1.

First Steps

The Legalization of Entrepreneurship

The first tentative steps toward the creation of a legal private sector during the Gorbachev era were taken November 19, 1986, with the adoption of the Law on Individual Labor Activity. It started the nation on the road toward the development of a new type of cooperative. The culmination of this process was some time in coming, and in this chapter we describe the background against which the process needs to be seen. We look at the provisions of the Law on Individual Labor Activity, the kind of thinking that it reflected, how people responded to it in the early days, and the unexpected ways it quickly took root, giving an impetus to private enterprise that proved to be unstoppable.

DISCUSSIONS SURROUNDING THE INTRODUCTION OF THE LAW

The decision to reintroduce legal private enterprise was the outcome of a long debate and of a political struggle that was itself a result of the growing difficulties being faced by the economy. Since at least the mid-1970s, there had been conflict between those who wanted to introduce some market forces into the economy and those who wanted either to retain the existing arrangements or to restrict the range of variation even more.¹ Those in favor of reform wanted not only decentralization of economic decision-making in the state sector, but also to awaken initiative and innovation by adopting the small-scale private enterprise that had proven so successful in Poland and East Germany. This position, representative of one major stream of thinking, had been supported during the 1970s by, among others, Anatoly Butenko of the Institute of Economics of the World Socialist System. Butenko argued that socialism was compatible with a variety of forms of economic activities, that state ownership could coexist with cooperative enterprises, production on private plots, and private trade engaged in by individual craftsmen. For historical support he referred to Lenin’s New Economic Policy of the 1920s. Strong arguments against this position were put forward by the chief editor of the party journal Kommunist, Richard Kosolapov, whose views were equally representative of a more traditional line of argumentation. Instead of decentralization and the use of market mechanisms, he advocated the elimination of existing variations in economic institutions by gradually getting rid of cooperative property until there was only a single, state-owned economy.

The tension between these opposing positions came to a head in 1986 with the decision to expand the existing cooperative sector represented by the law of November 1986. The decision came after the appearance during the previous year of articles in the press discussing the feasibility of relaxing some of the restrictions on private enterprise. At the 27th Party Congress in January 1986, Gorbachev supported the idea of building up the cooperative sector, and of restoring the manufacturing functions that had existed up until the 1960s. Market relations were not incompatible with socialism, he insisted, a theme he was to bring up several times in his travels around the country. Moreover, he pointed out, the idea of manufacturing cooperatives had widespread public support.² By August of 1986, the Politburo went on record as favoring this policy, and as a first step advocated the creation of cooperatives that would procure and process secondary raw materials.³

In a speech in Khabarovsk in July 1986, Gorbachev had also provided a basis for going beyond this policy by declaring that what was necessary was “initiative and perseverance, and a search for new forms of assisting the population in individual labor activity. . . .”⁴ By the fall of 1986, the line between an extension of the old, official cooperatives and the development of individual enterprise became more and more blurred. Thus, in discussing the setting up of new manufacturing organizations to process and use sec-ondary raw materials, the USSR Council of Ministers noted that cooperatives created to do this (under the auspices of the territorial agencies of the USSR State Supply Committee) would be open to precisely those who were eligible to start their own individual businesses, namely pensioners, housewives, families, students, and state-employed workers using their spare time.⁵ This clearly laid the groundwork for the potential development of business organizations that were not simply individual enterprises or even small-scale family businesses, but rather businesses that could be made up of people not related to each other. Whether or not this was intentional is not clear, but by the time the law came into effect in May 1987, the debate took it for granted not only that new businesses would be composed of individuals and family members, but that there would be “the creation of every possible kind of cooperative.”⁶

The debate in the months that led up to the drafting of the November 1986 law made it apparent that there was still no clear commitment to a return to private enterprise—indeed, the fight against private sources of income was if anything stepped up. A campaign against what were called “unearned” incomes was waged, backed by a decree passed by the USSR Supreme Soviet in May 1986.⁷ This law was explicitly aimed at those who obtained money through bribes, illegal use or theft of state property, speculation, and even the use of personal plots on collective farms as “production facilities”—that is, producing for the market. The latter was an especially serious issue if the individual gave up his or her regular job to do this. In a commentary on this law, USSR Prosecutor-General A. Rekunkov was at pains to separate honestly earned from dishonestly earned income. The commentary, though, like others was highly moralistic and was unable to draw a clear line between earned and unearned, between honest and dishonest income.⁸

ECONOMIC ACTIVITY AND THE LAW

At the same time, a rethinking of the whole issue of non-state economic activity and its place in Soviet society was obviously taking place. The problem was that this was a very confused area, both legally and practically. Bureaucratic methods and attitudes played a large role in discouraging private and entrepreneurial economic activity. Thus, while

the law did not explicitly forbid people to earn money on the side in their spare time, such activities were not . . . encouraged by the authorities either. Al-though the rules on crafts and trades published in 1976 stated in black and white that it was permitted in the Soviet Union to engage in any kind of craft or trade (except those forbidden by law), in practice much in this sphere was regulated by unpublished departmental directives that limited or outlawed certain activities and made people uncertain of their legal position.⁹

The right to engage in individual labor activity was in fact already recognized in Article 17 of the Constitution. Indeed, according to official figures, there were more than 100,000 people registered as engaging in private economic activities, in addition to the countless number of people working in the underground economy.¹⁰ But the Law on Individual Labor Activity changed the rules of the game significantly by legalizing a wide range of activities which had previously been treated as criminal. The law was both a liberating and constraining mechanism. On the one hand, it opened up a wide range of activities that were hitherto not possible for Soviet citizens, but on the other hand, the law hedged these opportunities with so many conditions and restrictions that it had a negative influence.

As I. I. Gladky, chairman of the USSR State Committee on Labor and Social Questions, put it, prior to this new law, individual enterprise was defined in a statute only in the case of handicrafts; other activities were covered by isolated normative acts, or were not covered at all. Thus, “Certain types of this activity, including some that have obtained public recognition and are widely practiced, are mentioned nowhere. This serves as a definite psychological barrier to citizens who desire to earn additional money through honest labor. At the same time, conditions are being created for a segment of the population to derive unearned income and to manifest private-ownership aspirations that are alien to our system.”¹¹ So, the new law was to put some activities on a clear footing, while tightening control on those who were deriving “unearned” income. At the same time, the registration of individual activities would cut down on the number of those who paid no tax on their private earnings. The law, therefore, provided a basis for separating honest from dishonest income, acceptable activities from unacceptable, for the country as a whole. As Gladky put it, this law would bring “order” into individual enterprise on the basis of three principles—that the state would regulate individual enterprise to ensure it served the interests of society; that “unwarranted” restrictions on individual enterprise useful to society would be removed; and that income from individual enterprise would correspond to personal effort and the principles of social justice.¹²

The main provisions of the Law on Individual Labor Activity were as follows:¹³

1. Individual enterprise was defined as “socially useful activity of citizens in the production of goods and the provision of paid services” that was not connected with their labor relations with other bodies. While handicrafts and consumer services were specifically mentioned, “other types of activity” were also permitted. People were encouraged to enter into contractual relations with state and other organizations, and also to “unite in cooperatives, voluntary societies and associations.” The use of hired labor, however, was explicitly forbidden.

2. Permitted to engage in individual enterprise were those who were of legal age, who had jobs in the state sector but worked for themselves in their spare time, plus housewives, pensioners, the disabled, and students in secondary schools and in higher education. Related persons living in the same household could work together, providing they were at least sixteen years of age.

3. Machines and materials used in the business could be the private property of those using them, or could be acquired from the state or some other legal outlet, such as a market.

4. Local officials and organizations were to provide assistance in acquiring resources and outlets for products and services, giving priority to those contracted to state organizations. Local bodies were also to provide credit, and to arrange for renting and leasing. The official level set for loans to purchase materials and tools and to lease equipment or premises was up to 2,000 rubles for a period of up to twelve months, with interest at 3 percent per year. For the acquisition of other necessities, loans could be up to 3,000 rubles for up to twenty-four months at 2 percent interest, with a six-month breathing space before repayment had to begin.¹⁴

5. Activities could be engaged in on condition that a permit was obtained from local authorities, the maximum duration of which was not to exceed five years. Refusal to issue a permit could be appealed to a higher-level organization. Decisions regarding activities not requiring a permit could be made by local officials. Incomes earned from individual enterprise were taxable, unless the work was done under license, for which an annual fee was paid. Taxes would not be payable if the average monthly income was no more than 70 rubles, and for incomes up to 3,000 rubles a year the taxes would be exactly the same as for those working in the state sector. Beyond an income of 3,000 rubles, the rate would be progressive, rising to a top marginal rate of 65 percent for income over 6,000 rubles a year. A few special classes of people (retired pensioners in special categories, permanent residents of the Far North and similar areas) were exempt from taxation of private income. In the case of licenses, certain people (disabled war veterans and others) either would be exempt from having to pay, or would pay a reduced rate.¹⁵

6. Manufacturing, referred to as handicrafts, was allowed for a range of specified articles, but prohibited for others such as those made from pro-tected furs; chemical, perfume, and cosmetic articles; narcotics and medicines; articles made from precious metals or stones; weapons, ammunition, explosives, and fireworks; and duplicating and copying equipment, stamps, presses, and type.

7. Consumer services permitted under the law included a wide range of activities, from repairs and construction to livestock raising, from personal services such as hairdressing to running a guest house, and from typing to looking after the elderly or running a taxi service. Services that were forbidden included gambling activities, and running a bathhouse or an amusement park. Instruction in a large number of topics was also specifically allowed, but some medical activities, some kinds of instruction, and organizing entertainment were not permitted.

8. Supervision of individual enterprise activities was the responsibility of local soviet executive committees, and the exposing of illegal activities was to be undertaken by financial and police agencies. Local authorities could revoke permits where violations occurred, and income obtained illegally could be confiscated.

Given the need to set up the administrative mechanisms to put the law into operation, as well as to prepare the public for this change in direction, the law was not to go into effect until May 1987.

The ambiguous and somewhat inconsistent character of the law reflected the lack of clear resolve of its framers. While it permitted a wide range of activities, authorities were given the power to decide for themselves what should or should not be allowed, and strong powers to give or deny permission to operate an individual business. This ambiguity had a contradictory set of consequences, leading to the development of private enterprise well beyond that envisaged by the law, as well as to constant attempts on the part of hostile officials to prevent individual enterprise from taking hold. It seemed to be the case that the enormity of the change being introduced made even those who were its advocates unwilling or unable to provide unambiguous legal and political protection for these activities. On the whole, though, as we shall see in later chapters, the ambiguity was ultimately used more effectively by those seeking to expand private enterprise than by its opponents, who were reduced to periodic attempts to plug the holes in the law or to violate it, as new kinds of activity emerged.

GOALS AND RESPONSES

It is clear from the comments of political leaders and from the framing of the law itself that what was envisaged was a relatively limited addition to the existing economy rather than a major change of direction. It seemed that what the reformers had in mind was to put unused energies to work to solve some of the unmet demand for services and a limited range of goods, not to shift resources, but to add to the forces in the state economy that were being asked to speed up economic output (the policy of uskorenie). “The development of this [cooperative] activity should not lead to an outflow of labor resources from social production [but should] facilitate an increase in the employment of the population in socially useful labor.”¹⁶ The idea was not to replace the state sector with a private sector but to add to it, to squeeze out more resources and put them to use.

This move was not to be seen as the reintroduction of capitalism. Chairman Gladky’s views undoubtedly represented the official view at the time:

The provisions of the new law are in complete accordance with the principles of socialist economic management. Therefore, it is perfectly obvious that the measures that are being taken do not signify a return, in any form whatsoever, to private entrepreneurial activity, and that the utterances and fabrications on this score by certain bourgeois figures are absolutely groundless. . . . In the second place, the intention is to develop individual enterprise solely on the basis of the personal labor of citizens, without the hiring of manpower from outside. In this way, any type of private entrepreneurial activity or exploitation of man by man is ruled out.¹⁷

PUTTING THE LAW INTO PRACTICE

Even before the law took effect in May 1987, there was considerable confusion, not to say bewilderment, on the part of officials and the general public. One of the aims of the reform that came to be expressed more and more frequently was to provide competition with the state sector, obliging it to improve the quality of its output.¹⁸ How this was to be achieved given the limited nature of individual enterprise, however, was not explained.

Many people found mysterious the question of how prices in the private sector would be set. In an interview in which he tried to explain the situation to the general public, L. E. Kunelsky of the USSR State Committee on Labor and Social Questions said that it was envisaged that, while prices would generally be set by sellers and buyers, in some areas prices would be linked to those for similar goods and services in the state sector. Thus, for doctors, fees in state-run self-accounting polyclinics would provide a guideline, and private taxi drivers would charge the rate of a state taxi.¹⁹

There was some question as to whether or not it would be proper for members of the party to engage in individual enterprise. A letter to the editor of Pravda summed up the dilemma well:

Can a Communist or a Party official allow himself to engage in such activity? . . . There’s no question that this is an extremely important endeavor . . . [and] that Party members should not also remain on the sidelines. . . . After all, one must bear in mind that if Communists start to steer clear of all these things and to view individual enterprise as not entirely respectable or as disreputable, there’s no reason to expect prestige, widespread public recognition or respect for those who want to do more work for others and to earn more money for themselves. The logic here is simple. People will say: If Party members—committed comrades—avoid individual labor, that means that such activity is only for people who are devoid of commitment. Historical examples, too, speak in favor of Communists’ participation in individual labor. In the 1920s, for example, there were peasant members of the Party who owned their own holdings and craftsmen who worked for themselves! And in the final analysis . . . CPSU members are no different from any other citizens.

Things may not have been that clear-cut, however, as can be seen from the writer’s parting comment: “On the other hand, it seems to me nonetheless inappropriate for a Communist, let alone a Party official, to become overly involved in individual enterprise. Yes, the law is there. But for a Party member there are other laws as well—the laws of moral self-awareness and the requirements of the CPSU charter.”²⁰

EMERGING PROBLEMS

Soon, complaints were being made about the licensing system, which seems to have been rather arbitrary and chaotic. Licensing was introduced in an attempt to deal with businesses in which it was difficult to know the level of output, or what legitimate expenses were. Examples were repair work, photography, construction work, and taxi driving. Rates were supposed to be based on comparable incomes in the state sector, and the license fee was supposed to ensure that excess profits were not made. Although there was great variation from place to place, the license fees for most activities were set in the 300-400 ruble range, while others were higher, such as taxi licenses (560 rubles) and licenses to repair metalwork (550 rubles). The lowest rate was 100 rubles, for dealing in pet fish and birds.²¹

Concerns were also expressed that the new arrangements were too restrictive. What was needed, said some commentators, was a system whereby cooperatives supplied each other instead of just relying on the state sector. Not only were the legal and administrative provisions inadequate and confused, but “the members of today’s cooperatives are ‘naked,’ since every cooperative stands alone, without the backing of a cooperative ‘public’ that has an interest in the undertaking’s success by virtue of their material advantage. It lacks the backing of a cooperative system.”²²

One Soviet observer commented that one of the main problems with the New Economic Policy (NEP) was that when people’s initiative was mobilized, the weakness of the state economy was exposed. There were not enough resources and manufactured goods to supply the needs of the new entrepreneurs, and the more that NEP developed, the greater became the gap between the potential of private businesses and the capacity of the state sector to provide for their needs. As a result, “The goods famine hit as early as 1926, and 1927 brought the grain strike, marking the beginning of peasant discontent with economic policy—with high taxes and unfavorable prices.”²³

This comment was an interesting one because most commentators in the late 1980s exaggerated the virtues of the NEP period. The fact is that because NEP did not have a way of breaking away from the restrictions of the state sector, it ran into trouble, just as the new cooperatives did in the period of perestroika. Unlike their NEP predecessors, though, the new cooperatives took matters into their own hands and began to service their own needs through all kinds of organizations, such as cooperative banks. The need for such arrangements became obvious to new and prospective entrepreneurs almost immediately. Thus, just a month or so after the law came into effect, there were already complaints that the loans made available by the state were too small. As someone trying to set up a cooperative café put it, “obtaining start-up loans from the State Bank is one of the most serious [problems]. Initial remodeling, equipment, and capital to cover the purchase of seasonal produce all require more than the small, short-term loans granted by the Bank. A cooperative development bank needs to be formed.”²⁴ In addition to providing needed start-up capital, private banks would deal with another problem, that of people not putting the money they earned to work. “A bank is needed above all for building up the cooperative’s capital and legalizing it. . . . The money that’s earned should be put to work—for the cooperative and for society. But at present the economic chain is broken.”²⁵

A resolution of the CPSU Central Committee in November 1987 noted that “existing possibilities for the development of cooperative forms of labor are not being fully utilized,” and that growth was especially slow in rural areas. Local officials were being obstructionist, and industrial ministries were not encouraging state enterprises under their control to set up coopera-tives.²⁶ The plan to have cooperatives use secondary raw materials was clearly not working out, and cooperatives were not able to provide for their own needs. The Central Committee instructed the various organizations of control (finance, prices, police, prosecutors) to step up their supervision of both the cooperatives and the local officials to stamp out illegal activities.²⁷

One of the reasons why the growth of the private sector was slower than many had expected was the reluctance of those in the underground economy to legalize their activities. A report from Andizhan in Uzbekistan noted that

the number of people who engage in various operations without the appropriate permits is not getting any smaller. There are still quite a few people who want to conceal their income from individual labor and want to enrich themselves through speculation. Even those whom the financial inspectors catch get off with a slap on the wrist. Instead of the 50- to 100-ruble fine set by law, they often pay just 10 rubles. . . . and even former employees of the province consumer services administration [are] quitting their jobs to engage in illegal operations. For example, in the province’s bazaars more than 1,000 people are engaged in mak-ing and selling shoes. But leather goods are unavailable in the store. So where are these bazaar tradesmen getting their materials? It’s obvious—they’re getting them illegally, from factories and warehouses. Tens of thousands of people in the province are selling goods under the counter, in effect robbing the state.²⁸

For months after the law became operative, neither the public nor the officials had a clear idea about its practical aspects, and so it was easy for local officials to take advantage of the situation. In Uzbekistan the baking and selling of cakes was declared illegal and bribes were extorted. The cost of a license to operate this business was then set at the prohibitively high level of 1,400 rubles, only to then be reduced to the still-high level of 900 rubles. Because of this the illegal trade continued.²⁹ Such arbitrary actions were to be found all over the USSR, particularly in licensing fees that were set seemingly without rhyme or reason. Thus, a taxi license was set at 1,500 rubles in Latvia, but at only 450 rubles in Kazakhstan.³⁰ The purpose of selling licenses, namely to prevent incomes from becoming unusually high in trades that were difficult to monitor, was clearly not being achieved. For example, the cost of a photographer’s license in Moscow was only 340 rubles even though a state photographer could do 3,600 rubles worth of business a month!³¹

Supply problems also kept many people from legally registering their “business” activities. Although the law had required local officials to help provide facilities and materials, they were not doing so sufficiently to meet the demand. As an engineer who was a cabinetmaker on the side put it, “who’s going to provide me with materials? After all, in our country the rule is: If you write it off, throw it away or let it rot, that’s all right, but to sell it to a private party?—sorry, you can’t do that. So what good is it for me to have a license if I have to twist arms, sneak around and get what I need by fair means or foul, just as I did before? Only now I’ll be in plain sight. . . .”³²That people were refusing to give up their illegal, unregistered activities was common knowledge, and there was no fear of referring to it quite openly: “I know people who do repairs on automobiles and apartments and who take orders for clothing, for rings—without paying any taxes. In short, anyone who was doing jobs for people on the sly is continuing to do so. . . .”³³

Difficulties in obtaining supplies, plus the general climate of opinion may also have accounted for the fact that about 90 percent of the businesses that opened during the early months of the cooperative movement were really individual labor activities, that is, one or two people working together. It was not until after the 1988 law was passed that the size of cooperatives began to increase, a development made possible in large part by the conversion of state enterprises to the cooperative form.³⁴

There were other reasons for the somewhat slow reaction to new opportunities in those early months, including the stigma which was attached to individual enterprise in the minds of many people. Thus, “the inertia engendered by an arrogant and prejudiced attitude toward any individual enterprise as something backward and suspicious . . . makes it all but degrading in many people’s eyes. Many are also voicing the apprehension that this is just a temporary indulgence—today they allow it, but tomorrow they’ll ‘crack down.’ The fear is expressed that all you have to do is register yourself, and anyone who feels like it will start monitoring you, and they will deliberately try to make a cheater out of you—you’ll never get rid of the shame.”³⁵ The public hostility toward the new cooperatives was shown in some of the ru-mors that were circulating even before the law had come into effect. Shortly after Moscow’s first cooperative café started, it was already rumored that the proprietors had been jailed, that the restaurant had been turned into a snack bar, that a serving of suckling pig cost sixty rubles, that reservations had to be made six months in advance, and so on.³⁶ These were gross distortions or outright falsehoods, but they showed the public’s willingness to believe the worst, and to expect harmful consequences of private enterprise. It is interesting that one of the true events in the café was apparently not being gossiped about—the firing of a waiter for rudeness to a customer, certainly a newsworthy happening in any eating establishment in Moscow!³⁷

Not only was the public ready to expect the worst, but private entrepreneurs themselves were often anxious about what they were getting into. As a journalist who published one of the first articles on cooperatives put it, he almost called his first piece “Fear” because “the thing that amazed me about the members of cooperatives was their combination of enthusiasm, eagerness to make a success of their business, and uncertainty about the future. They are knowledgeable people. They apparently remember the fate of the ‘Nepmen.’ And they remember how afterwards—after the industrial cooperatives were done away with—some people found themselves a long way from home [i.e., in camps or in exile].”³⁸ As a result, “the person involved in the cooperative is afraid, and we are afraid. And if we are afraid, if we narrow the bounds instead of freeing up and legalizing things, then severe shortages are inevitable, along with the high earnings that result not only from his enterprise but also from our own sluggishness.”³⁹

There was a provision in the law, though, that was to undermine any chance there was of controlling the growth of individual enterprise, and was to set in motion an evolution of private enterprise that was unstoppable: “In Union and autonomous republics, territories and provinces, the list of permitted types of activities and services can be expanded with an eye to the population’s requirements, local traditions, special national features and certain other specific conditions.”⁴⁰ This “loophole” resulted in the ignoring of restrictions on what could and could not be done, as would-be entrepreneurs and local officials worked out special deals to supply “the population’s requirements.” The range of cooperative activities, therefore, spread so widely as to include almost every kind of enterprise.

A second way in which the provisions of the law were breached was in the types of people who worked in this new sector. The May 1987 legislation had narrowly limited workers in cooperatives to those who were not already employed, and to those currently employed in state enterprises who could work only on their time off.⁴¹ But from the very beginning this restriction was violated in practice. It was obvious to all that the potential income from working in a cooperative far exceeded what could be earned working for the state, and consequently the law never had any meaning. By the end of 1987, pensioners made up only 13 percent of the cooperators, housewives were 8 percent, and students and pupils only 3 percent. Sixty-five percent of the cooperators held a second job with the state.⁴² In a strict sense, virtually two- thirds of the cooperative labor force was working there illegally. Even more important, cooperators were employing workers who were not owners of or investors in the business. The law specified that using hired labor was not allowed, but as with so many other aspects of Soviet life, people found ways around the law. Some tried to finagle the system by getting jobs where they had several days off so they could work in their cooperative. Others bribed people who could register them as working for the state when in fact they were working in a cooperative.⁴³ The upshot was that having opened the flood gates, the state could not hold back the tide of people who wanted a crack at private enterprise. However, it was not until the beginning of October 1988 that the legal restrictions on this were abolished. Even then, restrictions remained on the number of hours that could be worked at a second job, supposedly for reasons of health and safety.⁴⁴

Another problem was that the new cooperatives were not adding to the existing economy in the way that the law had originally envisaged. Many of the “new” organizations were not new at all, merely old organizations with a new look. In the area of public catering, for example, in some republics as many as four out of five of the new cooperatives were usually old, low-profit state trade and consumer-cooperative enterprises that had been transformed into cooperatives. As a report in Pravda at the end of 1987 put it, “What is taking place is not an expansion of the existing network but a change of signboards, which often infringes on the interests of the population.”⁴⁵

LEGALIZING THE NEW REALITY

By the spring of 1988, it became clear that a new law to govern private economic activity was necessary. The situation had become hopelessly con-fused as activities expanded, as local officials set complicated local rulings, and as a stream of often contradictory decrees and edicts flowed from the center and the republics. The new Law on Cooperatives was adopted in May 1988. It abandoned the restrictions of the earlier law, a concession to reality, recognizing that the cooperative movement had evolved well beyond the vision of its early supporters, and bestowed an official blessing on this evolution. The law was an attempt to clarify the situation and make the position of cooperatives more secure.

The basic provisions of the law moved the legal basis for private enterprise to a qualitatively new level, and provided a rejection of the timid, restrictive approach taken by the 1986 Law on Individual Labor Activity. First, cooperatives were now given the status of “basic units” in the economy, on an equal footing with state enterprises.⁴⁶ Restrictions on the size of a cooperative were removed, and no limits were set as to the size of a business’s assets. Cooperatives could encompass all forms of economic activity, save for those that were forbidden by Soviet law. The financial arrangements were also liberalized. First of all, shares in the business could be issued. There being no limit put on the size of earnings, incomes could be based in part on the financial contribution a member made in addition to the amount of work he or she performed. At the same time, the distinctions between private and cooperative activity were kept vague. People working on private plots could organize into a cooperative, cooperatives could enter into contracts with individuals or families on a sub-contracting basis, and the assets of a cooperative could be sold to an individual. This set of provisions made the distinction between capitalist private enterprise and socialist cooperative or personal enterprise, which the leadership had all along insisted on making, a purely semantic one. For example, the line between a contract worker and a hired laborer was for all practical purposes imaginary.

In order to deal with the problem of official interference at the local level, local authorities were given the task of registering a cooperative, but not of approving or disapproving it. The earlier law had left it to the discretion of local soviets to decide what was in the interests of local citizens, and this provided, as we have seen, a basis for harassment. On the other hand, local soviets were now given the right to regulate the ratio of members to hired workers, giving them a way of interfering should they so decide. The new rules on who could work in a cooperative, though, marked a momentous change in comparison with earlier law. Now, people as young as fifteen could join a cooperative, and no barriers were put in the way of those who wished to leave the state sector to work in a cooperative, although the law encouraged people to give priority to those without jobs. In principle, therefore, someone could legally work full-time for his or her entire career in the private sector, a major break with the past.⁴⁷

“Work,” though, was the operative term. No one could receive income from a cooperative unless he or she actually worked in it, either as a part- owner or as a hired (contract) worker; there were to be no investors who were not also workers. This was the thin line that in principle was supposed to separate socialist cooperatives from capitalist private enterprise, for profits were to stem from one’s contributed labor in addition to one’s investments. The bonds which cooperatives were allowed to offer could be given only to members of the cooperative, not to outsiders except where an association of cooperatives was formed. Once a bond was owned by another corporate body, though, it was difficult to see how the line between a cooperative and a capitalist business could be maintained.

The tax rates were not set by the law, but the principle was supposed to be that rates would differ according to the type of activities engaged in, and that the rate would be fixed for a period of five years. In addition, members’ incomes would be subject to a progressive individual tax. Donations to charities would be tax-deductible.

The separation of cooperatives from the state sector was set in the law by prohibiting officials from giving compulsory state orders to a cooperative. Relations between the private and state sectors, therefore, were to be strictly on the basis of negotiated deals. This separation was weakened by the provision that cooperatives could be formed that were “attached to” (pri) a state enterprise, a practice that had been common before the 1988 law, but whose legal status had been uncertain. The supply problem was addressed by giving cooperatives the right to buy equipment and materials from the state wholesale organizations, as well as by direct purchases from state and other enterprises.

A major change was that cooperatives were given the right to form joint ventures with foreign companies, in addition to which they could be granted the right to carry out their own export and import transactions if their products were competitive on foreign markets. Other cooperatives would still have to operate through official foreign trade organizations.

Another shift in attitude that the law reflected was a recognition that the people who operated in the private sector had interests that were legitimate and worthy of protection. Thus, in Article 3 of the law, it was specifically stated that the central function of cooperatives was not only to “meet the requirements of the national economy and the population” for goods and services, but also “to develop the labor and social activeness of cooperative members, and to boost their material prosperity, cultural standards and professional skills.” Also, cooperatives were to exist to “improve the living standards of cooperative members and their families, resolve social tasks, create favorable opportunities for highly productive work, protect their members’ property interests and social rights and participate in the shaping of the state budget.” The right to own productive property was also given in Article 6, but in the absence of an all-union law on property rights this was a right without an ironclad guarantee.⁴⁸ This issue was to remain one of the most difficult ones faced by the society and its leaders, and by the end of 1990 it had still not been resolved.

What began as an attempt to harness the energies of those individuals who desired to work for themselves, and to breathe some life back into the old, quasi-state cooperatives, ended by giving rise to the “new cooperative.” In theory, the new cooperative was a collective form of business activity, owned and run by a group of people who shared the risks, provided all the labor, and shared the rewards. As such, it was quite distinct from a capitalist business because no one’s labor was being “exploited,” and rewards were directly proportional to any value produced by the business. In practice, however, these organizations became indistinguishable from capitalist enterprises in all but the legal sense. Thus, capital was obtained and invested, workers were hired, products and services were sold for whatever price could be obtained, and profits were distributed in ways decided upon by the owners of the business. The cooperative, therefore, was really a form of private enterprise camouflaged as a socialist form of enterprise.

With the 1988 law, the way should have been clear for the unhampered growth of the cooperative movement. The creation of cooperatives in every sector of the economy had been legitimized, as had the growth of cooperatives attached to state enterprises, the use of hired labor for wages, and the right to obtain resources from state organizations. Cooperatives had been given formal equality with the state enterprises, they had been given a large degree of protection against bureaucratic interference, limits on earnings had been removed, and their specific interests and rights had been recognized as legitimate. And there was indeed dramatic growth in the cooperative movement. However, the battles that had raged throughout 1987 and into 1988 continued even after the new law came into effect in the summer of 1988, and the resulting tensions persisted over the first four years of the cooperative movement’s existence.