INTRODUCTION

In March 1985, when Mikhail Gorbachev became general secretary of the Communist Party of the Soviet Union, he inherited a nation that had at-tained superpower status as a military force, was one of the largest producers of some of the world’s key products, such as oil and steel, and had achieved great accomplishments in space exploration. Yet everyone, including Gorbachev, also knew that part of the legacy was a stagnant economy, one that was perhaps bordering on crisis.

In the 1960s the average annual rate of economic growth in the Soviet Union was still a highly respectable 5 percent, but in the early 1970s it dipped to about 4 percent, and the downward slide became ominous in the last half of the decade when growth fell to 3 percent a year and then to 2 percent in the first half of the 1980s. The slowing of growth reflected the fact that the system of central planning which had taken the Soviet Union so far, so fast, was not working. And it was more than simply a slowdown in growth that Gorbachev faced. The capital stock was aging and the technology that drove the Soviet industrial machine was falling further and further behind the levels achieved by the industrial nations in Western Europe, Japan, and the United States. Even the rapidly advancing newly industrializing countries of Southeast Asia were beginning to leave the Soviets behind in certain areas.

There was a great deal of popular discontent with the standard of living. Much had been promised to the people by the party, but little had been delivered. The housing stock was still inadequate, food supplies were meager in quantity and quality, and there was a general absence of consumer goods. Part of the historical deal that was made between successive leaderships and the people was that if they sacrificed today and kept the goal of building communism before them, there would be substantial rewards. And while their leaders did not entirely fail them, it became clear that the sacrifices had outstripped the rewards.

There were few corners of Soviet economic and social life that were without their deficiencies. Only someone out of touch with reality could have unconditionally defended the status quo in the spring of 1985. What, then, were the causes for the lapse into stagnation? And, in the eyes of the new leadership, where did the solutions lie?

At first it became fashionable to blame the deceased former party general secretary, Leonid Brezhnev, for the woes of the economy. Scapegoating is a grand Soviet tradition, and Brezhnev’s failed policies became known as the “years of stagnation.” But there was certainly a realization by many that the problems were embedded in the system; simple finger-pointing was not the answer. In the words of Leonid Abalkin, economist and close Gorbachev adviser, “The revolutionary modernization of the system of management, the break with existing methods, and the transition to a qualitatively new model of the economic mechanism must have deep-going foundations.”¹

Hence the call for a reconstruction of the economic system loosely called “perestroika.” One of the foundations that would be constructed was a legalized private economy. There is no doubt that this was a heresy. Private enterprise meant private gain, and private gain was associated with capitalist exploitation. But it was also recognized that private enterprise could meet needs that were not currently being met by the state. Moreover, the private sector could provide a legitimate channel for the entrepreneurial talents of those who wanted an outlet for their energies. Soviet cooperatives were to be the vehicle of the newly legitimized private enterprise under perestroika.

Before perestroika there had been a long series of attempted economic reforms after 1953 that for one reason or another had failed. Khrushchev’s attempts to reorganize the bureaucracy to inject some dynamism into the economy came to naught as the bureaucracy resisted and finally contributed to his removal from office in 1964. While his approach was not a break with the past since it relied on the use of administrative mechanisms, it at least had the virtue of allowing public discussion of economic problems.² The much-vaunted Liberman reform proposals of the early 1960s, which would have removed some of the burdens from enterprise managers, given them more control over several key economic decisions, and made the rate of profit the sole criterion for success, also came to nothing. The 1965 reform introduced by Kosygin had two elements: the first was to simplify enterprise planning by reducing the number of targets set by the center, and the second was to make sales and profitability the key success indicators in place of gross output. It, too, soon fell by the wayside. An interesting experiment that came to be known as the Shchekino experiment began in 1967; in an effort to increase incentives at the enterprise level, managers were given more discretion over the use of the wage fund to improve labor productivity. Although it never spread to more than a thousand or so enterprises, it was a relatively successful innovation even though it was curbed because of bureaucratic sabotage.³ The seventies saw constant tinkering but a refusal to contemplate systemic reform. Ultimately, the directors of the system always returned to central planning.

The failure of central authorities to put in place economic reforms that would meet the growing and increasingly sophisticated demands of the population led many to take matters into their own hands and to develop an illegal, underground economy. This “second economy” grew rapidly in im-portance.⁴ By its very nature, it is impossible to measure the size of this sector accurately, but interviews with Soviet émigrés in the 1970s have provided some approximations of its size. According to Ofer and Vinocur, 10-12 percent of Soviet personal income came from private sources, and Grossman estimated that the figure may have been as high as 30-40 percent of total personal income.⁵ Thus, in a real sense, there was already de factoprivatization in the Soviet Union, in the form of the second economy, from the 1960s through the mid-1980s. Private trade, and even private manufacturing, not only flourished but also reached such a level of development that it thoroughly corrupted the official structure. Government and party officials became caught up in the illegal economy, both as active participants and as recipients of kickbacks and bribes for turning a blind eye to what was going on. Campaigns against official corruption were waged by Yuri Andropov for a number of years while he was both head of the KGB and party general secretary, as a result of which many officials were removed from office and put on trial. Even government ministers were not immune to this anticorruption campaign. Yet this did nothing to change the system.

Gorbachev’s response to the economic difficulties he had inherited was at first conventional. His initial attempts to stimulate the economy had much in common with those of his predecessor, Andropov. The approach was essentially based on imposing discipline and squeezing more output from the existing structure. An anti-alcohol campaign was inaugurated just weeks after he came into office, aimed at increasing productivity, and there was a re-newed emphasis on labor discipline. The watchword for this program was uskorenie, a “speeding-up” of the economy. Because this tack was not working, Gorbachev shifted direction in June 1987 at the Central Committee Party Plenum and made a renewed commitment to “intensive development,” a reliance on the introduction of new technologies and the concentration of investment in those areas which would bring the greatest economic return. But within a year the leadership recognized that there was no “technological fix” that could get the economy moving again—that a change was needed in the way things were done rather than just a change in the machinery.

Thus, by 1988, the leadership decided to introduce sweeping organizational and political changes in an attempt to rescue the economy. This meant accepting in deed as well as word the radical program outlined as early as January 1986 at the 27th Party Congress and also at the June 1987 plenum. Two of the major foundations of this new course were the introduction of the khozraschet (economic cost accounting) system for state enterprises in January 1988, and the encouragement of private enterprise under the Law on Cooperatives that came into operation six months later. The ideologically explosive nature of the latter change was obvious, and Gorbachev and his followers had to overcome strong opposition to this move.

Supporters of reform drew liberally from Lenin’s writings to justify the new course. For example, Lenin was cited as saying: “The socialist ideal according to Marx . . . in practice has not brought self-government by the people, an upswing in the economy, or progress in socialist consciousness.”⁶Furthermore, there was considerable discussion about the New Economic Policy (NEP) which Lenin had introduced in 1921 and which lasted until the era of central planning was inaugurated in 1928, and the lessons to be drawn from it for the new reforms. This was part of the effort to legitimize the reforms, by making them seem Leninist in nature. In his book Perestroika,Gorbachev stated that Lenin “was not afraid to stimulate individual labor activity, when the state and public sector were weak. . . . What we need is no ‘pure,’ doctrinaire, invented socialism, but real, Leninist socialism.”⁷ “Leninist socialism” was said to be represented by NEP, and at the 27th Party Congress, Gorbachev made the link between the radical reforms he was proposing and the NEP.

NEP had two major components, the first of which was the reintroduction of private enterprise after War Communism to reestablish a link between producers and consumers. By the end of 1922, 90 percent of retail trade outlets and about 75 percent of retail sales were in private hands. The second cornerstone was the denationalization of enterprises employing twenty people or fewer, some of which were given back to their original owners, while the others were leased out to new entrepreneurs. The state sector also experienced changes, the majority of industrial enterprises having been given the right to set their own contracts for supplies and the disposition of output.⁸ By any standard, NEP was an economic success. Whereas in 1920, industrial production was only 20 percent of the prewar level, by 1928, the prewar levels in industry had been surpassed.⁹ Even exports rose under NEP.¹⁰

The NEP period, though, also saw social and political reactions to the new class of often wealthy entrepreneurs that in retrospect bear a striking resem-blance to the experiences of private enterprise under perestroika. In addition to public hostility to the conspicuous lifestyle of many of the new businessmen, known as “Nepmen,” there was also considerable hostility on the part of local authorities. Much of the antagonism was fueled by high prices. Only nine months after NEP was introduced, an official in Central Asia expressed in print the idea that the secret police should be used to combat rising prices, and in Samarkand, local officials actually did use the secret police to arrest Nepmen and impose price controls. As an observer on the scene wrote, “the attitude of local authorities toward private trade is not always favorable. . . . Traders live in constant fear of losing their property.”¹¹Eventually, Nepmen had more to fear than mere loss of their property, for when the Stalinist crackdown came at the end of the twenties, many were sent into exile and to almost certain death.¹²

In rejecting Stalinist practices it was easy to cite Lenin, especially as a source for the legitimation of Gorbachev’s new cooperatives. Lenin had written an essay, “On Cooperatives,” which, while mainly a justification of the need for cooperative forms in agriculture, had in the Gorbachev era been given much wider applicability. It was possible to find quotes from Lenin to the effect that cooperatives were an “integral part” of socialism—“. . . a simple growth of cooperatives for us is identical . . . with the growth of socialism . . . ”—and even Lenin’s suggestion that cooperatives should be politically organized was quoted with approval.¹³ It was said, though, that any attempt merely to copy Lenin’s program was naive; what was necessary was “to restore Lenin’s methodology for moving towards socialism on the basis of market relations and a multiplicity of socioeconomic structures.”¹⁴

Gorbachev and the reformers probably had two reasons for choosing the term “cooperative.” First, it came from the effort early on in the reform program to expand the existing cooperative program and to bring back production cooperatives. Whereas in 1928 such cooperatives were responsible for 13 percent of industrial output, they had virtually disappeared by 1960, when they accounted for only 3 percent.¹⁵ Trade and consumer cooperatives, however, had existed throughout the period of central planning and typically accounted for about one-fourth of annual Soviet trade.¹⁶ The cooperatives which developed following the 1987 Law on Individual Labor Activity were quite different from either of these old cooperatives, however, since the former were generally the private property of those who created them. The idea of calling these new organizations “cooperatives” fooled few in the Soviet Union. It was recognized that this was really private enterprise dressed up as socialist enterprise.

Once the way had been cleared for legal non-state forms of economic activity, what came to be known as the “alternative economy” developed rapidly. Because of economic, political, and social forces operating in the USSR, it took directions that were unlikely to have been foreseen by the architects of economic innovation and resulted in a highly complex alternative economy. In addition to privately owned and run businesses, a wide array of intermediate forms of enterprise evolved, creating ties between the state and private sectors that were both close and complicated.

The purpose of this book is to tell the story of the emergence and evolution of the new Soviet cooperatives, and their experiences during the first four years of their existence. What is shown is that, in spite of restrictions placed on their activity, they developed extremely rapidly. It became obvious that there was a reserve of entrepreneurial talents ready to be liberated. What developed, however, over the four-year period 1987-1990 was not private enterprise in the full Western sense of the term; not all of the cooperatives were free-standing, independent organizations. On the contrary, what developed were also forms that combined the state and private sectors in a variety of ways. The relationship between these two sectors was symbiotic; the cooperatives needed the connections and resources of the state, and the state enterprises needed the efficiency and freedom of operation that the cooperatives possessed. Yet because the new cooperators challenged an old ideology, their very existence offended many of their countrymen, particularly officials at the local level and ordinary citizens who were envious or unaccepting of greater economic inequality. Forced to defend themselves, cooperators became actors on the political scene. What started out as an economic movement for improving the standard of living of the population and the cooperators, became a political force in Soviet society. The economic ingenuity of people in the cooperative movement enabled the USSR to lay the tentative foundations for the move to a market-oriented economy. The second stage in this development came in the autumn of 1990 with the announcement of broad and far-reaching freedoms for private enterprise. It is with the announcement of this policy that our story of the cooperative stage of the economic transition ends.

The chapters in the book are organized around four main themes. Chapter 1 chronicles the first stage in the emergence of cooperatives, chapters 2 and 3 examine the evolution of private enterprise in the cooperatives, chapters 4, 5, and 6 detail the main problems they faced, chapter 7 describes the politici-zation of the cooperative movement, and chapter 8 assesses the relationship between entrepreneurship and the transition to a market economy.

SOURCES AND TERMS

A word of caution about the data is in order. Throughout the book we depend entirely on Soviet sources for the data we use. One of the by-products of glasnost has been the increased availability of statistics on, and evaluations of, matters that would never have been revealed before in public. No scholar could be anything but grateful for the increased access to what is going on in the Soviet Union. But that does not necessarily mean that the data are always reliable, for the Soviet Union is not experienced in collecting high-quality economic and social statistics. Where we have noted contradictions in Soviet sources, we have attempted to figure out what makes the most sense, or have found ways to corroborate particular findings. Some of the data that Soviet authorities have collected depended on the answers of cooperators themselves. In certain sensitive areas, the people involved in cooperatives have an incentive to shade the truth. For example, there is a strong motivation to evade taxes. Moreover, because of a long history of abuse of privacy and rights in the country, there may be a lingering distrust toward those who collect information. Nevertheless, in spite of these problems we have accepted a great deal of Soviet information at face value. In doing this, we believe that we have come close to portraying the reality of what hap-pened over these last few years in the cooperative movement.

There are always problems involved when one tries to do justice to Russian terms without misleading the reader, and therefore decisions have to be made regarding how to translate particular words. The reader should be aware of the choices we have made. There are two ways to translate the Russian word kooperatsiia: as either “cooperative” or “cooperation.” We have generally chosen the former on the grounds that it better conveys an idea of the activity that is involved. Our use of the term “private enterprise” reflects our belief that many of the new cooperatives are in practice what we in the West would call private businesses. In the Soviet Union, however, there is a careful distinction made between private (chastnyi) and personal (lichnyi). There is an important reason for this distinction, namely that private enterprise is said to involve the exploitation of the labor of others, whereas in the case of personal enterprise, income is thought to derive only from one’s own labor.

Because the cooperative movement is evolving so rapidly, we wrote this book in the past tense. Yet, whatever happens in the future, this book chronicles an important phase in the transition.

October 1, 1990