2.

The Evolution of the Cooperative Movement

The purpose of this chapter is to profile the unfolding of the cooperative movement and to provide a quantitative and qualitative analysis of its development since the earliest stage of its formation. What is shown is that while the cooperative movement grew extremely rapidly, there were substantial shifts in the areas of the economy in which cooperatives operated, that there were significant regional differences in its development, and that the character of the cooperative labor force also changed notably in numbers and in composition as the movement in general grew.

One of the most remarkable aspects of the cooperative movement was its rapid growth. Table 2.1 shows the increase in the number of operating cooperatives and the corresponding level of employment. There was a veritable explosion in the growth of the cooperative movement in 1988, the first full year of its functioning. The number of cooperatives increased by 450 percent just in that year, from over 14,000 on January 1, 1988, to 77,500 at the beginning of 1989. Growth continued unabated through 1989 with the number of cooperatives increasing by another 150 percent. This pattern of growth was then broken, however, in the first part of 1990; the figures issued for April 1, 1990, showed an absolute decline in the number of cooperatives by 7,500. Moreover, there was also a falloff in the number of people employed by cooperatives: after approaching five million in employment at the beginning of 1990, or about 3 percent of the total Soviet labor force, within three months cooperative employment had dropped by roughly half a million people. On the face of it, this was a disquieting reversal of the earlier trend. It meant not only that many people had left private economic activity, but that there were not a sufficient number of entrants to replace them. There is no solid reason to reject the data showing that such a reversal occurred. It would certainly be consistent with a number of problems faced by the cooperatives that we will discuss below. But the early 1990 decline in the numbers notwithstanding, the fundamental fact remains that there was an enormous growth in the cooperative movement. Moreover, there was some recovery evident even by June, when about 220,000-230,000 cooperatives were in operation, with about five million people producing an estimated sixty billion rubles worth of goods and services.¹

Table 2.1 Growth in the Number of Soviet Cooperatives

Sources: Izvestiia, November 25, 1987; Argumenty i fakty, no, 18, 1989; Izvestiia, June 30, 1989; Moscow News, no. 28, 1989, Ekonomicheskaia gazeta, no. 37, September 1989, p. 15; Sovetskaia torgovlia, March 29, 1990, p. 2; Merkurii, no. 4, June 28, 1990, p. 2.

In spite of the growth of the movement, for various reasons the number of cooperatives actually operating was always less than the number that were registered, although the gap between the two narrowed over time. Table 2.2 shows that at the beginning of both 1988 and 1989, only 57 percent of the registered cooperatives were actually operating. But during 1989 the discrepancy between the two figures declined considerably and 84 percent of registered cooperatives were actually operating by the end of the year. The discrepancy between the number of operating cooperatives given in tables 2.1 and 2.2 should be noted. The first set of figures are those of Goskomstat,the State Committee on Statistics, and the second set of figures come from the Interior Ministry. The methods of collecting data in the Soviet Union are in general primitive and, as we suggest below, the incentive to lie is not inconsequential.

In large part, the existence of non-functioning cooperatives was due to such chronic problems as inadequate supplies, the difficulty of obtaining a physical facility, and bank credit stinginess, all of which are chronicled in chapter 3. It is also possible that the early fervor and the rush to join the fray waned somewhat; those either only marginally interested or discouraged by an interfering bureaucracy and public hostility dropped out. That would mean those who remained represented the most determined.

From the beginning there were significant differences in the rate at which cooperatives developed around the country. The Baltic and Caucasian republics were the leaders in the development of cooperatives. In 1988, when per capita production by cooperatives was 21 rubles for the country as a whole, it was 71 rubles in Latvia, 64 rubles in Estonia, 64 rubles in Armenia, and 38 rubles in Georgia. On the other hand, cooperative development was considerably slower in the Central Asian republics. In Kirgizia, per capita output was 15 rubles, in Tadzhikistan, 7 rubles, and in Turkmenistan, a mere 6 rubles.² Their growth was especially slow in the rural areas of the country.³The results of a January 1990 poll also showed quite substantial differences in the population’s use of cooperatives. In Armenia, Estonia, and Latvia, the volume of goods and services sold to the population was between 1.8 and 3.5 times the national average. In Armenia and Estonia, 35 percent of the population said they used cooperatives (the highest in the USSR), and in Belorussia and Moldavia, only 17 percent of the population frequented cooperatives, the lowest level of participation in the country.⁴

Table 2.2 Number of Registered and Operating Cooperatives, in thousands

Sources: Trud, July 26, 1989, p. 4; Izvestiia, March 5, 1990, p. 6.

How can one account for these rather substantial differences in cooperative activity? In some places, such as Central Asia, many probably chose to remain in the second economy rather than shift their operations to a cooperative. In the case of the Baltic republics, it may be argued that their greater interest in cooperatives stemmed from the fact that they had spent one less generation under central planning with its inhibiting impact on so many who lived under it.

As a consequence of the growth in the number of cooperatives, there was also a substantial increase in total cooperative output. On October 1, 1987, sales of goods and services by cooperatives equaled 134 million rubles.⁵From that point on, the level of output grew at a staggering rate, equaling 40.4 billion rubles in 1989.⁶ This exceeded the expectations of even the movement’s most enthusiastic supporters. Vladimir Tikhonov, the head of the Union of Amalgamated Cooperatives of the USSR, predicted in mid-July 1989 that at the end of the year cooperative output might rise as high as 17 to 20 billion rubles, but this was only half of the actual figure reached.⁷Output continued to rise, and as of April 1, 1990, cooperative sales were running at an annualized rate of 46.5 billion rubles.⁸ One estimate was that the figure would reach 100 billion rubles by the end of the century.⁹ This would mean slightly more than a doubling of nominal cooperative output, or an average annual rate of growth of about 7.5 percent a year.

All of these figures should be approached with great caution. Both officials and cooperatives had their own reasons for distorting statistics in one direction or another. Individual cooperatives had an incentive to underreport their own income in order to evade taxes. Representatives of the cooperative movement often tended to exaggerate the current and potential size of cooperative output as well as the damage to the economy of any given legal restriction on their operations.

Many officials, especially at the local level, were subject to competing pressures. On the one hand, they had an interest in showing that they were complying with central wishes to encourage the cooperative movement, and this may have led them to exaggerate figures.¹⁰ On the other hand, their hostility to cooperatives may have led them to understate the size of the cooperative sector. An example of such underreporting apparently occurred in Cheliabinsk oblast during 1988. According to statistics put out by the oblast administration, Cheliabinsk cooperatives produced only 21 million rubles worth of output during the year. But when the tax records were checked it was found that the amount of taxes paid reflected an output level of 197 million rubles. Similar checks in three other oblasts also uncovered official underreporting of cooperative performance.¹¹

The absence of a reliable mechanism for establishing accurate statistical information on the cooperative sector led to what one observer described as a truly fantastic situation. Government agencies collected faulty statistics, the press then reported these inaccurate government assessments as if they were accurate, and the government in turn referred to these press statements as verification of its own figures when preparing legislation.¹²

The rapid increases in output translated into cooperative output rising as a proportion of the Soviet gross national product. In 1988, the level of production of goods and services produced by cooperatives rose to 1 percent of national output, a ten-fold increase over the 1987 level of 0.1 percent.¹³ By the end of 1989, the relative importance of cooperative output more than quadrupled and was about 4.3 percent of the 1989 Soviet gross national product of 932 billion rubles.¹⁴ Their share in the total output of consumer goods grew from 0.4 to 1.9 percent and in the total volume of services, from 4.6 to 15.4 percent.¹⁵ Leonid Abalkin, deputy prime minister and economist, articulated an even more ambitious goal in November 1989; he wanted cooperative output to reach a rather staggering 18-20 percent of Soviet GNP,¹⁶an achievement which would require dramatic changes in the structure and performance of the Soviet economy.

There were several reasons why the number of cooperatives began to decline by early 1990. First, there were a rash of closings of cooperatives during the second half of 1989 and early 1990. One source described a “wave of ‘rooting out’ ” which eliminated about 15,000 cooperatives.¹⁷ Second, cooperatives were in competition with the state sector for resources which were in short supply, and everybody was competing for supplies that were increasing at a rate not nearly commensurate with the demand for them. Until such time as the economy is better able to provide resources for all who want them, the state will always have first call and cooperatives will have to stand at the end of the line. Unfortunately for the cooperatives, the lines were getting longer at the very moment when the crunch of shrinking supplies made it difficult to distribute supplies to those at the rear. This meant that some had to fall by the wayside. Given the structure of the Soviet economy, and with-out a turn to a market economy, the growth of the private sector probably faced a natural limit dictated by supply stringencies. Third, many cooperatives were experiencing difficulty repaying their debts. At the end of 1989, overdue cooperative debts on bank loans exceeded 3.5 million rubles, more than ten times the 1988 figure of 342,000 rubles in overdue debt.¹⁸ Therefore, those attempting to enter private sector activity who needed external financing may have had serious difficulty obtaining loans from banks. Also, toward the end of 1989 and in early 1990 cooperatives were under assault by local bureaucrats and often faced restrictive legislation. The Uzbek Republic, for example, issued a decree entitled “On the Prohibition of Some Kinds of Cooperatives and Individual Labor Activity on the Territory of Uzbekistan” that led to the Union of Amalgamated Cooperatives of the USSR forecast that 72,000 people would lose their jobs in cooperatives.¹⁹ Because of the large number of closings at the beginning of 1990, there was cause for great uncertainty and concern. Given the heavy-handedness of local bureaucrats, potential entrants into the cooperative arena may have been waiting to see how the local elections in March 1990 turned out and whether the so-called radical reformers who supported cooperatives would take power in the major cities, before they would gamble on entering the private sector.

TYPES OF COOPERATIVES AND WHAT THEY PRODUCED

In the law of May 26, 1988, cooperatives were mandated to produce more goods and services for the population. While there is no doubt that they formally met that goal, they did so largely indirectly. The pattern of the cooperative movement was to shift away from producing directly for consumers, to fulfilling the orders of state enterprises which in turn sold to the general population or sold intermediate goods to other state enterprises. The shifts were so dramatic that cooperatives in some sense came to look more like a subsidiary creature of the state than an independent entity. In 1988, 45 percent of the services and 57 percent of the consumer goods produced by cooperatives were sold to state organizations and enterprises.²⁰But in 1989, about 83 percent of cooperative output was sold to the state, and in the first quarter of 1990, this figure was almost 87 percent of cooperative output.²¹

There is serious question, therefore, as to whether there was a real shift from state, planned production to private enterprise or whether many, if not most, cooperatives were merely fronts for state enterprises. Because the old economic system strictly limited the prerogatives of the state enterprise, the cooperative may have become the way for enterprise directors to circumvent the fetters that bound them. Indeed, while there is no direct evidence, it may well be that enterprise managers deliberately created cooperatives in their enterprises because cooperatives were not shackled by the obligations of the state plan. If this was the case, everyone won; the enterprise director met the plan and ambitious workers earned more money. But cooperatives of this subspecies were not spontaneously created private enterprises.

A part of the growth of cooperative production was achieved through the transformation of failing state enterprises into cooperatives. This was true of the public catering establishments, especially at first. In late 1987, 80 percent of the public catering cooperatives in the RSFSR, 72 percent in Kazakh-stan, and 83 percent in Moldavia had formerly been state enterprises.²² By mid-1989, as things stabilized, two-thirds of all public catering establishments (80 percent in Leningrad and 60 percent in Moscow) had replaced what were either state cafés or state dining rooms. Similarly, industrial and construction cooperatives tended to emerge from the ashes of unprofitable state enterprises.²³

There was also a substantial shift in the composition of cooperative output. In the beginning, it seemed that almost everybody wanted to open a small restaurant in the Soviet Union. In relative terms, cooperatives serving food were very important in 1987 when they were 22 percent of the total number; these dropped to 10 percent in 1988, and then became no more than 2 percent of the total. Likewise, their earnings went from 25 percent of the total in 1987 to 6 percent in 1988 and to less than 1 percent in 1990.²⁴ In a similar way, cooperatives providing everyday services such as apartment repair, shoemaking, tailoring, etc. grew very rapidly in the beginning. One of the primary reasons for this was that a great deal of illegal activity already involved these kinds of services, and it was therefore a relatively easy transition from the underground economy to a legal business. Entry into these trades was easy since it required little initial capital and there was a wellspring of unsatisfied demand for services of this type. Furthermore, services were the main avenues of opportunity open to people, such as the building trades. But as time passed there was a radical shift in the relative importance of cooperatives providing everyday services and those doing construction work; the former substantially decreased in importance, while the latter became predominant in the cooperative movement. The building cooperatives came to produce one-third of total cooperative output, with no other area of cooperative activity even coming close to matching their significance, either in terms of the numbers of cooperatives or, most important, in respect to earnings.

Table 2.3 Distribution of Cooperatives by Type and Earnings

Sources: Ekonomika i zhizn’, no. 12, March 1990, p. 5; Merkurii, no. 4, June 28, 1990, p. 2.

Two things may have caused this shift. First, there was probably a saturation point reached in the market for everyday services. Second, Soviet state enterprises found cooperatives so efficient that they saw it in their interest to use them. The state construction industry was notoriously ineffective for many years; it had failed to complete projects on time or to provide work of high quality. Consequently, the building cooperatives became a blessing to state industry. Indeed, over 97 percent of building cooperative production was done with the state, compared to only 60 percent of the business of everyday service cooperatives. Moreover, the earnings became so great that many cooperatives were lured into doing business with the state. The incentive for individuals is obvious; as of April 1, 1990, the average wage per person in the building cooperatives was about 45 percent greater than that of a person working in a cooperative providing everyday services, 1,192 rubles to 819 rubles.²⁵ The attractiveness of this higher-paying work led to the outflow of considerable numbers from the state sector into cooperatives that did business with the state. The bitterness that this provoked in those who remained in the state factories was illustrated in a discussion which President Gorbachev had with angry workers in the industrial city of Nizhnii Tagil in April 1990. They complained to him that more than 100 of the 250 people in the city’s railroad car construction plant had left to work in cooperatives. When Gorbachev asked them what kind of work they had left for, he was told that overwhelmingly they had gone to building cooperatives. In response, he defended these cooperatives: “Building cooperatives are needed . . . they are needed.”²⁶

There was also an impressive decline in the importance of the cooperatives that have been associated with speculation, namely the trading and trade and purchasing cooperatives. They are now just under 4 percent of the total. The relative decrease suggests that the authorities were successful both in getting rid of the most egregious violators of the law (and quite possibly a number who were not in violation of the law) and in discouraging others to enter. However, the decrease may mean people in speculative trade, often attacked in the press, have gone underground again.

Two main types of pressure determined what kinds of businesses developed in the cooperative sector. The first were the legal restrictions that de-fined what cooperatives could and could not do. The second, and perhaps the most important, were the pressures imposed by the general shortage of goods and supplies. In the RSFSR in 1988 among the consumer goods cooperatives, the production of knitted wear and footwear was the most profitable, but the number of such cooperatives was but one-third to one-fourth that of clothing cooperatives. The main reason for this was that the former had considerably greater difficulty in finding the necessary materials and equipment than did the latter.²⁷ Not surprisingly, therefore, the cooperatives producing goods used as inputs by state enterprises were the ones that grew most rapidly in 1989.²⁸ A 1989 survey revealed that 80 percent of all cooperatives either were physically established within state enterprises or operated under their umbrella. In this relationship, cooperatives leased about 60 percent of their fixed assets and bought more than 60 percent of their raw materials from state enterprises.²⁹

The shortages that dominated consumer goods markets also gave a number of prospective entrepreneurs a great incentive to start trade and pur-chasing cooperatives. For many individuals it was simply easier to buy and resell than to produce something new. Many cooperators also preferred to go into commercial businesses because it was more difficult for the state to control how they spent their money; these cooperators always claimed that it was necessary for them to have the convenience of holding cash to buy the goods they were going to resell rather than putting their money in a bank. Holding cash also made it easier to evade taxes.³⁰ Thus, not only did supply problems dictate that cooperatives associate themselves with what state enterprises wanted to produce, but shortages created a natural milieu for the rise of commercial cooperatives.

From the beginning people demonstrated great resourcefulness in regard to the kinds of businesses they started. In the tradition of entrepreneurship, Soviet citizens came forward to fill gaps left by the inefficient state economic machine. As early as 1987, a cooperative began to sell insurance to other cooperatives; it covered buildings, equipment, supplies, and transportation against such risks as theft, fire, floods, and even earthquakes.³¹ One of the most widely publicized cooperatives was Fakt, an organization which provided information to other cooperatives and assisted people in forming coop-eratives. It even had an “emergency squad” comprising a lawyer, an economist, and a journalist to help cooperatives with special problems.³² In some instances, the state began to depend on rather specialized cooperatives. In mid-1989, with the summer vacation season beginning, the chairman of the Central Council for the Administration of Health Resorts of the Trade Unions said that he looked to cooperatives to do such things as repair health resorts, make goods that the resorts needed, and provide facilities to look after children.³³ And in a nation where there is a chronic shortage of car parts, cooperatives making these items were expected to manufacture 200 million rubles worth of output in 1989.³⁴ Several cooperatives also began taking part in environmental protection. An all-union ecological association called Noosfera was formed in late 1989 with an eye toward including other cooperatives. The organization, which directed most of its work toward Moscow, estimated that it would do 2 million rubles in business during 1990— 1991.³⁵ The almost infinite possibilities available even moved the newspaper Trud’s political cartoonist to depict a former Soviet SS-20 missile which had been converted into the keg-like dispenser of the cooperative “Beer.”³⁶

Several cooperatives diversified their business and entered other areas of the economy. The cooperative Kropotkinskaia-36 in 1987 became the first public catering establishment in Moscow and was extremely successful. In 1989, it diversified and developed a computer center where it collected information from all over the country which it sold to interested parties. It also acted as a conduit between foreign firms and Soviet enterprises wanting to develop joint ventures.³⁷ Diversification was also undertaken by cooperative associations, an example of which was the creation of a cooperative called Kaissa under the auspices of the Tekhnika association to run an automobile insurance business. This cooperative was bold in moving into an area totally dominated by the Ministry of Finance’s Chief Administration for State Insurance. The cooperative believed that it would be successful because of the complexity and bureaucratic nature of the claims procedures followed by the state insurance agency. The service that the cooperative offered gave the automobile owner the choice of arranging for repairs himself, with the cooperative reimbursing the costs, or the cooperative could take upon itself responsibility for the repairs—one of Tekhnika’s divisions repaired automobiles. There were also plans to introduce automobile theft insurance in addition to the existing accident insurance.³⁸

But in a number of places, great bureaucratic rigidity was encountered when cooperatives attempted to “violate” their agreement with the state and move into new economic activities. Such independence and diffusion of operations was not welcomed by the bureaucracy, and officials kept the cooperatives on a short leash.³⁹

THE STRUCTURE OF COOPERATIVE COSTS

A great deal more is known about the structure of cooperative output than about the cost structure of a typical business. However, we can get some insight from a major study done by Goskomstat, the State Statistical Committee, at the end of 1989 that sampled 84,000 cooperatives employing 1,980,000 people.⁴⁰ Input costs were 41 percent of the value of gross sales revenues. Of this 41 percent, 76 percent went for raw materials. Sixty-three percent of the raw materials supplied to cooperatives came from state enterprises, and 13 percent came from state retail trade stores and consumer cooperatives. Cooperatives retained 48 percent of their earnings, of which 69 percent went to wages and 15 percent went into the cooperative’s development fund.⁴¹ In a different study, data for all cooperatives at the end of 1989 showed that the share of wages in total distributed income was 79 percent while the proportion that went to the development fund was 15 percent. At the same time, the share of wages in total earnings went from 36 percent in 1988 to 42 percent in 1989.⁴² The pattern that we see here, wages increasing and then leveling off at a high percentage of total cooperative earnings, by itself would provide a continuing incentive for workers to move into the cooperative sector.

A profile of the building cooperative Stroitel’, organized in 1987 in Karelia, provides a sense of how cooperatives were organized and operated. Stroitel’ built roads and housing, among other things, operating on the basis of contracts with state enterprises and organizations. It was a large cooperative, with more than 600 workers, overwhelmingly men aged 30-40 years, who were skilled in the use of different kinds of building equipment. They worked in two twelve-hour shifts, without any days off. After four months, the workers received a two-month leave. All materials and fuel were provided by the customer, i.e., the state, but machinery and other equipment were leased. The cooperative made the following deductions: 4 percent of income went to pay income taxes, 8 percent of the wage fund went for state social insurance, a minimum of 5 percent went to the coop-erative’s development fund, and 2 percent went to the social-cultural, housing, and social security fund. The remaining income was distributed among the cooperative’s members in accordance with the number of labor days they worked. Every month, each worker received 300 rubles in advance against the quarterly distribution. This settlement at the end of each quarter was based on the number of labor days, overtime hours, the value of each labor day, the coefficients that were assigned each job (which de-pended on the work conditions), and the rate assigned each job (for the cooperative chairman the coefficient was 2.0; for the chief engineer it was 1.7; for a brigade leader it was 1.6).⁴³

COOPERATIVE EARNINGS

There have been several estimates of the wages of cooperators. In the fourth quarter of 1988 the official figure for the average monthly earnings of a cooperative worker, excluding the additional income from profit distributions, was 406 rubles.⁴⁴ Two estimates in mid-1990 varied: one said that monthly wages were 500 rubles, while the other said that cooperators averaged 600-700 rubles.⁴⁵ Even if the lower estimate was the correct one, it meant that cooperative earnings were at least twice the average monthly earnings of someone working full-time in the state sector. At the end of 1988, the average monthly wage of state workers and employees was 217 rubles.⁴⁶ Only about 15 percent of the state labor force earned over 300 rubles a month as of May 1989.⁴⁷ A sample survey of scientific-technical cooperatives in Moscow, Leningrad, Kiev, Minsk, and Kharkov conducted in October-December 1989 revealed that the average monthly wage of each cooperative member was 1,043 rubles. This was separate from the profit distribution that would take place at the end of the year. And private enterprise did, sometimes, produce some astonishing incomes, such as that of the chief project engineer of Brianskagropromproekt who earned about 109,000 rubles in the last six months of 1989, or over 18,000 rubles a month!⁴⁸

A survey conducted in the last quarter of 1989 looked at the wages in cooperatives, but since the data were collected on the basis of financial statements filled out by the cooperatives, they need to be treated with caution.⁴⁹The figures showed that the average monthly income per cooperative member was 317 rubles in the first quarter of 1989, 422 rubles in the second quarter, and 528 rubles in the third quarter. Incomes ranged from 167 rubles to 900 rubles a month. It is highly probable, though, that these figures underestimated the true amounts because of the incentive for cooperatives to hide their incomes in order to avoid paying taxes and to minimize public hostility toward their large earnings. The author of the article believed that the real range of monthly wages was 450 to 900 rubles. There was a difference in the incomes of those cooperatives which directly served the public and those which sold their products or services to the state. Thus, the monthly range of incomes in cooperatives dealing with cash (cafés and restaurants, everyday services and repairs, transportation) was 167 to 450 rubles. But for those cooperatives which fulfilled state enterprise orders the average monthly income was 450 to 900 rubles. It seems likely that cooperatives which dealt in cash were better able to conceal their earnings and that this in large part accounted for the reported differences in incomes by type of cooperative.

The high earnings of cooperative workers led to envy. In one case, a shop in the Tatar Housing Construction factory became an immensely successful cooperative producing construction lumber. It was so productive that the first month’s paycheck was 1,000 rubles for each worker. Rumors began to fly that the cooperative must have done something dishonest to earn so much. It was forced to close down on a legal technicality, but the real source of its demise was the jealousy that ran rampant throughout the factory, all the way up to the director’s office.⁵⁰ In another instance, a cooperative specializing in extracting ferrous and non-ferrous metals from scrap was so successful that its sixty members were receiving 1,300 rubles a month at the same time that wages in the state enterprise with which they were associated were only 250 rubles. The cooperative workers were getting 40 percent of total enterprise income, while the workers in the state metallurgical enterprise were getting 20 to 25 percent. This gave rise to the accusation that the cooperative was enriching itself at the expense of the state enterprise, when in fact most of the scrap metal it used was written off by the state enterprise.⁵¹

For obvious reasons, cooperators have been reluctant to reveal their incomes. In the 1989 survey of fourth-quarter earnings, despite the anonymous nature of the questionnaire, only 60 percent of the respondents provided income data. About two-thirds of the group earned an income of 500 to 1,500 rubles, while 28 percent earned a monthly income of 250-500 rubles, and a few earned much more—1.2 percent claimed an income of 1,500-2,000 rubles, 1.7 percent had an income of 2,001—3,000 rubles, four people reported an income of 3,001-4,000 rubles, and two Moscow chairmen made about 10,000 rubles a month.⁵²

SOCIOLOGY OF THE COOPERATORS

Who were the cooperators? The obvious fact is that most Soviet entrepreneurs had to come from the state sector, since, with only minor exceptions, no legal private sector had previously existed. Without a significant private sector for almost sixty years, there were no family businesses, no work in private firms, and no business culture to socialize the typical Soviet citizen. But that does not mean that there were no entrepreneurial skills. Far from entirely destroying the entrepreneurial spirit, central planning had in some ways fostered it. Its managers, for example, were forced to cope with supply shortages by finding devious ways to meet their output targets. In addition, because of chronic shortages of consumer goods, there was a significant underground economy which had in fact developed in some individuals all the skills necessary to conduct business in the new, legal private sector. The negative aspect of this kind of “entrepreneurship” was that it also brought the culture of bribery, theft, and even violence from the underground economy into the world of legal private enterprise.

What, then, was the profile of someone who dared to leave the security of state employment for the risks of private enterprise? We can get some insight from a survey conducted in early 1990.⁵³ The respondents were 586 cooperators from Moscow, Leningrad, Kharkov, Baku, Tbilisi, Tallinn, Naberezhnye Chelny, Magnitogorsk, and Cheliabinsk, mainly chairmen, managers, and organizers of the cooperatives and primarily middle-aged males: 86 percent of the respondents were men, of whom only 4 percent were younger than 25 years old, and only 16 percent were 25-50 years old. Fifty-seven percent were 56 and older.⁵⁴ The data indicated that the cooperators were well- educated and had held responsible positions with the state before they moved into the cooperative movement. Two-thirds had a higher education, and another 20 percent had some higher education or a specialized secondary education, although the educational level was highest in Moscow and Leningrad.⁵⁵ Before moving to the cooperative sector, 40 percent of the respondents had been either enterprise directors or heads of shops and departments. Another 54 percent were engineers and technicians. Only 8.5 percent of the cooperative chairmen had been blue-collar workers and only 25 percent were party members.

The findings contradicted the conventional wisdom on the street that cooperators were “lazy young guys looking for an easy life.” The fact is that most of those who were in the vanguard of the cooperative movement were the same people who formed the heart of the state economic system. These were not people who held values radically at variance with those of their society; they seemed to be loyal sons (and a few loyal daughters) of the motherland. However, while the leadership in the cooperative movement was middle-aged and well-educated, it was estimated in mid-1989 that overall, 80 percent of those who worked in cooperatives were young people.⁵⁶ This would suggest that for a variety of reasons, there is little difficulty attracting people of all ages out of state employment into cooperatives.

What motivated people to become part of the cooperative movement? Contrary perhaps to expectations, it was not money alone. In the survey of 586 cooperators, when given seven choices as to why they had decided to become part of a cooperative, 57.6 percent said the primary reason was the possibility of realizing their creative potential, entrepreneurship, and talents; only 20.4 percent ranked a higher income as the primary motivation. About one-third gave the “administrative-bureaucratic yoke” as their first or second reason for leaving state employment. The people who most frequently gave this as a reason for leaving were workers (of whom there were few in this sample) and managers, suggesting that bureaucratic pressures were most strongly felt at the very lower and the upper reaches of enterprises. It was understandable, therefore, that only 14 percent said they would return to the state sector even if wages were equal to their cooperative earnings; 47 percent said they would never return to state employment.⁵⁷ Even when the hypothetical possibility of business trips abroad was dangled before the cooperators, only one-third said this would induce them to return to state employment.

There is a distinction to be made between members of a cooperative and those who were its hired hands. Members shared in the cooperative’s profits and the workers were those who worked on a contractual basis, usually for wages. The distinction between the two raised more than a few ideological hackles from the inception of the movement. The obvious similarity to the capitalist system’s employer-employee dichotomy and its alleged attendant exploitation made many wary of allowing some people to hire the labor of others. The ideologically pure at heart persisted in the view that workers produced most of the income, but did not participate as equals in the distribution of its earnings. There was some factual basis to this argument; there were many cooperatives where the gap between member earnings and contract worker wages was quite large. In the Kiev cooperative Zvezda, each of the fifteen members received 3,000 rubles a month, whereas each of the hired workers was paid 215 rubles a month. Each member of the Kishinev cooperative Polimer received 15,500 rubles a month, about forty times more than the 400 rubles a month the hired workers received.⁵⁸ In 1989, scientific- technical cooperatives in the large cities were found to be paying their members an average of 1,043 rubles a month and the contract workers 587 rubles.⁵⁹ On the other hand, it was estimated that in 1989, wages as a share of commodity output (tovarnaia produktsiia) were 13 percent in state production enterprises and 37.2 percent in production cooperatives; in the state consumer goods industry, wages were 9 percent of output, while in consumer goods cooperatives the comparable figure was 38 percent; in state construction organizations wages were 23 percent of output, but 46 percent in building cooperatives.⁶⁰ In other words, cooperative labor received a much higher proportion of its organization’s earnings than did state labor. It is not clear that cooperative workers were victims in terms of the Marxist notion of exploitation.⁶¹

A survey of 11,800 Moscow cooperatives conducted at the end of 1989 showed that members constituted just over 44 percent of the employment in cooperatives. This means that, on average, for every member, there were 1.27 workers. The survey also revealed that the average monthly earnings of the contract workers were 1.7-2.0 times less than those of cooperative members. Moreover, more than half of the hired workers were without social insurance.⁶²

In November and December 1989, Moscow State University conducted a smaller survey of 324 cooperatives in a single region of Moscow.⁶³ It found that only 9 percent of the cooperatives did not use hired labor. On average, the ratio of workers to members was 1.7 to 1. In 44 percent of the cooperatives the number of hired workers exceeded the number of members. In 28.5 percent of these cooperatives the ratio was 1-5 to 1, and in 15.5 percent of the cooperatives the ratio was 5 to 1 or even higher. In four cooperatives there were 25 to 60 workers for each cooperative member, and in one cooperative the ratio was 100 to 1.

The basic argument made by those who criticized the distinction between members and workers was that it violated the May 1988 law. Indeed, Article 3 of the Law on Cooperatives stated that a cooperative’s activities were to be based on the personal labor participation of its members, but Article 3, Point 2 also provided for the right of cooperatives to hire workers on a contractual basis. Article 40, Point 2 stipulated that the executive committee of the local soviet could determine the percentage of labor that could be hired by a cooperative. So, for example, in Krasnodar, this ratio was established as 20 percent of the total membership of the cooperative.⁶⁴

At the policy level, the battle seems to have been fought over the question of what percentage of a cooperative should be contract labor rather than over the purely ideological issue of whether there should be any contract labor at all. The RSFSR passed a law on June 6, 1989, which stated that if the number of hired workers exceeded 30 percent of the total number in a cooperative, then the income taxes paid by the cooperative would increase by 25 percent.⁶⁵ Cooperatives in lower tax brackets were hardly affected. For example, if taxes were 3 or 5 percent, an increase of 25 percent would raise taxes only to 3.75 and 6.25 percent. This was not a persuasive way to induce cooperatives to reduce the number of people on contract. A potentially more powerful solution was offered a year later. On April 6, 1990, new amendments to the law included a provision that all full-time workers in a cooperative were to have rights equal to those of the members.⁶⁶ This would mean, for example, that profits would have to be shared by both members and fulltime permanent workers. In practice, however, this was already being done in many cooperatives.⁶⁷

As the cooperative movement evolved, so did the sophistication with which cooperatives developed a labor force. In Moscow, an organized cooperative labor market evolved and job vacancies were advertised in a Bulletin of Job Openings and Vacant Positions in Moscow Cooperatives.⁶⁸ The Bulletin's third issue, which was published in 1989, had sixty-five pages of job listings and advertisements. The typical listing gave the name of the cooperative, its address and telephone number (if it had one), the kinds of positions it was trying to fill along with the number of people sought for each position, the level of skill the applicant should possess, the daily work schedule, and the level of pay being offered. The listings were broken down by city district. Out of the seventy cooperatives with job listings, fifty-one had telephones. For particular jobs, the advertisements could be quite specific—calling for perhaps a male pensioner, or a skilled person.⁶⁹ It was also quite obvious to anyone with a knowledge of Soviet wage rates that cooperatives offered the possibility of earning far more than could be earned by working for the state. What follows is a sample of the job listings.

Veteran—Sewing of children’s clothing. Seeking seven seamstresses. Pay is 200-250 rubles. Ad requests pensioners.

Vertikal’-89—Construction work. Seeking five joiner-carpenters. Pay is by the job and is up to 700 rubles.

Delikates—Trade and purchasing cooperative. Seeking five housewives to sell fruit, vegetables, or flowers on a seasonal basis (October, November, and early spring). Pay is by contract from 10 rubles a day up.

Mosspetsavtomatika—Production cooperative enterprise. Seeking four electricians, three machine tool setters, five electric repairmen, and other such skills. Pay range is 240-400 rubles. Jobs are for men only.

Provensal—Public catering cooperative. Seeking four truck drivers to unload trucks at 10 rubles a day (up to 300 rubles), ten people to ferment vegetables (same pay as previous job). These jobs are advertised for pensioners, housewives, and students as either permanent or temporary part-time work. Also seeking ten people to prepare vegetables, where pay is 200-250 rubles, ten people to pack barrels at 250-300 rubles, and five salespeople, where the pay is 300 rubles. These jobs are for women and are either permanent or temporary part-time.

ABSK—Production cooperative. Seeking three category 3 male mechanics for the repair of motors. This is permanent work and pay is by the job.

In general, the number of jobs being performed on a part-time basis in cooperatives declined. While 65 percent of those working in cooperatives were part-timers at the beginning of 1988, their numbers fell to 47 percent at the start of 1989 and 35 percent as of January 1990. Similarly, the average number of permanent employees rose significantly in the cooperatives: from six or seven employees in 1987 to twelve in 1988, then doubling to twenty- five in 1989.⁷⁰

The freedom to leave state employment worried those protecting their interests as state enterprise managers or as members of the bureaucracy. Even in 1987, Pravda noted that there was an outflow of skilled workers from the state sector to the cooperatives.⁷¹ As can be seen by the changing structure of cooperative production, such as the rising importance of building and high-tech cooperatives, it was apparent that a substantial number of highly skilled people left state enterprises for greener pastures. A mid-1989 political cartoon reflected the mood that must have prevailed in many Soviet state enterprises. The boss was reprimanding a drunken worker who responded with the threat: “If you don’t leave me alone, I’m going to leave and go to work in a cooperative.”⁷²

FOREIGN TRADE OPERATIONS

The possibility of involvement in foreign trade was very attractive for both the state and cooperatives. For cooperatives the main appeal was the potential to earn hard currency and thereby have access to scarce Western and Japanese goods for its members. For the state, foreign trade meant access to foreign technology as well as the prospect of alleviating the nation’s hunger for goods. But from the very beginning, the state did not make cooperative involvement in foreign trade very easy. Of the 2,548 cooperatives registered in Moscow on July 5, 1988, only one was given the right to engage in foreign trade.⁷³ Finally, by 1989, the government was willing to recognize the potential gains that resided in allowing cooperatives to enter foreign markets more freely. On April 1 it put through a new law that gave cooperatives the right to do business abroad on much easier terms. In the year that followed, about 2,500 cooperatives were registered as having economic relations with for-eigners. Coinciding precisely with passage of the new law on foreign economic activity, the USSR State Committee for Science and Technology announced a contractual relationship with Infeks, a Moscow-based information and consulting cooperative which had an elaborate network of information on technologies that Soviet enterprises and institutes could sell abroad. The cooperative was also supposed to help choose foreign partners for joint enterprises in the Soviet Union and to do the technical as well as marketing work to help such joint projects succeed.⁷⁴ Official approval of such activities came when USSR Prime Minister Nikolai Ryzhkov said at an April 1990 meeting of the Presidium of the Council of Ministers that he expected an expanded role for cooperatives in foreign trade to be part of the total package of radical economic reform.⁷⁵ At that time, cooperatives were already doing 500-600 million rubles worth of foreign trade.⁷⁶

But Ryzhkov’s words belied the ambivalence that continued to surround cooperatives’ role in foreign trade. There were constant complaints in the press and in some government circles. The complaints can be grouped under three headings: that cooperative export activity hurt domestic supply; that it was often shady or even corrupt; and that it endangered national wealth and independence. This was compounded by legitimate criticism, fear, and envy and was reminiscent of the official ambivalence toward other aspects of cooperatives. Examples of the types of criticism reflect these mixed attitudes.

One of the constant complaints about cooperatives trading in Soviet goods or materials was that they exported things that were needed for domestic consumption. Mineral fertilizer was one example. In the second half of 1988, over 500,000 tons were sold to other countries by a number of organizations, including cooperatives, and in 1989 some 800,000 tons over and above the mineral fertilizer sold by state foreign trade organizations were slated for export. This was at a time when collective and state farms faced shortages of mineral fertilizer.⁷⁷

A second type of criticism had to do with cooperative business practices. Although they were heavily involved in the export of raw materials (especially wood and metal resources), they imported mainly consumer items, such as VCRs and used cars. The equipment and technology so badly needed by manufacturing enterprises was not, apparently, profitable enough to attract the attention of most cooperative importers. In part, this may have been a result of barter arrangements and direct deals with foreign companies, which avoided documentation of the deals by Soviet banks. There were also com-plaints that although cooperatives were supposed to export only their own output, they were getting around the law by setting up fictitious production facilities as a cover for their trading activities.⁷⁸

Another complaint was that there was a great deal of speculative activity by cooperatives involved with foreign goods, and these criticisms were often mixed with references to what was called the “low level of commercial work on external markets.”⁷⁹ In one instance, a cooperative in Sverdlovsk contracted with the People’s Republic of China to exchange four Chinese-made copiers for 100 tons of Soviet aluminum sheets for roofing. Before long the Chinese partner was informed that the machinery did not work, and it then sent four people to the USSR to check into the situation. In the four days that they were in the Soviet Union they were never allowed to see the machinery, and no reasons were given for why the machines did not work. Their Soviet hosts instead treated them to four days of hunting wild game, and then on the fifth day the Chinese went home. The four unrepaired copiers, paid for with valuable resources, were useless. In another case, a cooperative in the Primorsk krai bought 36 tons of pears, 72 tons of apples, 10,000 cassettes, and also clothing and footwear from China in exchange for 340 tons of frozen fish. The Soviet partner sent only 167 tons and after that the cooperative disappeared without a trace.⁸⁰ In a jab at the business acumen of cooperatives, there was even criticism that the cooperatives were not very good at trading, since they were ill-informed about prices on the world market.⁸¹

Third, in conservative circles, the cost of exporting raw materials was seen to endanger national wealth and even independence. In a newspaper interview on this issue, A. Ovidyev, the head of the Counterintelligence Department of the KGB, implicitly likened the USSR to a colonial host under imperialism:

What have we done to our foreign trade? Take our forests, for example. We cut the trees down, saw them into boards, load them on foreign ships in Archangel and they pay us back by sending saws—more machines for the destruction of forests. With their saws we cut trees even faster and they send us even more sophisticated means to ruin our natural resoures. The circle is widening all the time. And somebody is lining his pockets on all of it. The gas situation is the same. We provide them with gas, they send us pipes and compressors. They use the gas for mass production of consumer goods and we sell the gas for pipes. Is this not sabotage, this kind of attitude to the people’s property?⁸²

The governmental ambivalence toward cooperatives engaged in foreign trade led to contradictory official acts—the policy makers such as Prime Minister Ryzhkov encouraged foreign trade activities by cooperatives, but local officials in practice gave them little latitude. Early on, cooperatives complained vociferously that the bureaucracy made life very difficult for them, creating an unwieldy set of procedures that discouraged trade.⁸³ But in an economy in desperate need of many goods, bureaucratic foot dragging eventually had to give way. The April 1989 law promised both cooperatives and state enterprises much more freedom in foreign trade. But only months later, those who had predicted doom were rewarded as news broke about a cooperative’s attempt to sell Soviet tanks abroad in December 1989 (an event described in detail in chapter 5). As part of the response, the government modified trade rights in early 1990, largely in a restrictive manner.

The tremendous growth of the cooperative movement was probably predictable, particularly given the existence of a cadre of entrepreneurs in the second economy, the pent-up demand for many goods, the lid that had been placed on entrepreneurial activity, and the course Gorbachev had charted for the nation. By tone and direction, he gave license to the spirit and deeds of entrepreneurship. But entrepreneurs did not have a level playing field; it was in some ways more like a minefield. If cooperators were not endangered, they at least operated in an environment that often made their success a difficult task.