easily redeployed.
Establishing some form of currency convertibility is a powerful symbol
of trade liberalization. The current plan is for limited convertibility into
domestic commodities and hard currency for the trade transactions of
state enterprises, first within CMEA then outside. Explicitly excluded
are capital movements and transactions involving the population. This
symbolic move is reinforced by the stated intention to join inter-
national organizations such as GATT, the IMF or the World Bank.
Perestroika 379
Czechoslovakia, Hungary, Poland and Romania already participate in
GATT and Bulgaria is an observer. In addition Romania, Hungary
and Poland are members of the IMF and of the World Bank.
6.3. Individual responsibilities

Reforms should also affect individuals as workers and savers. Perform-
ance-linked rewards for managers and workers are introduced, with
wages and salaries growing more slowly than allowed by productivity
and profits. As workers become exposed to the results of their enter-
prises, it is natural to introduce workers' participation in management.
Workers' councils have been an essential element of Polish aspirations
and official reform projects, less so in Hungary and other countries
with the exception of Yugoslavia. It is fair to say that, so far, implementa-
tion of workers' participation has been modest.
A major area of reform is the policy commitment to full employment
as it conflicts with labour mobility. So far full employment has taken
the form of a right to tenure in the enterprise, job and place in which
one works. The new principle is a generalized right to work somewhere
in some position. The implementation of the new principle is expected
to provoke massive redeployment of labour. 4
Greater responsibility also concerns financial matters. In some coun-
tries a wider range of financial assets is being made available. This
concerns firms now allowed to reinvest their profits when internal
opportunities are not good enough. It may also concern the population
at large as new financial instruments include fixed-interest, variable-
interest and performance-linked bonds (Hungary and China). The next
step is the introduction of shares; they are already available on a limited
scale in China and are due to be introduced in Hungary in 1989, mostly
but not exclusively for sale to the enterprise's workers. Furthermore,
the secondary trading of financial assets in organized markets is
envisaged, though there will be limits to voting rights and to the scale
on which these markets might be allowed to operate. Share issues are
sometimes regarded as a major departure from socialist premises, but
once the population is allowed to earn interest on savings and to
buy lottery tickets it is hard to see why they should not be allowed to
4
For instance, in Poland substantial measures for the reduction of state employment were taken
in 1981: early retirement, voluntary severance, maternity leave, retraining schemes. In Hungary
small - negligible by our standards - pockets of unemployment are reported, 30,000 in 1987,
expected to rise to 50,000 in 1988. In the USSR the need for labour mobility and the positive
role of some frictional unemployment has been stressed by the authorities. It is officially reckoned
that 16 million people will have to change jobs by the year 2000.
buy shares which are a combination of both, and at least involve a game
of skill as well as chance. If shares were regarded as conflicting with
socialist principles, surely the very ability to save would have to be
challenged.
If the objective really were to replace central commands by genuine
market or quasi-market discipline, what is most clearly missing in the

existing reform blueprints is some form of market-based valuation of
enterprises. In spite of systemic limitations affecting share ownership,
voting rights of shareholders, and the scale of secondary markets, these
functions of capital markets could be simulated by introducing
appropriate new procedures. This could include challengeable self-
valuation of assets by managers (Nuti, 1988). This would open the door
for risk taking by households in spite of limits to ownership and voting
rights: by providing loans indexed to the firm's valuation, they would
have a channel to form and convey their expectations. The obstacle to
such developments, however, is ideological as well as practical.
Finally, wide-ranging legislation on economic matters is designed to
reduce uncertainty about the right and duties of economic agents, and
to prevent instant reversals of reform changes by administrative action.
The principle would be to subject such reversals to legislation, which
is a slow and public process. More radical steps are hinted by Gorbachev's
glasnost. It could eventually lead to the establishment of a form of
political pluralism. There can be no doubt about the revolutionary
nature of the proposed political change if it were to end, or even
substantially reduce, direct political interference with enterprise
management through the nomenklatura system of Party nominations
to leading managerial posts and political pressure. Implementation and
stabilization of the proposed changes, however, are still to come.
7. Obstacles and stimuli to reform

The main stimuli to radical reform come from the official realization
that the slowdown is systemic, that economic performance is essential
to the legitimacy of the socialist system, and that new incentives are
needed. If not Gorbachev now, who when? But there are many obstacles
ahead, both to the implementation of reform and to its success.
7.1. Obstacles to reform
Opposition to the process of radical reform is bound to come on a large

number of fronts. Quite obviously, unenlightened party bureaucrats
fear that the loss of control over producers will reduce their power and
Perestroika 381
privileges. The military worry whether they will be able to maintain
their priority position through budgetary allocations and market prices.
But ordinary people too wonder. This the case of risk-averse managers,
especially middle-aged non-technical staff as well as workers in loss-
making enterprises (one-third of the total in the USSR) who fear
dismissal or forced redeployment, or income losses through earning

links to performance. Opposition is likely to be strengthened by the
fact that the gains will be widely diffused and not very perceptible,
while losses may well be concentrated in particular regions and on
particular sections of the population. Furthermore, the gains will be
delayed and uncertain, while losses tend to occur earlier and to be
certain. Finally, one must acknowledge ideological and/or practical
concern for the possibility of adverse consequences such as inflation,
unemployment and economic fluctuations.
7.2. Obstacles to the success of reform
Even if carried out in full, reform will have to face a number of

implementation difficulties. First is the lack of the additional resources
necessary to literally 'restructure' the distribution of sectoral production
capacities, modernize industry and eliminate shortages. The current
conditions are not favourable. Additional resources could be obtained
through terms of trade improvements (unlikely in the USSR, present
in other East European countries which import oil from the USSR),
the resumption of world trade growth (unlikely in the near future),
disarmament (hence the credibility of Gorbachev's overtures), or excep-
tionally good weather and good harvests. Otherwise, the only remaining
possibility is a (massive) increase of external debt-which cannot be
sustained by Poland and is not desired by Romania. Furthermore
reform, while inflationary, requires a deflationary environment to
succeed.
Second, the shift from manual to automatic controls is a delicate one
to achieve. Above all, it requires putting all enterprises and all house-
holds in a sustainable competitive position. Enterprises can compete
equally only if their performance can be measured with reference to a
competitive valuation of their assets, and not referred to an irrelevant
historical cost for which they have not been responsible (Nuti, 1988).
This requires a delicate re-evaluation (possibly a downgrading) of the
value of social capital entrusted to them. Some kind of equality should
also be established between households when a radical reform is intro-
duced, in order not to validate gross inequalities which are likely to
have arisen in the chaotic crisis or pre-crisis period, in the grey area of
official tolerance of illegal economic activity. Here again, care must be
taken to be able to justify the inequalities likely to be generated by the
reform as rewards for entrepreneurship and good fortune rather than
past illegal activities.
Third, if reform does not happen simultaneously in all CMEA coun-
tries, it may prove hard to uphold existing the traditional and rigid
pattern of intra-CMEA commitments, particularly structural bilateral-

ism and the inconvertibility of trade balances. The difficulty is not due
to the technical aspects of trade between different systems. A reformed
economy can still enter and fulfil long-term trade commitments through
specialized trade agencies with a traditional centrally planned economy.
The difficulty is rather the burden of maintaining traditional patterns
of international division of labour. On the other side, were reform to
take place simultaneously in most CMEA countries, trade creation would
emerge along new patterns, instead of less trade in the case of radical
reform in one country.
8. Two alternative scenarios

While the balance of circumstances in favour of radical reform in the
USSR and in some other East European countries has never been as
encouraging as it is now, there is no way of predicting whether, when
and where a radical reform will be implemented fully, and whether it
will be a success. Alternative scenarios can be identified, however, for
both the success and failure of radical reform.
8.1. The success story
The successful introduction of radical reform is bound to generate a

once-and-for-all productivity increase - probably diluted over a number
of years - leading the economy up to a higher growth path. The growth
rate itself might be slightly raised if the factors previously impeding
the diffusion of technical progress had been overcome. This is the
expected 'acceleration' (uskorenie) effect of perestroika, probably a less
persistent effect than it is hoped. If reform would lead into less troubled
waters, it will certainly not lead to a harbour of ultimate destination.
The traditional problems of centrally planned economies will have been
alleviated or perhaps solved, but at the cost of introducing at least some
of the problems of capitalist economies, including a measure of unem-
ployment, open inflation, a certain turbulence, greater personal and
regional inequality, lower investment (at least partly offsetting the effect
of higher productivity growth), and greater exposure and vulnerability
to external shocks. A radically reformed USSR would be somewhat
similar to a large underdeveloped market economy, politically less
Perestroika 383
antagonistic towards the West but economically probably more aggres-
sive, competing in international markets for trade, investment
opportunities and finance. For the other East European economies
currently undertaking reform the difference would be primarily one
of size.
What would be the difference between a radically reformed centrally

planned economy and, say, the UK under Harold Wilson? The
ingredients would be the same: a large public sector coexisting with
private and cooperative firms, indicative planning, concern for public
consumption and income redistribution, economic democracy in the
workplace, openness to trade, active public policy and commitment to
full employment. Is the theory of socialism simply the theory of public
policy, a la Tinbergen (1956)? Was Harold Wilson the non plus ultra of
socialist achievement? Obviously, the proportions in which the various
ingredients would be used would vary, and one might argue that
quantitative differences (the share of public ownership, redistribution,
maximum tolerated unemployment, the sheer size of any Stock
Exchange) would make for a substantial qualitative difference. In the
case of the USSR, and perhaps of other East European countries except
Poland and the GDR, private labour employment could remain absent,
though it remains to be seen how large might be self-employment and
employment by cooperatives. Ultimately, however, socialist reformers
have simply imitated capitalist institutions, often with touchingly naive
faith in their miraculous powers. Western theorists are often much
more cautious.
New institutions that might preserve some kind of socialistic commit-
ment and above all ensure greater success in combining market and
plan are needed. Otherwise, why should reformed Hungary succeed
where French planning and Soviet NEP failed? Little inspiration
can be found in the theory and practice of Yugoslav 'microsocialism'
(a term that stresses the implementation of strict socialist principles
within the enterpise in an otherwise market environment). In theory,
all kinds of inefficient, unstable and even perverse phenomena are
possible, while actual performance is as bad as that of traditional cen-
trally planned economies: the Yugoslav experiment may well prove to
be a diversion. Hardly any inspiration can be found in the theorists of
market socialism: Lange, Brus (1972), and many others have produced
a blueprint of 'capitalism with a human face', or a 'capitalism without
capitalists', more competitive, fair and efficient in its intentions, consist-
ing basically in a package of socialist policies, not a distinctive socialist
system. For socialism to claim systemic identity it would have to intro-
duce new institutions, either totally new or borrowed or modified from
Utopias.
8.2. Reform failure j
The alternative scenario does not imply a decline, let alone a collapse. J
If a decline occurred it would probably be temporary, as the system -j
has already displayed a remarkable capacity for reproducing itself and I
recovering its previous performance levels and structure (see the Polish
speedy recovery from a sudden decline of l/4th of its NMP). If the

system directed its single-mindedness towards economic survival, and
if this single purpose did not compete with military demands (whether
external or required by the control of domestic unrest), the system
could just stagnate for an indefinite period of time, while being gently
pulled down by the likely depletion of natural resources, and pushed
up by the steady accumulation of a backlog of technical inventions
(always available from the West anyway). Nove (1983) has attempted
to draw a model of 'efficient' socialism, but we must remember that the
traditional model of socialist planning is indeed perfectly feasible,
beyond question. It could happily stagnate ever after, were it not for
a political threat: stagnation would undermine the system's legitimacy,
which rests on actual or expected economic success. This is the route
through which pressure for reform will continue to be exercised, or
the system will lose its resilience.
Thus, there exists a different scenario which includes recurring politi-
cal-economic-institutional fluctuations, of the kind witnessed in the past,
with reform failure leading to recentralization, followed by greater
shortages and inefficiencies leading to popular unrest and renewed
pressure for reform (Nuti, 1979), until the system undertakes a success-
ful radical reform. This continues to be the most likely course, though
many of the recent changes are bound to be irreversible; what is sure
is that the system does not stand still.
Discussion
Seppo Honkapohja
Turku School of Economics and Business Administration
Mario Nuti's paper is a most useful and stimulating overview of the

background, need, scope and problems of the Perestroika reform in
the USSR and other Eastern European countries. The paper is sweeping
in its coverage, and I liked the attempt to relate some of the topical
ideas to the history of economic thought on socialist economics.
Let me start by strongly emphasizing some details concerning the
reasons for reform. The obvious point deserving even more attention
than given in the paper is the poor performance of the centrally planned
economies (CPEs) since the 1960s, with a further deterioration in the
Perestroika 385
second half of the 1970s. Nuti's Tables 2 and 3 show a very marked
slowdown in growth and chronic inability to achieve the set targets. We
are reminded of the high energy intensity of production and of the
waste of primary inputs and so on. It is easy to agree with Mario Nuti's
summary conception of the problem: 'systemic inefficiency' that has led
to large macro imbalances.

In his discussion about control and management of firms the author
argues that principal-agent models are not broad enough for analysing
the incentive issues in socialist systems. While this may be so, I would
like to point out that some of the new literature on organization struc-
tures, which emphasizes information and communication costs, may be
a relevant tool, though almost all attention so far has been directed at
capitalist economies. For example, take the distinction between (unitary)
U-form and (multi-divisional) M-form structures, the efficacy of the
latter being explained by informational factors. Maybe centralized plan-
ning with simple quantity targeting fails in part because of its inability
to allow for complex forms of contracting, necessary in the production
of modern high-technology or specialized products. Simple directives
and orders do not seem to provide the appropriate incentives for such
product development and innovation.
Nuti identifies lack of innovations as a major problem in CPEs
but he does not provide any numbers about this. I may thus quote
from the recent Economist survey on the USSR (April 9-15, 1988)
that, two years after patenting, only 23% of inventions have been put
into production in USSR while the same figure for US is 66 and for
FRG 64%.
Nuti mentions several factors that may make the Perestroika fail, such
as resistance by the military and bureaucracy, the diffuseness of gains
and the visibility of harmful effects. I would like to emphasize two of
the most important factors here. First, the current circumstances - to
use the Russian terminology - are a 'contradiction' par excellence; it is
a bad time to have a reform, but the reform has been made necessary
by the poor performance of the system. To succeed, the public (con-
sumers) needs to see some benefits quickly, and not just be asked to
make sacrifices.
Second, the current reforms are wide-ranging, and, in that respect,
differ from earlier reforms which Mario Nuti calls 'system improve-
ments'. In order for the reforms to succeed it is essential that they have
access to the resources that are necessary to achieve the ideals. Quite
clearly the CPEs will have to borrow heavily from the West to pay for
high imports from the West. Both investment and consumer goods
must be imported: the former to modernize production, the latter to
improve living standards. Can the CPEs afford this? From the evidence
given by Nuti it would appear that Poland at least will face severe
difficulties.
Let me end by noting that I sense pessimism in Nuti's conclusion
about Perestroika. He rightly warns about expectations of miracles, and
he points out that there is no new comprehensive model to replace
central planning. He questions the economic performance of social-

democratic capitalist periods, and so on. While all this is true, it must
be pointed out that there are large potential supply-side benefits from
reforms. Let me just quote again the Economist survey which mentions
that in the USSR the private sector produces more than a quarter of
farm output on only 3% of the farmland. The average productivity in
private farming is then approximately 10 times that of collective farms.
Even if the perestroika reform only managed to close this gap a part
of the way, the gains could be enormous! Such numbers are no basis
for pessimism.
George Yarrow
Hertford College, Oxford
Mario Nuti's paper is a very thorough survey of the main features

of centrally planned economies, their poor performance, the pressures
for reform and the obstacles to change. It also sets out a number of
the policy options that are available to central planners, including the
more radical changes that are now grouped together under the label
of Perestroika. However, there is relatively little by way of detailed
analysis of what is now actually happening in the USSR, about which
I suspect many of us would have liked to have heard more.
It is abundantly clear that the centrally planned economies are riddled
with incentive failures, and it appears that much of the current debate
is focused on improving incentives at the levels of the industry and the
enterprise. In the terminology of Oliver Williamson, the aim of Pere-
stroika is to effect a shift from hierarchical to market-based methods
of economic organization, or, in Nuti's more graphic phrase, from the
visible fist of the command economy to the invisible hand of the market.
This is clearly a very formidable exercise. The incentive failures are so
substantial and so pervasive that, applying the precepts of second best
theory, it is hard to see how alternative piecemeal reforms can sensibly
be evaluated against each other. Yet comprehensive, simultaneous
change is bound to run into feasibility constraints of one sort or
another.
Underlying all these 'lower-level' economic problems is a more funda-
mental issue concerning incentive failures at the top of the planning
hierarchy. While Nuti focuses upon what he calls 'economic' aspects of
Perestroika 387
reform, rather than on the political monopoly of the Communist Party,
I would argue that this separation is artificial. Not only does the political
monopoly have economic consequences, but it is arguably this feature
of the centrally planned economies that gives rise to the most substantial
incentive failures. Put simply, and quite apart from any issues of political
philosophy, the Communist Party's monopoly of power is, in its very

nature, likely to be highly inefficient.
To see this, consider the model of the Soviet economy that views it
as a single giant firm entirely owned by the state. In theory, the Politburo
and its subsidiary hierarchies act as agents for the ultimate principals,
the Soviet population. Now in a market-based system the 'managers'
of such a firm would face a number of pressures that would provide
incentives discouraging them from acting in ways that excessively
damaged the interests of the principals. These include the ability of
customers to switch to alternative suppliers, the ability of workers to
move to other firms, and the ability to replace an inefficient management
team by voting it out of office.
Admittedly, such incentive systems in market-based systems are not
devoid of problems. One difficulty arises from asymmetries of informa-
tion between principals and agents - generally speaking, the poorer the
information of principals the less efficient the incentives - but they do
work tolerably well. And liberal democracies have similar mechanisms
in place to limit the discretion of politicians. Consumers can purchase
imports, migration of labour is possible, and governments can be voted
out of office. In short, competition in markets for products, factors of
production and corporate/political control provide a range of perform-
ance incentives at the highest hierarchical levels.
Compare this situation with that in the USSR. International trade is
tightly controlled. So are labour mobility and information flows. And
the population has no means of voting politburo members out of office.
Thus, the political monopoly of the Communist Party, buttressed by
the barriers to mobility that the party has erected, effectively insulates
the top level of the hierarchy from strong feedback effects in the event
that performance is poor.
There are, of course, some incentives toward better performance.
Party leaders themselves may not enjoy unfavourable comparisons with
the West and, since it will be infeasible to block all information flows,
these may also cause political dissatisfaction at a lower level which,
eventually, may lead to revolt. Above all, there is the pressure of military
competition with other nations. But these incentives are generally rather
weak.
What this rather simplistic analysis suggests is that there are good
reasons for doubting that Perestroika will produce radical changes in
the mode of operation of the Soviet economy over the next few years.
When resistance to change is encountered, the problem is that the
higher levels of the Soviet hierarchy may not have sufficient incentives
to bear the costs of driving the reforms forward. The insulation from I
competitive pressures afforded by the political monopoly of the Com- 1
munist Party makes backtracking feasible, and we know from past 1

experience how durable the system can be. Democratic political reforms \
would be one sign that 'top-level' incentives are being improved j
but, glasnost notwithstanding, there are as yet few signs of changes j
that would be radical enough to make a substantial difference. 1
Nuti's cautiously pessimistic conclusions are, therefore, amply
justified, although we can all hope that things turn out better than
expected.
General discussion
Richard Portes wondered whether Perestroika really differed from
previous attempts to reform the Soviet economy (e.g. under Khruschev
or Kosygin). He argued that, in the last 25 years, there had been
successive cycles of decentralization and re-centralization. Portes was
rather pessimistic about the prospects for Perestroika, because given
excess demand in the product market, it was hard to see how the price
mechanism could be allowed to work unless national priorities were
radically altered. In addition, it was worth bearing in mind that an
equilibrating price vector would lead to a substantial proportion of the
existing capital stock earning negative quasi-rents.
Mario Nuti disagreed with Portes, arguing that Perestroika did rep-
resent a significant departure in Soviet practice - all previous attempts
at reform had been much less ambitious or generalized. Luigi Spaventa
concurred, arguing that the move towards significantly greater political
freedom was important, and the economic reforms should be viewed
just as a by-product of this general move. Seppo Honkapohja endorsed
this view, arguing that Gorbachev had been attempting to win the hearts
of the Soviet people to provide some leverage against the possibility of
a military coup.
Rudiger Dornbusch disagreed with Yarrow's assertion that exposing

Soviet managers to a Western-style system would make them more
efficient. He could think of several US firms which were extremely
inefficient despite the supposed rigours of competition in the product,
labour and capital markets.
Perestroika 389
References
Aganbegyan, A. (1988). The Challenge: Economics of Perestroika, Hutchison, London.
Alton, T. D. (1988). 'Comparison of overall economic performance in the East European countries',
NATO Conference on 'The economies of Eastern Europe under Gorbachev's influence',
Brussels 23-25 March.
Amann, R. and J. M. Cooper, (1986). Technical Progress and Soviet Economic Development, Blackwell,
Oxford.

Berliner, J. (1976). The Innovation Decision in Soviet Industry, MIT Press, Cambridge, Mass.
Bornstein, M. (1979). Comparative Economic Systems: Models and Cases, Irwin, Homewood, 111.
(1985). The Transfer of Western Technology to the USSR, OECD, Paris.
Brus, W. (1972). The Market in a Socialist Economy, Routledge and Kegan Paul, London.
Grossman, G. (1968). Money and Plan, University of California Press, Berkeley and Los Angeles.
Hayek, F. A. (1935). Collective Economic Planning, Routledge and Kegan Paul, London.
Hunter, H. (1961). 'Optimal tautness in development planning', Economic Development and Cultural
Change.
Kantorovich, L. V. (1965). The Best Use of Economic Resources, English edition, G. Morton,
Translated by P. F. Nightsfield, Harvard University Press, Cambridge, Mass.
Keren, M. (1972). 'On the tautness of plans', Review of Economic Studies.
Kornai, J. (1980). The Economics of Shortage, North-Holland, Amsterdam.
Lane, D. (1982). The End of Social Inequality} Class, Status and Power under State Socialism, Allen
and Unwin, London.
Lange, O. (1936, 1937). 'On the economic theory of socialism', Review of Economic Studies.
(1967). 'The computer and the market', in C. Feinstein (ed.) Capitalism, Socialism and Economic
Growth: Essays in Honour in M. H. Dobb, Cambridge University Press, London.
Marer, P. (1986). East-West Technology Transfer - Study of Hungary 1968-84, OECD, Paris.
Mises, L. (1935). 'Economic calculation in the socialist commonwealth', in F. A. Hayek (ed.)
Collective Economic Planning, Routledge and Kegan Paul, London.
Nove, A. (1983). The Economics of Feasible Socialism, Allen and Unwin, London.
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(1979). 'The contradictions of socialist economies - a Marxian interpretation', in R. Miliband
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New York.

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Economic Policy October 1988 Printed in Great Britain

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Reform is almost as old as the history of socialist economies. Indeed

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2. The conventional centrally planned economy

2.1. Production, income and saving

In the traditional Soviet-type model (described for example by Ward,

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2.2. Money and finance

Money is primarily an instrument of accounting and control. Financial

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2.3. International relations

Traditionally centrally planned economies are regarded as having a

3. Expectations and performance

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The promoters of socialist planning expected a number of advantages.

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Net material product a

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Source: CIA-DIA, 'Gorbachev's Economic Program: Problems :', 24 March 1988.

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GNP growth rates

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1966-70 1971 -75 1976-80 1981 -85 1986-90

actual plan actual plan actual plan actual plan

Bulgaria 10.9 9.6 9.1 9.0 6.0 5.1 4.3 4.9

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Source: UN-ECE Economic Survey of Europe.

Table 5. Investment ratios

1966-70 1971-75 1976 -80 1981 -85 1986-90

Actual Actual Plan Actual Plan Actual Plan

Bulgaria 35.1 35.1 36.8 35.4 31.2 34.4 36.4

Source: UN-ECE Economic Survey of Europe.

reliant on technology transfer through the purchase of modern

1966-70 1971-75 1976-80 1981-85

Labour productivity (a)

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Capital productivity (b)

Source: ECE-UN, Economic Survey of Europe, various issues.

a modest US$5.5 billion in 1971 to a dangerous level of almost US$100

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1970 1975 1980 1981 1982 1983 1984 1985 1986

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3.3. The slowdown: systemic efficiency

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4. Advantages and drawbacks

4.1. Planning and priorities

The main, perhaps the only, advantage of centrally planned economies

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4.3. Technical innovation

Of particular interest is technical innovation, because it involves generat-

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5.1. Areas of reform