3.

The Economic Environment of Cooperatives

The course of the cooperative movement cannot be appreciated without a detailed understanding of the environment within which it developed. The term “cooperative” refers not to a particular kind of business organization, but rather to a wide variety of models that differed in essential characteristics and in their relationship to the state sector. The economic life of cooperatives was intimately tied to the state, if only because state orders accounted for the preponderance of cooperative production. But beyond this, it must be stressed that the freedom of action possessed by cooperatives was heavily constrained by their overwhelming dependence on the state for their access to raw materials, plant and equipment, and bank credit. The environment in which cooperatives operated and their relationship to the state dictated both the movement’s possibilities and its limitations. Several key factors in the complex relationship between private enterprise and the state economy gave Soviet entrepreneurship its unique character.

There is no single model which can capture the complexity of the statecooperative relationship since there was no single kind of cooperative. In fact, several different models of cooperatives evolved, each of which had a somewhat different relationship to its environment. Broadly speaking, cooperatives can be reduced to three basic types: spontaneous, sponsored, and quasi-state.

MODELS OF COOPERATIVE ORGANIZATION

Spontaneous cooperatives are those that were started on the initiative of individuals to be run as purely private, free-standing organizations or busi-nesses. Finances were provided or borrowed by the entrepreneurs, and the business belonged to them alone. All decisions regarding production, marketing, pricing, and so forth were made entirely by the cooperative members. These businesses are closest to what in the West would be considered a private company.

Sponsored cooperatives may be similar in many ways to the spontaneous, independent cooperatives, but differ in that the initiative for their creation came from local official organizations. One type of sponsored cooperative was created when local authorities decided that a particular kind of product or service was needed and entrepreneurs were found to set up and run a business to fill this need. When private enterprise was reintroduced in 198687, sponsorship was seen as a major mechanism through which cooperatives would be formed, a way of reconciling the interests of the consuming public, the state enterprises, and the cooperatives. Those goods and services most needed would be supplied by the private sector without interfering with the obligations of state enterprises. Another kind of sponsorship arose when a state enterprise was transformed into a cooperative. Under this arrangement, the workers who provided the personnel for the cooperative leased plant machinery and other necessary resources from the ministry, the actual arrangements for which varied widely. Typically, leases were provided for up to thirteen years to encourage workers to invest in long-term growth. During this period, the workers could operate the business as an independent concern, and were free to distribute the profits as they saw fit. Some worked under state contracts, while others sought their own customers. A third form of sponsorship was found in cases where cooperatives were set up under the guidance and protection of an official organization (such as a school or some other public body), as long as they pursued the general goals expected of them. Either way, sponsored cooperatives clearly started out with a special relationship to local authorities, and this may have given them, especially in the early days of the movement, some special advantages. On the other hand, since it is known that local authorities were under mounting pressure from the center to encourage the development of the cooperative sector, but were often in fact antagonistic toward cooperatives, one of the ways in which the local soviets could control the process of cooperative development was to sponsor those cooperatives whose activities they found least offensive.

The third model of organization, what we are calling the quasi-official cooperative, came to be the dominant one. This type of cooperative was started not by individuals, nor at the behest of local authorities, but by the decision of managers of state enterprises or even of the ministries under which they operated. The goal of this form of cooperative was to enable a state enterprise to pursue certain objectives that were not possible given the restrictions imposed by the state. These cooperatives generally operated within the physical premises of the state enterprise, used its equipment, and helped it to achieve its planned output. The range of organizational and productive forms that these cooperatives took was very wide.

The relations between cooperatives, and between them and the state sector, were far more complex than this typology suggests. Special deals and arrangements were made that blurred the lines between the state and private sector. Moreover, amalgamations, offshoots, and diversification often created such a complicated set of arrangements that it was difficult to say what type of cooperative had been created. An example of such a special arrange-ment was when a cooperative was individually owned, but was given special shelter by a state enterprise. This relationship was advantageous for the cooperative because it provided access to material resources and to a market, thus removing most of the risks and headaches faced by an independently operating cooperative. In addition, it provided the cooperative some protection against racketeers and others who would normally prey upon it. From the point of view of the state enterprise, the relationship was a useful one in that it could sub-contract operations that it found difficult or risky or unre-warding without having to bear the full responsibility for running the cooperative and dealing with its failures. This relationship is in some ways analogous to that between major Japanese corporations and small companies that sub-contract specific responsibilities.

SUPPLY PROBLEMS

The dominant, day-to-day problem faced by cooperatives was how and where to get adequate supplies. According to Article 27, Point 4 of the 1988 Law on Cooperatives: “A cooperative is authorized to buy, barter, lease, and hire from state, cooperative and other public enterprises (organizations) and citizens unused buildings, installations, machines, equipment, transportation fa-cilities, raw materials and other materials.”¹ Moreover, the law stipulated the creation of wholesale depots and specialized stores for supplying coopera-tives.² But these never came into existence. The changes that were made in the Law on Cooperatives in October 1989 reaffirmed the principle of “the stable and equal rights of cooperatives with state enterprises.”³ Unfortunately, this was merely a restatement of a desideratum and was not taken seriously as a policy obligation. This led one angry cooperative chairman to label the clause committing the country to a separate supply system for cooperatives an “empty promise.”⁴ Consequently, there remained a huge gap between the right of cooperatives to buy what they needed and their actual capacity to do so.

The reason that cooperatives needed a supply system was that, unlike state enterprises, they did not have reliable sources of materials and equipment. Cooperatives could buy only what was left over after the needs of state enterprises had been met. When it came to materials and equipment, cooperatives were essentially supplicants at the feet of the state. But it was not just the central allocation mechanism that failed to address cooperative needs. From the very beginning, state enterprises demonstrated an unwill-ingness to sell or even rent their superfluous equipment to cooperatives.⁵There was irony in this situation. The successful performance of many state enterprises often hinged on the performance of the cooperatives that worked for them. But rather than being given equal priority with state enterprises, cooperatives were treated as of secondary importance. This also had serious implications for the performance of the cooperative. For example, the Moscow Plant of Low-Voltage Equipment claimed that it routinely received 30-40 percent less in raw materials and supplies than Goss- nab (the State Committee for Material and Technical Supplies) should have sent, and its supplier of cable in Tallinn usually sent only 1 percent of the contracted amount. The Moscow plant had a system of internal accountability whereby fines were levied against subunits that did not meet their obligations on time. When an individual shop did not receive the parts or materials it required from some other shop in the plant, it fined the delinquent unit. The problem was that this island of economic efficiency existed in a sea of supply uncertainty. In October 1989, the plant’s supply department had to pay out half of its wage fund in the form of fines because it did not receive the promised supplies from outside sources.⁶ But it was in the nature of the existing organization of the economy that cooperatives could not control their environment.

BUYING SUPPLIES AND EQUIPMENT FROM THE STATE

There were two ways for cooperatives to buy unused, although not necessarily new, commodities from the state. The first way was “through special and general-purpose associations, administrations and enterprises for the delivery of products and by wholesale and commission stores.” The prices were established by agreement between the state enterprise and the commission trade specialists. The second way was to buy surplus equipment directly from an enterprise. In this case the price was determined by agreement between the cooperative and the state enterprise. Cooperatives could also buy new equipment directly from the producing plant on the condition that the plant had met all its obligations to its state customers or its output had been refused by the state customer. Starting in 1989, a few, very limited models of agricultural machinery and transport equipment were especially produced for cooperatives. The price cooperatives were charged for this equipment depended on its end use. If the equipment was used to produce retail goods or services for the general population, cooperatives paid the retail price. If the equipment was used to produce goods and services for state enterprises and organizations, then the cooperative paid only the lower wholesale price.⁷

The state’s general unwillingness to provide cooperatives with legitimacy as a user of resources forced them to seek supplies in the state retail network, and this was part of the reason for the animosity toward cooperatives. This was especially true in the case of food. The public was angry because cooperatives were buying food that was already in short supply. But cooperatives were also angry because they believed they had been given short shrift. As one cooperative director said in late 1988, “The cooperative movement is already a year and a half old and to this day not one wholesale store has been opened.”⁸

There was also a senseless waste by state enterprises of precious resources that could have been used by cooperatives. The Riga cooperative Komfort(which had a fashion studio where it tailored leather clothing) had trouble acquiring leather, even material that was going unused at state factories. At the same time, a number of leather factories in the area were burning their superfluous material.⁹ The lack of cooperation on the part of state agencies at times reached absurd proportions. A cooperative was formed to manufac-ture sports equipment in a Moscow factory that was normally closed during the second shift. It was extremely successful, raising worker incomes by about 250 rubles a month and improving labor productivity in the state factory. But the cooperative experienced difficulty buying raw materials. It developed a system of obtaining its material by buying scrap metal from other factories that otherwise would have been turned over to a government scrap metal collection agency. Although it seemed as though selling the metal to a cooperative was an ideal solution, there was a hitch—the state agency that collected scrap metal levied fines on the factories for not meeting their quota of scrap metal!¹⁰ The general consequences of conditions such as these were predictable: less was produced because of the shortage of raw materials and equipment, and many cooperatives did not function at all because of these problems.¹¹

THE PRICES OF COOPERATIVE INPUTS

Cooperatives were also placed in a difficult position because they were forced to pay extremely high prices for the inputs they were allowed to buy. In two letters published August 3, 1987, and January 6, 1988, and then with a supplement issued on July 11, 1989, Goskomtsen, the State Committee on Prices, published a list of coefficients which established the amount by which the state wholesale price would be multiplied in order to determine the price that cooperatives would have to pay for equipment and other supplies. Table 3.1 gives a sample of the 107 such inputs or categories of inputs and the coefficient associated with each one. According to the published coefficients, cooperatives had to pay anywhere from 5 percent to just under 600 percent more for goods than did state enterprises. The unweighted average of the wholesale price coefficients for the more than 100 items on the price lists was 2.98, i.e., on average cooperatives paid three times as much as state enterprises did for the same goods.

A Soviet émigré who was once a cooperator producing dumplings cited his own experience of having had to pay 4,500 rubles for a dumpling machine while the same machine cost a state enterprise only 2,100 rubles.¹² A KamAZ truck usually sold to state enterprises for 17,000 rubles cost a cooperative 70,0 rubles.¹³ In a 1989 survey of cooperators asking about the problems they faced, 40.6 percent cited the high price of raw materials, the second most frequently mentioned obstacle after extortion.¹⁴ The situation became so difficult at the end of 1989 that production and scientific-technical cooperatives organized an exposition in Leningrad to bring cooperatives together with state enterprises that might be induced to sell their excess raw materials and equipment. There were several things about the exposition that showed how great the hunger for raw materials was. The state enterprises, because they controlled supplies, were wooed with a very low fee, 100 rubles, in contrast to the 4,500 ruble fee cooperatives were charged. Equally instructive was the fact that although the exposition could accommodate only 180 cooperatives, more than 2,000 actually applied and were willing to pay the hefty cooperative fee.¹⁵

Table 3.1 Coefficients of State Wholesale Prices to Cooperatives

Sources: Vse dlia kooperatora, no. 4, 1989, pp. 55—57; no. 6, 1989, pp. 17—21.

The principal implication of this difference in the cost of inputs was that cooperatives had to charge higher prices for their output than their state counterparts. Because of the nation’s shortages, high prices helped create cooperative prosperity. But high prices also engendered enormous public hostility, and the angry public had no patience with explanations about high input costs. One highly visible example of the way that cooperatives were trapped between resource shortages on the one hand, and an angry public on the other, was the story of the Novokuznetsk cooperative Liana, located in the Kemerovo coal fields. The plan was for the cooperative to buy agricultural products from local peasants and process them. After several failures in this business, Liana became a purchase and trading cooperative, importing fruits and vegetables from Central Asia and the Caucasus and then reselling them in the Kemerovo area—at much higher prices, of course. The cooperative chairman explained the high prices as a result of the fact that he had to spend great sums, over 100,000 rubles in all, to build a small refrigerator- equipped warehouse. The refrigerated truck alone cost 72,000 rubles. When the coal miners went on strike during the summer of 1989, they demanded, among other things, that this cooperative be shut down because of its high prices and indeed, as a result of intense public pressure, the cooperative did go out of business.¹⁶

STATE-COOPERATIVE ECONOMIC RELATIONS

In 1989, about 80 percent of all cooperatives either were physically located within state enterprises or operated under the umbrella of one. In addition, they leased most of their capital and bought most of their raw materials from the state.¹⁷ Often they sold to the state. In a variety of ways, cooperatives depended on economic relations with state enterprises.

In an economic system where virtually every inch of space is either owned or controlled by the state, it was extremely difficult for cooperatives to find a physical space to set up their operations. During the early months of the movement, the fact that only 179 out of 500 newly organized coop-eratives were in operation was attributed to the shortage of physical premises. This was particularly a problem for restaurants and cafés. As we indicated earlier, a large proportion of the public catering establishments actually took over failed state operations. Since there was a limit on the number of restaurants that could operate on this basis, the expansion of public catering was limited by the lack of places to locate new businesses.¹⁸The lack of space reinforced the dependence of cooperatives on the state and in essence forced them to use space in factories or department stores. The premises that were not available on the free market had to be leased from the state in much the same way as the cooperative leased capital equipment.

In at least some state circles, even as high as the ministerial level, the efficacy of using cooperatives to produce output was explicitly recognized. The Ministry of Energy decided that in the 13th Five-Year Plan (1991-1995) it would produce 30 percent of its output in cooperatives. Its view was that, while the Ministry of Electrotechnology and Instrumentation did not always supply the necessary instrumentation, cooperatives had proved that they could produce and deliver it on demand.¹⁹

Cooperatives also provided such good terms to state retail stores that it was hard for the state producers to compete with them. For instance, women’s beach shoes produced by cooperatives replaced those produced by a Moscow association in state retail stores despite the fact that the cooperative prices were higher. First, the quality of the cooperatives’ shoes was better. More important, when a shoe shop sold shoes produced by cooperatives it received a commission of 11-15 percent of the selling price, while the commission for selling shoes made by the state enterprise was only 7.5 percent. Since this commission was the basis for salaries and bonuses of sales personnel, it is no wonder that state retail stores preferred shoes produced by cooperatives. In addition, shoe stores had to pay in advance for shoes produced by state enterprises, whereas the cooperatives allowed them to pay for the shoes after they were sold.²⁰

A cooperative was relatively free of the regulations and requirements to protect labor that burdened state enterprises, and some enterprises took advantage of this. An interesting example of the usefulness of the cooperative form of organization was the creation of the Instrument cooperative in Kharkov, formed in 1988 on the basis of a former state-owned instrument plant. For more than two years the plant had been barely able to hold its head above water. Changes that were needed to produce new types of products would, according to the calculations of experts, have been enough to bankrupt the enterprise. So, the decision was made to turn the organization into a cooperative. The Ministry of the Machine Tool and Tool Building Industry leased the fixed and circulating capital to the new cooperative and guaranteed it the necessary material resources. Among the first decisions made by the managers of this new business was to reduce labor expenditures, especially the inflated size of the administrative- management apparatus. To this end, they announced a plan to release 150 personnel.²¹

THE ECONOMIC EFFICIENCY OF COOPERATIVES

A long-standing criticism of the Soviet system of economic planning was that it was highly inefficient. The system failed to produce the goods the society needed. What it produced was often of poor quality, the productivity of the factors of production was low, and the system was incapable of responding to shifting demands and supply availabilities.

Great hope had been placed in the private sector in the early phases of its introduction as a mechanism for forcing the state sector to use resources more economically, as well as to rescue resources that were being wasted by the state economy. Cooperatives were expected to be more efficient in the use of resources, thereby increasing output and the standard of living.

The evidence is rather persuasive that cooperatives were extremely efficient and satisfied early expectations that they could outperform state enterprises. A good example of this can be seen by comparing production figures for the building cooperative Podriad in Kiev and the state enterprise Kievgor- stroi-7 (see Table 3.2). The differences are quite startling. A cooperative worker produced almost twice what a worker produced in a comparable state enterprise. Moreover, the state enterprise was extremely top-heavy in administration; the cooperative produced seven times as much per administrator as the state.

Examples of superior efficiency in cooperatives in comparison to state enterprises could be found in all areas of the economy. An interesting illustration is the Moldavian scientific-technical cooperative Vizir. Whereas in 1988 all the state enterprises in Moldavia implemented 214 inventions, this cooperative introduced 32 inventions by itself. State inventions are notoriously slow to make their way into the final stages, averaging six years, but the Moldavian cooperative was able to introduce one invention in less than a year. All told, revenues from their inventions topped 3 million rubles for the year.²² In 1989, the Volgograd Central Universal Store received a plan which obliged it to sell 67 million rubles worth of goods, but it was given 9 million less in commodity funds than it needed to fulfill the target. So it decided to enter into an agreement with local cooperatives to help it meet its plan. The agreement included a stipulation that the store would pay a cooperative only after the goods were actually sold, and if an item was returned as defective the customer would get a cash refund or a replacement. The store wound up overfulfilling its 1989 plan by 5.35 million rubles.²³ The Odessa department store Passazh in 1989 leased space to cooperatives equal to 1 percent of its total retail space, but the cooperatives’ share in the total amount of goods sold in the store was more than 9 percent.²⁴ Lastly, one could cite the building cooperative Kalinin that built a bakery for 13,000 rubles less than its original estimate and completed the job in three months, while it took a state crew over a year and a half to finish building a similar bakery.²⁵

Table 3.2 Comparative Performance of State and Cooperative Building Organizations, Kiev, 1989

Source: Ekonomicheskaia gazeta, no. 48, November 1989, p. 19.

Soviet accounts tended to stress the importance of labor productivity as a factor in the efficiency of the cooperative sector. Thus, in mid-1988, prominent economist Pavel Bunich wrote: “In the majority of instances, labor productivity in cooperatives is higher than in the state sector. If workers at state enterprises strived, in the manner of cooperative specialists, and did not count the money in other pockets, then it is fully possible that they also would acquire considerable sums.”²⁶

In 1989, one source claimed that labor productivity in the most successful cooperatives was two to three times higher than it was in state enterprises producing analogous goods and services.²⁷ There were many specific examples of cooperatives that demonstrated economic efficiency based on high labor productivity. The Zagorsk cooperative Beriozka was established at the beginning of 1989 at an unprofitable state enterprise making cement tiles. After the factory became a cooperative, the number of white-collar workers went down 30 percent and labor productivity doubled. Average monthly wages rose to 500-550 rubles, at least twice what workers made in comparable state enterprises.²⁸

In fact, there were a number of reasons why private cooperatives were more efficient than state enterprises. First, there was the prospect of earning a great deal of money. Second, there was the sense that one was working for something that was one’s own. Third, the complete economic independence that cooperatives had meant they were not constrained by state directives as to how many they had to employ and how much they had to be paid. Fourth, the production plan was not an annual, exogenously determined target. Rather, cooperatives formulated their production continually on the basis of demand. Fifth, cooperatives showed the flexibility to reorganize immediately after receiving an order. Sixth, cooperatives could hire the kinds of specialists they needed for any number of working hours. They could do this because, given the gap between what state and cooperative workers earned, the labor supply available to cooperatives was enormous.

Aside from the issue of productivity in the narrow sense, cooperatives also made a considerable contribution to the Soviet economy by rescuing materials that were idle or destined for scrap and putting them to use. A familiar sight in many cooperative enterprises was machines that had been repaired and were in use. This was in addition to the use and leasing of equipment that was previously operating well below capacity. While difficult to measure, these contributions cannot be ignored.

LEASING

In the absence of a free market for property and resources, and the limited amount of capital available to new entrepreneurs, leasing was an effective way for new businesses to gain access to premises and equipment. This arrangement was also less of a break with the past than selling off state property, and therefore less of a target for those who opposed the whole notion of private enterprise in the first place. The state also liked this arrangement because it was a quick way to improve the state sector—even the limited experience of leasing in 1986 and 1987 proved that it could lead to much greater efficiency and productivity, and a sharp rise in profits.²⁹ Results of leasing in agriculture were impressive. On one farm in the Altai krai, it was claimed that average gross output rose by 64 percent in 1987 compared to 1981-1985, while income rose by 85 percent and wages went up by 38 percent. Leasing of enterprises in trade, public catering, and everyday services was also said to be effective, with labor productivity going up by a factor of 1.3 or so, and wages increasing by 1.5 to 2 times.³⁰ Similar improvements were reported in leased factories.

Because of these good results, the decision was taken in the autumn of 1988 to expand the leasing system, particularly in the form of leasing medium-sized and small factories producing consumer goods to the workers employed in them. The enabling legislation for this was introduced at the beginning of 1989, with the Council of Ministers decree “On the Economic and Organizational Foundations of Leasing Relations in the USSR.”³¹

Leasing was one of the ways in which the private and state sectors of the economy became linked. The resulting organization was neither fully state- run nor fully a form of private enterprise, but a hybrid. Thus, when workers took over a factory from the state, they also assumed the fixed production funds and the working capital (and by some accounts, often the debts of the old enterprise as well). The lessees then paid a fixed leasing sum, and ran the enterprise in the way they wished without having to meet state-imposed norms. As one economist put it, the lessees were not formally the owners of the enterprise, but were essentially the “true” owners—in other words, they had control even if they did not own the property outright.³² Leasing provided an opportunity for the exercise of entrepreneurial skills without providing full ownership of the productive property that was being used, thereby satisfying at the same time economic and ideological forces.

But even leasing was not immune to harassment by those opposed to the new economic forms that were introduced by perestroika. There were many complaints by leaseholders about the obstructionism of officials. Some authorities used their positions as fund-holders of the leased enterprise to exert pressure on the new organizations to run their business as the officials wanted, even interfering with their access to supplies in an attempt to enforce compliance. Also, official bodies saw the leased enterprises as a source of fast money, increasing the payments the latter had to make at the very time that they were trying to reorganize and to get on their feet financially.³³

Despite these problems, leaders of the leasing movement saw it as a stepping-stone to the eventual privatization of the state economy. In the view of economist Valerii Rutgaizer, the godfather and theoretician of leaseholding in the USSR, the fixed assets of leased enterprises would soon be bought from the state. Workers would then own shares in their companies, and would receive income on these shares that would be based on profits.³⁴

An interesting case showing how the leasing arrangement worked was the Stroipolimer factory in Odintsovo, near Moscow. At this enterprise, the workers leased their own plant, and although the business remained obligated to fill state orders and make payments to the state budget, in everything else the workers were their own masters, able to decide on how the income of the cooperative was to be distributed. At the time that this arrangement was created there was some concern that the workers would take the profits in wages rather than reinvest in their cooperative. It was hoped that worker shortsightedness could be avoided by providing a lease of thirteen years. This would give workers a stake in long-term growth rather than in high wages in the short term. This cooperative is of more general interest because of the imaginative way in which it went about its business. Instead of selling off waste products in order to get income, the cooperative not only kept these but also went out and bought waste materials from other enterprises and thereby built up a reserve as a hedge against interruptions in its supplies. The organization then created three additional cooperatives at the plant that processed some of the wastes into new products, and provided insulation services for customers of the enterprise. Workers in Stroipolimer had an interest in the prosperity of these three cooperatives since they themselves benefited when these cooperatives were successful. This creative arrangement was a happy contrast to the contempt in which cooperatives were held by many workers in the Soviet Union.

In another example, in 1987 a lease agreement was signed between Karellesprom, the Karelian state timber industry association, and the building cooperative Stroitel’. The lease agreement between the two was one in which the state provided the dump trucks, bulldozers, excavators, and welding equipment in exchange for an agreed delivery of output.³⁵ The Gigiena (Hygiene) cooperative in Moscow started an operation at the Pavletsky Railway Station where it kept the public restroom clean and operating efficiently and charged people ten kopeks for its use. The station (i.e., the state) signed a lease with the cooperative and received 20 percent of the profits.³⁶ A coal mine in the Donetsk oblast became a cooperative and mined coal on land it leased from a state farm. The agreement required the mining cooperative to provide the state farm with 7,500-9,000 tons of coal a year at 30 rubles a ton. The remaining coal was to be sold to collective farms, state farms, and other organizations and individuals at 46 rubles a ton.³⁷ In yet another variation of the leasing system, a cooperative of workers leased a shop at a factory where they used to work. While this was not unusual, in this case, an entire department converted itself into a cooperative. The cooperative paid rent of 13,300 rubles a year and did all the maintenance work on the machinery, and it custom-made machinery that the factory in the past would have had to import from abroad.³⁸

These forms of economic organization became popular after the success of the first few experiments received widespread publicity. In 1988 and 1989, the press was full of stories of conversions and leasing arrangements that had rescued ailing state firms and increased the earnings of their workers. By the fall of 1988, in the Moscow oblast alone, there had been over 150 such conversions covering all sectors of the economy and there were plans to raise this figure to 425 by the end of the year and to add more than 1,700 in 1989.³⁹ Not all conversions were successful, however. One of the barriers to success may have been the reluctance of some of these new organizations to reduce their labor force. A survey of reports on these companies suggests that reorganization and a change in ownership were no guarantee of success unless the burden of excess labor and top-heavy administrative apparatus was shed.

STATE-COOPERATIVE TENSIONS

But the relationship between the state and cooperatives was not always a seamless one. There were several difficulties in what often turned out to be an uneasy alliance between the two. The first problem might be described as philosophical differences. The fundamental premise from which many in government circles proceeded was that cooperatives existed to serve state needs. In this view, most cooperatives should use factory wastes and second- rate products that could not be used by state factories.⁴⁰ This limited and unimaginative conception of the range of cooperative activity translated into an abysmal lack of support for cooperatives. Moreover, cooperatives were interested in maximizing profits, so few went into the business of reprocessing state enterprise leftovers.⁴¹ Anti-cooperative attitudes showed up in other ways. The general director of one amalgamation decreed that workers associated with cooperatives in his amalgamation should not be allowed to hold positions with the state. In his view, cooperators were nothing but speculators with whom he wanted no concourse.⁴² Or state bodies set up prohibitive barriers against cooperatives trying to buy materials and equipment for cash. For example, the Belorussian Ministry of Trade and the republican office of Gosbank issued an order limiting cooperatives to the purchase of only fifty rubles worth of goods at a time, although there was nothing in the Law on Cooperatives to support this kind of action.⁴³ For many, cooperatives were categorically defined as predatory and greedy, and therefore as undeserving of the state’s largess.

There was also a set of problems that reflected the inherent flaws in the relationship between a state enterprise and a cooperative formally attached to it. First, a cooperative was an independent financial entity operating within an enterprise that was accountable to several external state monitoring agencies. This limited the freedom of the state enterprise to make independent decisions, and impinged on its initiative and on that of the cooperative with which it was allied.⁴⁴ A second problem was that if workers left a state enterprise to work in a cooperative, even if the cooperative was physically located within the state enterprise and was fulfilling state orders, the workers lost the fringe benefits they had as state employees, including their pensions.⁴⁵

A third problem was that the cooperative’s viability within the state enterprise was at all times fragile. At any moment it was liable to be left high and dry if the state enterprise decided to pull the plug. For example, the Moscow cooperative Ideal, which produced high-fashion clothing, was established in December 1987 under the aegis of Clothing Factory no. 1 of the Moscow Production Association Siluet. The association agreed to provide the cooperative with cloth, equipment, and thread, in exchange for 10 percent of the cooperative’s profits. The cooperative began its work in an old space that had previously been in very bad condition and that it repaired with the aid of a small bank loan. Without warning, the association demanded that the cooperative return the restored space. The cooperative complained to the authorities and the local soviet ruled in its favor. But the contractual relationship between the state and the cooperative was terminated and the cooperative had to buy its material in retail stores, paying retail prices.⁴⁶ This type of arbitrariness caused the great fear that cooperatives had of the state sector, including branch ministries and state enterprises. This apprehension deterred many from operating production enterprises, and they chose instead to run commercial cooperatives where they were less likely to need the state. Others stayed out of the cooperative movement altogether.⁴⁷

Occasionally, it was not clear what belonged to the cooperative as a legally independent economic entity and what belonged to the state because it was legally the patron of the cooperative. Take, for instance, the case of the Moscow cooperative Energiia, which produced home appliances. It was organized within the amalgamation Transstroimash to produce consumer goods, and the relationship was mutually satisfactory in the beginning. Then the cooperative on its own initiative helped an inventor put his work into production, and both the cooperative and the inventor amassed a considerable amount of money. The amalgamation put in a claim for part of the income and when the cooperative protested, Transstroimash responded by refusing to be the sponsoring state enterprise anymore. This effectively put the coopera-tive out of business because it no longer had physical facilities or equipment.⁴⁸ A variation on this occurred when a cooperative opened a trucking business in the Belorussian city of Vitebsk. State trucking services in the Soviet Union have a poor reputation—customers are treated rudely and there are long lines to get a truck without a bribe. When the cooperative first entered the business, the state agency was not concerned, but when a major retail store in the city decided to take its business away from the state and give it to the cooperative because the latter’s service was so much better, the head of the state transport agency appealed to his superiors, who ordered the store to use state transport. This created a row that led ultimately to a negotiated settlement whereby the store was able to use both services.⁴⁹While this conflict reached a negotiated settlement, it nevertheless shows, as do these other cases, that the rights of cooperatives always seemed to be tenuous at best.

In the first months of the movement’s development a problem arose in Moscow, and probably in other large cities, in cases where a cooperative was registered in one district of a city but was actually operating in another district. This happened because of the inability to find a physical location for the cooperative in the district where it was registered. From the perspective of the state, there were now two districts and a guarantor enterprise accounting for the operation of one cooperative. The situation became even more complicated if the cooperative had subsidiaries. Because of this turf question, the financial accounts of the local committees and the guarantor enterprises became complicated. Finally, in Moscow, it was decided that cooperatives should be allowed to operate wherever they wished in the city.⁵⁰

BANK CREDIT

An ongoing problem for cooperatives was the lack of credit from Gosbank,the omnipresent and omnipotent state bank. One of the first experiences of would-be cooperatives was the difficulty of obtaining start-up capital from Gosbank. One of the reasons why many registered cooperatives did not function was the failure of the banking system to make credit available to them.⁵¹In 1987, banks were willing to give only small, short-term loans for remodeling, buying equipment, and, in the case of restaurants, buying seasonal produce,⁵² and Gosbank placed a ceiling of 5,000 rubles on what cooperatives could borrow for repairs on their physical facilities, even though repairs typically cost from 10,000 to 15,000 rubles.⁵³ Moreover, Gosbank was accused of being “inconsistent” in its lending policies. It was not clear who would get loans and why some were favored over others.⁵⁴

The bank’s unwillingness to provide funds partially dictated the direction in which the cooperative movement developed. Because it was so difficult to get financing from the state, medium- and large-scale cooperatives, or even those that simply had ambitious goals, were virtually impossible to start. These types of projects were excluded because of what one author referred to as the “imaginary poverty” (mnimaia bednost’) of the state bank. Take, for example, the case of a group of inventors who, working with several scientists, gained government approval to produce an industrial conveyor belt device. At the last moment the bank backed out of its promise to provide a 100,0 ruble loan to the inventors, claiming it did not have adequate funds.⁵⁵ As Nikolai Petrakov, Gorbachev’s chief economic adviser, said in mid-1990, “The state must not merely allow small businesses but immediately start encouraging them. What Soviet citizen can buy a laundry or a hairdresser’s? The state must provide tax cuts and easy credit to help business people who have no funds as yet.”⁵⁶ The absence of financial resources also reinforced the dependence of cooperatives on the state; even if equipment and supplies were readily available in the market, cooperatives could not purchase them because they often lacked the financial wherewithal.⁵⁷

It should be pointed out that banks rightly claimed that they had not been getting their money back on many loans to cooperatives. As of April 1, 1989, 3 billion rubles in loans had been made to cooperatives, but only 400 million had been repaid. In the RSFSR, only 10 percent of outstanding loans had been repaid and in Lithuania a mere 5 percent. In part, the failure to repay was a result of real disaster; some defaulted on their loans because they were victims of the earthquakes in Armenia and Tadzhikistan. But others perpetrated fraud on the banking system. The scam that many apparently em-ployed was to join together and register a cooperative, borrow money from a bank, employ another scam to transform the loan into cash, and then share it among themselves.⁵⁸

For all these reasons, cooperators took matters into their own hands in mid-1988 and began to set up their own financial institutions. The country’s first cooperative bank was chartered on August 24, 1988, and was registered with Gosbank. The Union Bank of Chimkent was founded by the Chimkent Oblast Association of Cooperatives with an initial capitalization of 1 million rubles and with the right to accept 20 million rubles in deposits from businesses and individuals.⁵⁹

COOPERATIVE PRICES

One of the persistent complaints against the cooperatives was that they charged extremely high prices for the goods and services they produced. This was an issue that went to the heart of the ambivalence expressed by Soviet officials and the general public toward cooperatives. On the one hand, everyone wanted the goods and services cooperatives offered; on the other hand, no one wanted to pay the high prices they charged.

There is little doubt that on the whole cooperative prices were extremely high relative to prices charged elsewhere. Table 3.3 gives meat prices in the collective farm markets (CFM) in July 1988 and then the price of meat dishes in three different types of eating establishments. The data show that cooperative café prices were anywhere from 3.5 to more than 5 times the prices of meat dishes in state cafés, and from 1.3 to 2.1 times the prices in state restaurants.

There was some justice to the complaints of the ordinary citizen about price gouging. To a large degree, higher prices were associated with the speculative activities of the trading cooperatives because in many cases, cooperatives charged prices that bore little relationship to the value added to the product in question.⁶⁰ One estimate was that 50-60 percent of the income of the trading cooperatives was a markup over the prices at which they bought goods in the state retail and wholesale trade network.⁶¹ The high prices charged by cooperatives often had broad implications, because cooperatives bought so many of their inputs from the same retail outlets as the general public, particularly food cooperatives that bought on the collective farm markets. Thus, cooperative activity exacerbated shortages and raised prices in the free market.⁶²

Table 3.3 Meat Prices in the Collective Farm Market and Public Catering Establishments

Source: Izvestiia, October 7, 1988, p. 3.

However, sometimes the prices in the private sector were actually lower than state prices. In a number of cases, cooperatives processing industrial wastes produced and sold consumer goods at prices below those charged by state enterprises;⁶³ a Zaporozhe cooperative specializing in the registration of official documents charged prices which were one-third those of the state.⁶⁴ Nevertheless, the dominant reality was that cooperative prices exceeded prices in the rest of the economy.

Beyond the easy accusations of price gouging, there were several reasons why cooperative prices were higher, and these become clear when we place cooperative prices in the total and confusing environment of the Soviet economy. First, in large part, the “exorbitant” prices, as they are so often characterized, reflected the underlying and chronic disequilibrium in Soviet markets; demand was perpetually greater than the supply of goods and ser-vices. The extent of the increasing inflation in Soviet markets can be seen in the following figures. From 1986 to 1988, the average annual increase in wages was 4.4 percent and savings rose by an average of 12.8 billion rubles a year. In 1989, the wage increase was 9 percent; this was double the rate of previous years and far outstripped the increase in consumer goods. As a consequence, savings increased by 41 billion rubles in 1989. It was estimated that “unsatisfied demand” in 1989 was in excess of 150 billion rubles.⁶⁵

The cooperative movement grew precisely because this “unsatisfied demand” existed. According to Goskomstat USSR, in 1989, cooperatives produced 40.4 billion rubles, or slightly more than 4.4 percent of total national output.⁶⁶ This constituted more than a four-fold increase in the relative share of the cooperative sector. The growth of cooperatives contributed to inflation because their prices reflected the full force of excess demand in the economy.

For reasons having to do with the Soviet definition of social justice, the state was unwilling to allow prices to reach their equilibrium level and absorb some of this excess demand. Indeed, huge subsidies have historically supported below-equilibrium prices, particularly for necessities, and have instilled in the psyche of the Soviet people a belief that “low” prices are an entitlement. This belief was reinforced by the February 5, 1990, USSR Council of Ministers resolution “On Urgent Measures for Normalizing the Consumer Market, Money Circulation and Strengthening State Control over Prices.” The goal of the resolution was to protect the population against a “groundless increase of prices.” The resolution listed a wide variety of food and clothing items as well as products for children whose state retail prices were to remain unchanged during 1990.⁶⁷ The major role of the resolution fixing prices was political, not economic. The causes of inflation did not diminish because the state decreed fixed prices; but it did allow the leadership to deflect the blame for inflation onto others, such as cooperatives, speculators, and the second economy. Three and a half months later, the promise to hold food prices constant was abandoned as part of the reform package of Prime Minister Ryzhkov designed to move to a so-called regulated market economy. In late May 1990 he announced that bread prices were to triple on July 1, 1990, and other food prices were to increase on January 1, 1991.⁶⁸ After a storm of public outrage and panic buying, the proposed price increases were withdrawn only weeks later. This meant that the dual economic system—the state-regulated sector and the free market and cooperative sector—would continue to exist and that the tension inherent in the duality was not resolved.

Second, there was a general lack of competition in most areas of the economy, including within the private economy. In recent years, Soviet economists have pointed to the deleterious effects of monopolistic elements in the official economy and the consequences of this for efficiency and product quality. This issue was finally addressed when the government drew up antimonopoly legislation in April 1990.⁶⁹ But the new private economy also suffered from monopolistic tendencies since the number of competing cooperatives was still relatively small. In the absence of controls on prices, which state enterprises are subject to, it is understandable that cooperative prices would reflect these monopolistic elements. The monopoly problem was worsened by the general shortages of goods and services in the Soviet economy.

Third, higher prices were also a reflection of the higher costs of doing business for a cooperative as opposed to the lower prices paid by state enter-prises for their inputs, as in the case of the KamAZ truck factory cited above. These higher costs were passed on to the consumer, contributing to the high prices about which so many complained. And because cooperatives were forced to remain small, they were unable to benefit from the lower average costs associated with economies of large-scale production.

The anger of consumers was only aggravated when they saw the same goods sold by the state and by the cooperatives at two different prices, even though, for the reasons cited above, the cooperatives may have had no choice other than to charge higher prices. The following case illustrates this point. The Penza bicycle plant, a state enterprise, was to manufacture a new bicycle with production costs of 115 rubles. But the State Pricing Committee set the retail price at 110 rubles. Recognizing that it could not make a profit at the prescribed state price, the plant established a cooperative which bought bicycle parts from the plant at state prices and then was able to charge a price that covered costs plus a profit. This brought the final bicycle price to 170 rubles, 60 rubles higher than the prescribed state price.⁷⁰ Much the same thing was true of certain services offered by both the state and the cooperative sector, such as medical services. Medical cooperatives charged patients more for services requiring the use of specialized equipment, but they had to pay the state for the use of the equipment.⁷¹

The woefully inadequate supply of materials, equipment, and financial resources that was part and parcel of the Soviet economic environment had several implications for the cooperative movement. First, it restricted the productive capacity of cooperatives. Less was produced by the private sector by simple virtue of its not having equal access to productive inputs. Second, cooperatives resorted to criminality to ease the supply problems and criminals preyed on cooperatives because they knew that, in an environment of general shortages, where cooperatives were not on an equal footing with the state, it was impossible to operate legally.⁷² Third, and intimately con-nected with the criminality issue, cooperators paid extremely high prices for the resources they obtained because they had to resort to illegal means to acquire them.⁷³

A good deal of the tension between the cooperatives and the state had to do with both sides having only an embryonic understanding of the implications of private enterprise and the market system. Many on each side misinterpreted legitimate economic outcomes as victimization by the other side. In the state economic hierarchy there was the common view that cooperatives shamelessly took advantage of market irregularities. And there were those, often the fiercest advocates of the market economy, who saw the state as exploiting its monopoly position vis-à-vis cooperatives. The reality in both cases was that neither side comprehended the workings of a market.

It is natural to ask what the relationship between the state and the cooperative should be, whether state and cooperative enterprises should work together, or whether cooperatives should substitute for state enterprises as they did in the case of public catering.⁷⁴ Bunich argued in 1989 that a proper partnership between the two would involve a division of responsibility. He proposed that the state sector would bear responsibility for production in those industries with a high capital-output ratio, those where the technology is very expensive, and those where there is large-scale production, and that cooperatives should be responsible for those areas of the economy based on small-scale production and requiring flexibility.⁷⁵ Four years after the coop-erative movement began, the future course of state-cooperative relations was still unsettled. The issues that defined this strained relationship were well- known, but the solutions for a peaceful and prosperous alliance were still out of reach.