N. Fedorenko, Initial Results, Problems of Raising Efficiency. 1967
Original Source: Planovoe khoziaistvo (No. 4) 1967.
The economic reform being carried out in Soviet industry is of vast economic and political significance. It should make the production relations conform to the character and the scale of development of productive forces, make these relations adequate to the modern level of development of techniques and production technology, and of the scientific cognition of the economic laws of socialism, and to the advanced methods of industrial management, planning, and stimulation of the socialist economy. As a result of the reform the efficiency of social production should rise and the development of the country’s productive forces should be accelerated.
The enterprises transferred to the new planning system in 1966 have gained comparatively little experience of operation under the new conditions (from 6 to 15 months). These are short periods considering the duration of the cycle of technical perfection, greater specialization, concentration and combination of production, and the training of cadres capable of working in the new manner. The full effect of the present measures will be felt within four to five years.
No less time is required to eliminate bottlenecks in the national economy, particularly shortages in the supply of materials and machinery. Such shortages at times make it impossible to fully utilize production capacities at the existing enterprises, as, for instance, to raise the index of number of shifts worked in machine construction. In analyzing the results of the work of the production units transferred to the new management conditions in 1966, it must be remembered that these results were achieved under conditions when the absolute majority of enterprises did not change to the new system of planning and economic incentives, when the material and technical supply organizations continued to work as before, when there was no cost accounting in the higher links of industrial management, and the reform machinery was not yet working smoothly. In addition, the effect of the reform is weakened by the imperfections in existing wholesale prices, a lack of clarity (in a theoretical respect) with regard to the nature, rates of and exemptions from payment for productive capital, the optimal size of the free remainder of profit, the criteria for choosing among various indices concerning the formation of funds. In most of the factories and plants the bonuses paid to the workers out of the incentive fund are small, and this weakens the role of the incentive fund as a stimulant of social production. The enterprises still encounter difficulties in attempting to utilize socio-cultural and housing funds, and to obtain material resources for non-centralized capital investments.
It must be remembered that in the initial period of the reform the most visible and easily detectable reserves are mobilized: stocks of raw and other materials are reduced to the necessary level, surplus stocks of finished goods are sold, excessive fixed capital is disposed of, the organization of production is readjusted. These measures produce high results and improve the economic performance of the enterprises, but reserves of this kind are limited. The principal effect of the reform is that it regularly yields profit that is used to improve the technical base of production, raise the quality of output, and renew the assortment of goods in accordance with consumers’ demand.
It is very difficult at present to determine with any degree of accuracy the effect of the transitory, temporary factors making for higher output and bigger profit, and the extent to which the latent production reserves created by the improvement of the economic machinery have been mobilized. However, in view of the existence of unsolved problems in every sphere of economic development, it may be assumed that even the temporary factors making for an increase in the volume of sales, profit and level of profitability are still far from having been fully utilized. As to the permanent factors of growth of production efficiency, they do not as yet make themselves fully felt in view of the small number of enterprises working under the new system and the brevity of the period of their operation under it.
Let us illustrate this by concrete facts, although available statistics limit our possibilities in this respect. To characterize the effectiveness of the reform, reference is often made to the growth of profits (or some other indices) at the enterprises transferred to the new system, as compared with enterprises not transferred. But this method of comparison is inexact, since only the most efficient enterprises with indices exceeding the average for the industry have so far been transferred to the new system.
Still another method of analysis of the results of the reform is to cite, namely, figures on the fulfillment and overfulfillment of plan targets. This information is important, of course, but it too fails to reflect the full effect of the reform. With a high level of the plan, it may not be overfulfilled at all, and in some cases a tight plan may not even be quite fulfilled. It has long been shown that what really counts is not overfulfillment of plan, but the real contribution a given enterprise makes to the national economy.
In 1966, the profits of the enterprises operating under the new system were almost 25 percent higher than in 1965. To gain an entirely clear picture of the situation, it is necessary to know how much their profits had grown in 1965 as compared with 1964, and in 1964 as compared with 1963, that is, the dynamics of the principal plan indices over a number of years, with changes in assortment, prices, etc., being taken into account. Such an analysis would help to bring out the full effect of the new measures. Lack of the necessary data makes this impossible.
It is quite plausible for the increase in profit to be accompanied by a proportionately greater growth of productive funds, so that the effect will be reduced instead of increased. In this connection an index of increase in net profit (profit less payment for funds, interest on credit, and fixed payments) acquires particular significance. Although no such index has been used in the past, it can be calculated for a number of years.
In analyzing the results of the reform, it is important to know not only the rate of growth of net profit, but also its components: whether all of them are in the interests of society, the sort of correlation that exists between the temporary and permanent factors of growth of production efficiency. Existing reports do not include any data on the factors making for higher profit, nor do they make it possible even to calculate them approximately.
The absence of the necessary accounting and analytical data is due, in our opinion, to shortcomings in the organization of collection and analysis of statistical information, in particular to imperfections in the statistical methods used in experimenting with economic processes applied to a selected number of enterprises. In the latter case the statistical indices should characterize the essential features of the experiment and produce materials for a comprehensive analysis. Upon completion of the experiment, disclosure of all its pros and cons, and adjustment of the new economic machinery, the volume of accounting data could then be drastically reduced.
In view of the absence of generalized, thoroughly worked out data on the performance of the enterprises under the new planning system, we are compelled to fall back upon an analysis of the primary data of certain factories and plants.
According to the data of the Kosino knitted-goods factory, the profit increase during the first nine months of 1966 over the corresponding period of the previous year was due to a decrease in enterprise cost of production (69% of the increase), improvement in product mix (3%), higher sales (28%). Four of the enterprises of the USSR Ministry of the Machine Tool and Tool Industry put on the new planning conditions in April 1966, attribute 85.9% of their increased profits to increases in the volume of sales, and the remaining 14.1% to lower enterprise cost of production. The group of engineering plants operating under the new system from July 1, 1966, reports a different picture: bigger sales accounted for 24.5% and reduction in enterprise cost of production for 75.5% of the increased profits, this being due mainly to difficulties in procuring additional material resources (metals and parts supplied by other plants).
Since converting to the new planning system, most of the plants concerned have to some extent improved the use of their fixed capital. However, for various reasons, their main reserves have not yet been mobilized. An increase in the efficiency of the production machinery has created a substantially greater demand for raw materials (metals in engineering, farm produce in the food industry, etc.), this in turn presupposing an increase in capital investments and higher production efficiency in the respective branches.
Fuller utilization of equipment is hampered in many cases by the existence of bottlenecks within the enterprises. Their elimination requires capital investments and a redistribution of equipment. The process of further specialization also requires certain expenditures of time and money, in some cases even a reconstruction of the enterprise. Thus, the problem of a sharp increase in efficiency of utilization of fixed capital cannot be solved quickly.
The scope of renewal of machine-tool stock in existing plants without any substantial expansion of work areas largely depends on the possibility of disposing of excessive instruments of labor. In 43 enterprises transferred to the new system at the beginning of 1966, the value of excessive equipment sold amounted to only 0.1% of the value of fixed capital as recorded at the beginning of the year – a more than modest result. But nothing better could really be expected for the time being. The point is that the enterprises have little in the way of absolutely redundant elements of fixed capital. There is much more, though, of the underutilized elements of fixed capital. In order to sell them, specialized capacities must be created for the manufacture of tools, supporting structures, and spare parts, thus allowing for their regular supply at low prices instead of having to produce them on the spot from time to time.
The sale of surplus equipment (as well as the reduction of the demand for new investments) is to some extent impeded by the fact that the funds for development of production are calculated in terms of percentages of the value of fixed capital, depending on profitability level and increase in sales (profit). So it turns out that those enterprises that reduce their fixed capital increase their profitability and are entitled to a higher percentage of deduction into the production development fund, but at the same time lose this right, in full or in part, owing to the contraction of the calculation base.
Among the other factors making for higher profit is improved employment of manpower. This has manifested itself in a speedier growth of labor productivity as compared with the average for the branch. This was facilitated in many ways by the fact that the enterprises have been relieved of the duty to plan the number of workers and their distribution by functions as directed from above. For the first time in many years of economic activity, employment in the enterprises working under the new system was 0.8% below the planned figure. In some of the enterprises the absolute number of people employed has actually decreased, although up to 1966 it invariably increased. The redundant workers have found employment at enterprises continuing to work under the old system. It is our belief that the dismissal of redundant workers is being delayed by the fact that the incentive, socio-cultural, and housing funds are calculated on the basis of a percentage of the wage fund. The higher the sales (profits) and the level of profitability, the higher are the rates of deduction into these funds. But if the planned wage fund also decreases, the size of the incentive fund may be reduced despite the higher deduction rate. The tendency to overstate the planned wage fund leads to the employment of excessive manpower. Thus, the incentive mechanism is in some respects faulty. With the growth of the number of enterprises adopting the new system, the scope of dismissals in the labor force will also grow unless the process is retarded by administrative measures. (Such a practice would adversely affect labor discipline and productivity.) It is therefore necessary during the current five-year plan, when all industry is to go over to the new system, to carry out the following measures:
to complete the solution of the problem of a scientific prognostication of the volume of employment and increase in manpower resources on a national, branch, and territorial scale;
to examine the enterprises from the standpoint of the way they employ their manpower resources;
to provide in the yearly plans of the five-year plan for the further development of labor-intensive industries in certain regions of the country to absorb redundant manpower;
to create more effective incentives for manpower to stay in the northern and eastern parts of the country;
to set up a state organization to register manpower resources and their distribution.
Problems of Further Increase of the Effectiveness of the Reform
The focal problem of the economic reform is how to provide for a correct relationship between central planning and independence of the economic units. What it amounts to is the following: does the national economic optimum coincide with the optimum calculated by each of the enterprises? In other words, is what the enterprise does in the interests of the economy as a whole; is there a conflict of interests between them? A number of major spheres of economic life could be named in which public regulation produces a higher effect than the aggregate approach of all the separate economic units.
An individual enterprise does not know how big society’s demand for its products is; it is unable to solve the question of a correct (from a national viewpoint) distribution of investments, to determine the prospects of development of its production. No less complex is the problem of distribution of new enterprises. It cannot be optimally solved even by the respective branch organ. The choice of the best distribution variant requires integrated planning of mutually related industries, the transport network, etc.
The state chooses the shortest and most economical way of concentrating the limited capital investments (as well as other limited resources) and their distribution in the interests of the entire national economy, helps to coordinate scientific research and to introduce on an extensive scale new technologies and advanced know-how, steps up the development of progressive industries and branches of production, and organizes the training of cadres. Therein are manifested the advantages of the socialist system.
Does this mean, however, that every detail of the economic development of the branch and enterprise must be planned from the center, leaving them only the right to fulfill plans set for them? This would do society more harm than good. The centralized plan would have to provide for every variant of production of all kinds of goods in their concrete assortment – by grades, sizes, styles, colors, and raw material components – calculate an endless number of technological variants for the production of goods under different proportions of the production factors, verify a multiplicity of variants of investment allocation and the location of new enterprises, and bring out the optimal size and structure of the different economic units and their amalgamations. With modern computing techniques and their prospects of development in the visible future, such calculations are practically impossible.
As a matter of fact, however, no such detailed information is required for an approach to the optimum on a national economic level. The higher the organ of management, the more the data appear in an average form and the less their effect as detailed information.
But it is not only a matter of complex accounting and of its high cost. The experience of economic development in this country and in other socialist states has shown that very demanding plans cannot be drawn up, much less fulfilled, without the initiative and economic interest of the enterprises concerned. A centralized plan cannot be so exact as to envisage all the processes that are likely to develop in the field of future scientific and technological progress, the changes in industrial and consumer demand, the discovery of new natural resources, changes in weather conditions, etc. Planning always involves elements of assumption subject to verification in practice. This is especially true in the case of problems solved tentatively, on the basis of incomplete information.
In view of all this it is necessary for the individual economic units to be concerned with both the amending of their plans dictated by market changes (in the scientific meaning of the term) as well as the fulfillment of plans. This is the principal problem of an organic combination of centralized planning with economic independence of the production units.
Harmonizing the interests of the general and the particular, centralization and autonomy depend on certain prerequisites, on preliminary conditions.
First, the broadening of the rights of the enterprises makes for better centralized planning. The more harmonized the various targets of the national economic plan are, the more reason there is (under the necessary conditions) to assume that the granting of wider powers to the enterprises will not result in any serious deviations from the plan.
Second, for centralized planning and local initiative to be properly combined, it is important to choose a correct local criterion of optimality of the plans of the economic units, which is right if it makes for the realization of the global criterion. Only in this case will there be unity of stimuli at all levels of management.
Third, for the interests of the society and the interests of different levels of management to coincide, the latter’s obligations to the state must be clearly defined. Unless correctly determined, some units may suffer unduly while others gain undue advantages. The system of economic incentives would then be violated.
Finally, the most important instrument of coordination of the interests of the national economy and the individual enterprises is an improvement of the system of price formation. We shall deal with this problem at some greater length.
Under the new conditions, price is the basic economic point of orientation for the enterprise in solving many of the problems of its operation. If the price does not rightly reflect the real utility of the product to the consumer, if it does not correspond to the actual intensity of the demand for it, under conditions of complete cost accounting this may lead to irrational use of the production resources. The “struggle” between the enterprises and the planning bodies over the choice of profitable and unprofitable product mixes may even be intensified.
For the economic reform to be successful, the products listed in the output plans must be profitable to the enterprises. This will be so only if the planning of products and prices is done at one and the same tithe, with one closely tied to the other. In practice this means that the price level of products must be determined by the sum total of production conditions: the volume of raw materials available and production capacities, the technical level of equipment, the public demand for the given product, etc. Without such economic information it is impossible to estimate correctly the national economic importance of the given products, that is, to set their prices correctly. However, although the close relationship between the planning of proportions in physical terms and in value terms can hardly be denied, in practice these two aspects of planning are often kept asunder. Here is an example.
After the September 1965 CPSU Central Committee Plenum, the number of physical indicators subject to approval from the center was reduced. This natural action was prompted by the fact that it is impossible for the authorities at the center to envisage the entire diversity of production conditions existing in actual practice. As to the fixing of prices, the old system has been left almost intact: the prices of the hundreds of thousands of products manufactured throughout the country are planned and approved mostly by the Committee on Prices of the USSR State Planning Committee (Gosplan). The level of prices is predetermined with great precision not only for groups of homogeneous articles, but also for the various types, makes, and grades within each group. A paradoxical situation has resulted: while agreeing that it is impossible to plan everything down to the last pin from the -center, the fixing of all prices from the center is, nevertheless, considered possible.
Such stringent regulation of prices leaves enterprises practically no room for independent cost accounting activity. Moreover, things are further complicated by the fact that the centrally fixed prices, which remain unchanged for years, do not react to the changing production conditions and are extremely inflexible.
In our opinion, in the course of the further development of the economic reform it is necessary to go over from global price revisions covering all industrial products to current price regulation. It must be made a rule that with each more or less substantial revision of the government plan, the prices of the respective products must also be revised simultaneously.
Only the prices of the most important products should be set by the central authorities. In the course of amending branch plans, the ministries and departments will be setting the prices of a wide range of goods relating basically to intra-branch turnover. Much wider powers should be given to the enterprises to set contract prices. Such a price-formation “hierarchy” will allow a price system to be created that stimulates the fulfillment of plan targets. In this situation the Gosplan Committee on Prices would be charged with the function of price control. Relieved of the tremendous job of compiling price lists, the committee could concentrate on the solution of the methodological problems of price formation.
Why do we emphasize the need for revising the price-formation system and introducing scientifically substantiated prices, such as those of the optimal plan? Because with such prices at its disposal, the enterprise can choose the best production variant, enter into direct contract with other production units, dispose of its reserves, make the most rational use of resources, and seek ways of replacing materials in short supply (and therefore expensive) by other, less scarce materials. This applies not only to the enterprises but to the higher economic units as well (the trusts, chief administrations, firms, etc.), and to the different subdivisions of production units.
Thus, the system of the economy functioning on the basis of an optimal plan is not rigid, the center does not issue orders to all lower bodies (as was the case before in approving technical, production, and financial plans). It is a flexible system for it allows for centralized decisions to be made only in relation to the links directly subordinated to one another (the branch administration and the ministry, the plant and the chief administration, etc.).
Such an interpretation of the “hierarchy” in the organization of the socialist economy makes it possible to consider the organization of cost accounting (or the introduction of some of its elements) at all levels of the economy – from the ministry to the lowest economic links (with the number of considered indices for them different in each case). Their transfer to cost accounting demands that within each link the lower links exchange products at the respective optimal prices.
Yet the existing price-formation theory proceeds from the proposition that the problem of prices concerns only the commodity output of enterprises, between whom alone genuine exchange relations are supposed to exist. As to prices within the enterprises, they are said to be “accounting” prices used to settle accounts between the shops, and the principles of their construction are supposed to be outside the sphere of political economy.
It should be emphasized that exchange relations exist between all links of the economy, at all levels of the hierarchy, and that the nature of these relations is always the same. Hence prices at all levels have the same essence and play the same economic role. From this, it seems to us, important conclusions should be drawn concerning the organization of cost accounting and the system of price formation at all levels of economic management. The higher authority sets the prices for all the lower economic links on those commodities that are made by the given link and are acquired from outside (from other economic organizations). As a result the prices of those products which are made and consumed within the ministries and their chief administrations will be worked out and approved (on the basis of methods applied by the Committee on Prices) by the respective departments of the ministries and chief administrations. What we are concerned with here is not merely the formal replacement of the price maker. The ministry officials, well familiar with the internal relationships of their links are better able to use the prices for the organization of effective production relations and consolidation of cost accounting within their departments.
At all managements levels the prices of products should include the cost of raw materials and supplies, power, wages and salaries, the payment for labor resources (according to the skills of the workers, engineering and technical personnel, and employees), payment for productive capital, and rent for natural resources (including rent for the area occupied by the enterprise for productive purposes).
The question of the indicated price structures as applying to the output of the enterprises has been repeatedly debated. There is therefore no need to cite once more all the pros and cons of the matter. We should like to draw attention to the need to construct prices similarly within the enterprises too. By taking into account all rent payments in these prices, the interests of the shops and the enterprises as a whole will in the long run be harmonized.
Closely related to the problem of coordinating centralized planning with the economic independence of the enterprises is the question of reserves. The stochastic element in the development of the national economy may be smoothed away by maneuvering with reserves. In the practice of plan fulfillment, slight deviations from the estimated growth rates, from the plan targets, are inevitable. Corrections, timely balancing of production, can best be made with the aid of the reserves, provided of course that their size is sufficient to offset the deviations from the plan. The reserves of raw materials, equipment, production capacities, marketable supplies, labor resources, and foreign exchange act as an important regulator in maintaining proportionality in the development of the various branches and of the economy as a whole. The greater the possibilities for maneuvering with reserves, the wider the powers that may be granted to the enterprises to plan their output nomenclature, material and technical supply, wages, and other indices.
For each level of economic management, there is a corresponding amount of reserves as well as a specific structure of these reserves. Due to such a composition of reserves, many “perturbations” in the economy are quickly extinguished at the bottom of the economic pyramid without affecting its top stories. Of course, if the reserves begin to be exhausted, this can be taken as a signal that it is necessary to revise the plan (provided the size of the reserves was correctly estimated).
For the economic units to react in time to changes on the market, as well as to inner shifts in production, they must be capable of altering their own structure; they must have the right to liquidate some of their departments, managerial positions, etc., and open new ones. Such management powers are required to insure maximum viability of economic units, to introduce the principle of full material responsibility and strict fulfillment of contract conditions despite any changes in economic conditions.
Closely related to this problem is the working out of the best scheme of industrial management. At the current stage of production development, the establishment of economic amalgamations is expedient. They may be branch firms or so-called horizontal integrated amalgamations (within the limits of the territory served), combines, or vertical amalgamations. Big amalgamations are in a better position than small enterprises to keep track of public demand; concentrate funds for the establishment of new shops, enterprises, and industries; redistribute expenditures connected with the production of new types of output; summarize advanced know-how, technology, and the introduction of new techniques within the framework of this combine; maneuver reserves; set internal (transfer) prices; centralize part of the supply and sales operations. Big amalgamations are also in a better position to set up computing centers to carry out centralized calculations of orders, distribution of tasks, regulation of the size of stocks, accounting of expenses, distribution of bonuses, etc.
There are already a number of amalgamations in the country, but only a few of them have been put on a cost-accounting basis. It seems advisable, on the basis of a study of their experience and the experiences of a number of socialist countries, to continue creating firms and to define their rights and duties toward the lower and higher management bodies.
The Economic Reform and Criteria for Assessing the Work of the Enterprises
At present the work of the economic units transferred to the new system of operation is assessed on the basis of several criteria, such as final profitability level calculated as the ratio between the net profit and the value of productive capital, or the growth of sales (profits) as compared with the previous year.
Let us examine the content and interrelation of the criteria named. Insofar as the level of profitability of enterprises is not the same, a criterion of the “return” on their productive capital becomes for each enterprise an individual quantity. This leads to the virtual erasing of the objective border between the effective and ineffective capital investments. Government funds may also be invested in the units where initial profitability is minimal and any investment causes it to rise. But it is well known that it is better to invest money in an enterprise with an initial profitability of 15% and to obtain from additional expenditures an effect equal to 14% profitability, than in an enterprise with an initial profitability of A and to obtain an effect equal to 4%. In the first of the enterprises the effect of the investment, despite the falling off of the profitability by one point, will be higher than in the second, where further expenditures also result in a one-point increase of profitability.
Nor are things any better where incentives are offered for profitability and increases in sales. According to the methodological instructions, the relationship among the various standard indicators used for determining the amount of money that will be left at the disposal of the enterprise is to be set with account taken of the importance of these standards for the development of the branch. But where is the exact “watershed” between the bonuses for this or that indicator? No answer to this question is to be found in the methodological documents.
Separate incentives for profitability and higher sales create other contradictions as well. Some of the enterprises have increased sales through the influence of prices, but their increase in profits has been relatively small. In accordance with the methodological instructions, these enterprises are entitled to set up comparatively large incentive funds. But the actual realization of these premiums is often difficult since in many cases a source for these bonuses does not exist.
The practice of separate bonuses for the level of profitability and for an increase in net profits is also far from satisfactory. At first glance these indices overlap, inasmuch as the numerator of the profitability index contains the net profit (in full). But behind this external similarity there is a contradiction. It lies in the fact that an increase in net profit may be secured by any measure which has an effectiveness that exceeds the rate of payment for funds. If, for instance, the payment for funds amounts to 6%, then, disregarding other payments, any measure whose effectiveness does not exceed 7% will prove to be advantageous from the standpoint of an increase in net profit. But if this leads to a reduction of the profitability norm, the enterprise will find itself faced with the following problem: will the growth of the incentive funds resulting from the increase in net profits exceed their reduction resulting from the decrease in profitability?
In our opinion, the following method of assessment of the work of economic units would be more correct. Each enterprise is assigned fixed rates of payment for resources (productive capital, natural and transport conditions, manpower resources), as well as basic prices. The rates of payment for resources are fixed at a level so as to balance their supply and demand on a national scale for the planned period. The same principle is applied in calculating the basic prices of finished goods, that is, the prices represent in essence the marginal limits of socially permissible expenditures for production of this or that commodity and thereby determine which of the enterprises should be allowed to produce the given commodities.
By comparing revenues and expenditures (including payments for funds, rent, etc.), the enterprises are able to determine their final profits. Where expenditures are very high, losses will be discovered. Such enterprises will be subject to diversification, reconstruction, or closure (depending on what is preferable). In the last resort, only those enterprises may be allowed to continue in operation whose proceeds cover current expenditures, including payments to the government (payments for land and manpower resources among them).
Where the profits of the enterprises are sufficient to pay for funds, manpower resources, and rent, they will cover all expenses. (We do not rule out such a modification of our scheme under which part of the social expenditures is reserved for the enterprises as their own sources of development and bonuses, which are received even in case of plan fulfillment.)
Enterprise collectives working with a higher than standard efficiency will be making over-plan profits. A certain part of this extra profit may be deducted, on the basis of a fixed rate, into the incentives fund and the rest withdrawn into the budget. There may also be a different arrangement, namely, a tax on extra profit, with the remainder going into the incentive funds. Losses incurred by production units may be made up from these funds and from credits. Obviously the adoption of the system of economically sound payments for resources will take considerable time in view of the need to prepare a detailed methodology for their calculation. But preparations for this experiment could be started right now.
There is no clarity at present as to which of the expenditures should be financed out of profit and which out of that part of it which is known as the incentive fund. It often happens that expenditures on similar or almost similar objects are financed from different sources, while incomes from similar sources are recorded in different ways. Thus, production of consumer goods may be organized with the enterprise’s fund for production development as its financial source. But if there is no such fund, then it is permitted to use profit or, to be more exact, its free remainder which actually represents budgetary resources. Credit granted to replenish the shortage of working capital has to be repaid out of over-plan profit, which makes the enterprises keep part of their reserves out of the plan, thus understating it. A self -contradictory system applies also to the method of recording expenditures and results connected with the improvement of the quality of output. Extra expenditures involved in improving the technical and economic parameters of products are financed out of the free remainder of profit, while the price increase due to improved quality goes entirely into the incentive funds.
The solution of the question of interest on bank loans also seems to us to be inconsistent. Enterprises pay the bank interest on credits, but the bank pays no interest to them on money temporarily deposited with it. The established differentiation of interest rates also seems to us to be objectionable. The basic rate of interest charged by the bank is 6%. But in many cases (loans granted for expanded production of consumer goods, for production of new output, for improving quality, reliability and durability of goods) the rate is only 2%. Credits for introducing new techniques and improving technology are also granted on preferential terms. What, it may be asked, is the reason for such a “differentiation”? It is undoubtedly necessary, but the rate of interest ought to depend on the conditions of repayment, on the security of loans and, to a much lesser degree, on their purpose.
Highly dubitable, to say the least, is the present practice of financing expenditures and recording results by capital investments. Interest on credits for non-centralized capital investments is repaid out of the enterprise’s fund for production development, while for centralized investments it is repaid out of the free remainder of profit. But the effect of the measures financed from these sources is regarded as the achievement of the enterprise and makes it subject to a reward.
In the light of the theory of the optimal functioning of the socialist economy, most expenditures and results ought to be related to the enterprise’s profit. Thus the extra expenditures involved in expanding the output of consumer goods, as well as the profit earned thereby, ought to be reflected in the “profit and loss” account. The same applies also to losses (receipts) from liquidation of fixed capital, expenditures on improving quality of output and the respective increases in price, as well as interest paid and received. But this method of accounting incomes and expenditures will be expedient only if the method of distributing profit is changed, namely, if the profit is used to make standardized payments for resources and then to compensate for the expenditures listed above. The result will be what is known as net profit. After taxes are paid, the remainder should be used as an incentive fund. Under such a profit distribution scheme all enterprise expenditures and income will be equally important.
In conclusion, we shall make some observations on certain points of the methodological instructions. According to this document, additional expenditures on updating the assortment have to be made up mostly out of the centralized fund for assimilating new production. Deductions into this fund are made by all enterprises, rendering their enterprise cost of production higher; but only a few benefit by it. What we get, in effect, is a reallocation of these expenditures among all the enterprises in the branch without a subsequent reallocation of the benefits obtained. Besides, enterprises producing new products develop relatively bigger incentive funds than other factories and plants. This places some of the enterprises in a privileged position.
In some of the socialist countries – Bulgaria, for instance – a different solution has been found for the question. Enterprises updating their output-mix receive long-term credits to make up for the cost of assimilating the new products and to pay bonuses to the workers. The credit is planned to be repaid within three or four years, by which time enterprise cost of production is reduced and the new product begins to bring a high return. Such a practice, it seems to us, deserves attention.
According to the methodological instructions, the minimum deduction from profit into the incentive fund, in case of non-fulfillment of plan, cannot be below 40% of the planned incentive fund. Considering that bonuses and other payments are part of their basic earnings, to many of the workers this measure is justified, especially in view of the following argument: no matter how inefficiently an enterprise collective works, there are some good workers in it deserving to be rewarded; this is precisely the aim of fixing a minimal incentive fund. But bonuses can be paid only out of surplus income and not at the expense of the inefficient workers. In other words, all wages are treated as a minimal quantity not subject to reduction. Is this right in principle if we proceed from the very essence of this category? We think not.
A number of advantageous conditions have been introduced for the promotion of technical progress and acceleration of assimilating new capacities. For two years no payment for funds is collected from units built at the expense of the enterprise’s fund for production development. No payments are collected from newly built as well as from existing enterprises for productive capital in the new shops and big production units for a standard period of assimilating their capacities. In calculating the annual payment for funds, units put into operation in the latter half of the year are not included. In our view, these privileges distort in some degree the real results of the measures taken; they may stimulate the less effective and retard the more progressive technical solutions since the latter are placed into relatively rigid conditions. Certain privileges are probably justified. But they should be granted overtly instead of covertly, by a direct subsidy or, in any case, economic decisions should be made, taking account of real expenditures and results.
Enterprises operating under the new system of management set up a fund for the payment of bonuses based upon the results of the year. At present there is no bonus reserve for the following year. In principle, however, such a reserve is necessary. The financial results of operation of enterprises at different periods are not the same and they do not always improve. They are relatively meager in the period of acquiring new types of output and new capacities, but improve with time. Under these conditions the fluctuations in the workers’ earnings should be kept down as far as possible, not only with the aid of credits, but also by reserving part of the bonus fund in the period of relatively high profit.
Nor can the enterprise’s fund for the production development be squeezed into a yearly framework. The need for capital investments is not the same from year to year. The enterprises are therefore interested in accumulating resources for capital construction during a certain period to be used later, as the need arises. Such a practice would stimulate production efficiency and would not rush the enterprises into investing money immediately in modernization projects of doubtful value when there are better projects in sight.
The next question relates to the funds of the economic amalgamations. For them, of special importance is the capital investment fund, which may be used to build industrial and housing objects and to specialize production. The amalgamations may concentrate in their hands part of the reserve stock of raw materials and supplies. It also seems advisable to centralize a certain part of the reserve equipment in the amalgamations. Cost-accounting amalgamations should have their own incentive fund too. The concentration of part of the reserve stock of raw materials and equipment means that they must pay for the respective resources themselves.
The economic reform being introduced now testifies to a strengthening of economic methods in the management of the national economy. But it will take hard work and energy, great consistency, and adherence to principle for the ideas of the September 1965 Central Committee Plenum and the CPSU 23rd Congress to be implemented in full.
Source: Murray Yanowitch, ed., Contemporary Soviet Economics; a collection of readings from Soviet sources (White Plains: International Arts and Sciences Press, 1969), Vol. I, 85-96.