The Goskomstat Report for 1989: An Economy out Of Control

CHAPTER 3

There was little doubt among observers of the Soviet economy that its performance in 1989 would prove to be worse than in 1988.  In the course of the year, it was evident that economic deterioration continued without respite, and the publication by the State Committee for Statistics (Goskomstat) of the economic results for 1989 confirms this trend.  With the possible exception of 1986, the four years of perestroika have witnessed dismal economic performance, and some believe it may yet be politically fatal for Soviet leader Mikhail Gorbachev. ⁽¹⁾

Today, public opinion plays a much larger role in Soviet political life than it used to, and the performance of the economy thus far under perestroika cannot continue without someone (or indeed the entire system) being held accountable. ⁽²⁾  Even if Gorbachev survives, the importance of the economic decline of the Soviet Union cannot be overestimated.  There is little doubt, for example, that it was the rapid deterioration of the Soviet economy that obliged the Soviet leadership to take the steps that have been considered so "radical" by analysts in the West.  Such measures as broadening the rights of individuals in the economic and political spheres, increasing the scope of information about and depth of analysis of previously taboo issues, and withdrawal from political and military commitments abroad all represent attempts by the Soviet leadership to arrest the debilitation of the Soviet Union, both internally and externally.  Perestroika itself is aimed at regaining control of the Soviet Union's destiny and reversing the loss of ground to the more advanced industrialised countries of the world.  In that sense, it is a replay of earlier periods in Russian and Soviet history that were marked by liberalisation of society from above in order to catch up or emulate the West.

One of the basic weaknesses of perestroika, however, is that the leadership has lost control of the reform process.  The forces unleashed in Soviet society since 1985 -- whether the secessionist movements on the periphery or such spontaneous phenomena in the economy as strikes, inflation, and organised crime -- have all served to weaken the centre's grip on society in the last four years and dampen economic performance.

Table 1:  Selected indicators of economic performance
(Percentage increase from beginning of year over corresponding period of previous year)

Indicator:	June 1988	December 1988	June 1989	December 1989	1989 Plan
Gross national product	6	5	3.5	3	6.6
National income produced	5	4.4	2.5	2.4	6
Overall labour productivity	5.5	5.1	2.8	2.3	4.4
Gross industrial output	4.7	3.9	2.7	1.7	3.1
Gross agricultural output		0.7		1
Monetary emissions		9.2		12.9
Blue- & white-collar workers' wages	6.5	7	10	9.5	-0.4
Kolkhozniks' wages	6	7.1	8	7.7	-1
Housing	2	0.7	-4	-3.4	2

Sources:  Itogi sotsial'no-ekonomicheskogo razvitiya strany v 1 polugodii 1989 goda, Moscow, Goskomstat, 1989, 2-4;  Izvestia, 28 January 1990.

GENERAL ECONOMIC TRENDS

Table 1 charts the development of the Soviet economy as reflected in some key economic indicators over the past two years.  A major goal of the economic plan for 1989 was a reorientation of the economy towards improving living standards in the short term. ⁽³⁾  By most accounts, growth in the social sectors does seem to have outpaced growth elsewhere.  Other trends (excessive wage increases, poor labour discipline, etc.) mean, however, that the overall picture is gloomy.  In almost every category, economic performance has slipped steadily since June, 1988.  Even housing construction, which showed robust improvement in the early part of the Twelfth Five-Year Plan (1986-90), has fallen off in the past two years.  On the basis of any indicator available, the Soviet economy slowed in 1989, and it is quite possible that GNP fell in absolute terms if realistic price deflators are applied.  In the last few years there has usually been at least one bright spot in Goskomstat's economic report.  This year, there is not one major trend that is encouraging.

WAGES AND PRICES

Growth of incomes continues to outstrip labour productivity.  Thus, while the output of many consumer goods (including food products) has increased slightly, incomes have increased faster, boosting unsatisfied consumer demand.  The emission of money rose by 56 per cent over the previous year and totalled more than 18 billion rubles at the end of 1989.  All told, an additional 64 billion rubles ended up in the hands of consumers in 1989, an increase of 12.9 percent.  (This exceeded the planned amount by 57.7 billion rubles!)  The average monthly wages of blue- and white-collar workers increased from 220 rubles to 240 rubles, while kolkhozniks' wages increased slightly less, from 182 rubles to 196 rubles.  On average, employees of cooperatives (including moonlighters) earned more than 500 rubles per month.  At the same time, consumer expenditure on goods and services increased only 9.1 percent, which means that personal savings continued to grow rapidly.  At the end of 1989, there were 337.7 billion rubles in savings accounts alone, an increase of about 41 billion rubles, or nearly 14 percent, over the year.  Some of this may be held for transactions demand, as precautionary balances, etc., but in view of the excess purchasing power already in the market, most of this increment is held simply because it is difficult to spend. ⁽⁴⁾

The major result of these additions to liquid balances in the market is inflationary pressure.  Goskomstat continues to use 2 per cent as its consumer price deflator, although it notes this year (apparently for the first time) that "hidden" inflation increased by 5.5 per cent in 1988. ⁽⁵⁾  There is a consensus in both East and West, however, that these estimates are too low.  For nearly two years now, leading figures in the Soviet economic leadership have been using a figure of about 5-10 percent for "open" inflation and about the same for "hidden" inflation.  The open inflation rate for some consumer goods has recently been as high as 17-20 percent, according to Aleksandra Biryukova.  None of the estimates takes into account the increase in black market activity or the deterioration in the quality of a whole range of consumer and producer goods. ⁽⁶⁾  Because of the lack of reliable data and the complicating factor of the Soviet pricing system it is difficult to determine exactly what the real rate of inflation is.  It is clear, however, that Goskomstat's use of 2 per cent in its calculations results in a misleading picture of "real" growth.  It is quite likely, in fact, that in real terms the Soviet economy shrank last year, perhaps by as much as 2-5 per cent.  When the calculations for national income are made without including foreign trade and the increased revenue from the turnover tax (mainly from higher sales of alcohol), the Soviet net material product grew by about 1.5 per cent.  Taking into account population growth of 0.7 per cent, that results in a very low per capita figure.

THE "PRIVATE" SECTOR

One of the few bright spots in Soviet economic development in 1988 was the re-emergence of a non-state sector in the economy.  In 1989, the scope of these activities continued to grow, but restrictive decrees and legislative measures made it more difficult for Soviet entrepreneurs to establish and run successful businesses.  By the end of 1989, 1332 industrial enterprises were operating on the basis of leasing arrangements.  In agriculture, 4911 kolkhozes and sovkhozes were leased (although the independence of these farms from the centre was more impressive on paper than in reality).  Cooperatives also continued to make significant progress, but growth in this sector seemed to taper off towards the end of the year, probably because of a fall-off in the formation of cooperatives involved in civil engineering and in retail and wholesale trade and distribution.  The number of people engaged in cooperative activity was 4.5 million.  The relative share of moonlighters in the cooperative sector continued to fall and, at the end of 1989, accounted for just under half of the total.

FOOD AND CONSUMER GOODS

Consumer goods (including alcoholic products) worth some 426 billion rubles were produced in 1989, an increase of 7 per cent over the previous year.  Total retail trade turnover rose by 37.3 billion rubles, or 2.4 per cent.  More than 9 billion rubles of the increase was a result of higher retail prices (including the replacement of less expensive goods with more expensive ones) and another 10 billion resulted from increased alcohol sales.  Still, there was some real growth in the production of both food and non-food consumer goods.  Food supplies continued to grow slowly (see Table 2), but because of excess demand many key items were rationed in various regions of the country.  Meat, sausage, and butter were rationed in 20 per cent of the 445 cities surveyed by Goskomstat for its report.  Sugar was rationed virtually everywhere in the country.  There was also unsatisfied consumer demand for tea, potatoes, and other vegetables.  The supply of food products in the state retail sector failed to grow in 1989, with the extra sales coming from the non-state sector, where prices are generally higher.  Because of the price differentials, produce was often snatched up relatively quickly in the state sector;  only when shortages arose or when more desirable goods were available in the non-state sector would people shop in cooperative or kolkhoz markets.  One result was that consumers who could not afford the higher prices in the markets were faced with relatively bare store shelves.

Table 2:  Production of selected food products

Product:	Actual production 1988	Percentage plan fulfilment	1989 as percentage of 1988
Meat (million tons)	12.9	103	100.9
Sausage products (million tons)	3.9	102	102
Edible fish products (million tons)	5.7	104	96
Butter (million tons)	1.7	105	100.4
Sugar (million tons)	13.3	100.2	111
Canned fruits & vegetables (billion cans)	14.8	98	97
Alcoholic beverages (billion litres)	1.24	106	119

Source:  Izvestia, 28 January 1990.

The production of non-food consumer goods seems to have increased somewhat over 1988 as well.  This was in part a result of the program of converting defence industries to production for the civilian market.  The defence complex increased its output of consumer goods by 11 per cent in 1989.  Table 3 presents data on key consumer goods produced mainly in the defence complex.  It is possible, however, that this increased output was at the expense of civilian-oriented capital equipment, which is also produced by various defence complex industries.  Nevertheless, the ministries of the aviation industry, defence industry, radio industry, and communications all failed to meet production targets for a number of consumer goods.

Table 3:  Production of selected non-food consumer goods

Product:	Actual production 1988 (millions)	Percentage plan fulfilment	1989 as percentage of 1988
Television sets     of which colour sets	9.9   6.3	96    97	103 111
Refrigerators/freezers	6.5	99.1	104
Radio receivers	8.6	92	107
Tape recorders	5.7	99	103
Video recorders	0.13	104	171
Sewing machines     of which zigzag	1.55 0.97	86    91	100 98
Vacuum cleaners	5.1	96	106
Washing machines	6.7	95	110

Source:  Izvestia, 28 January 1990.

INDUSTRIAL PERFORMANCE

Industrial production in a number of other areas of the economy was down, reflecting the increased attention paid in 1989 to Group B (consumer goods) industries as opposed to Group A (capital goods) industries.  (Production of Group B industries was 4.8 per cent higher than in 1988, while that of Group A industries was only 0.7 per cent up.)  In the energy sector, oil production was down by 2.6 per cent, and coal production fell by 32 million tons, or 4.1 per cent, from last year's figure.  These trends were countered where possible by switching to natural gas.  Production of natural gas was 5 billion cubic metres above the plan for 1989.

A major disappointment for the leadership must have been the poor showing in industrial technological development.  Just as much hope was pinned on renewal (obnovlenie) as on restructuring (perestroika) of the economy.  It was hoped that, with massive investment in the first half of the Twelfth Five-Year Plan period, the Soviet industrial base could be refitted with modern equipment that would make production more reliable and efficient.

Except in a few cases, that did not happen.  By 1988-89, the priorities of the plan began to change, reflecting the increased importance attached by the leadership to consumer satisfaction in the short term.  Moreover, in the last year or two, the introduction of robotic production lines, CAD/CAM design systems, and high technology capital equipment in general has been less than was hoped.  This trend even applies to the production of equipment for the higher priority sectors of light industry and the agricultural sector.

FOREIGN TRADE

Foreign trade turnover increased by 4.7 per cent over 1988.  Imports (up 7.9 per cent) grew much faster than exports (up only 1.7 per cent).  The Goskomstat plan fulfilment report for 1988 provided information on Soviet terms of trade, but unfortunately that information has not been made available in the report for 1989.  The direction of trade shifted slightly away from the Socialist countries, with Soviet exports to the Socialist world totalling 42.2 billion rubles (61.9 per cent), and imports 43.4 billion rubles (61.8 per cent).  In 1988, Soviet exports to Socialist countries had amounted to 63.9 per cent of the total, and imports to 66.9 per cent.  During the last half of the 1980s, Soviet trade with Socialist countries had grown more or less steadily, but the 1989 figures look much more like those of the mid-1980s. ⁽⁷⁾  There were serious shortfalls in the contribution to foreign trade of the machine-building ministries and other heavy industry sectors, reflecting the lacklustre performance of these industries in general.

CONCLUSIONS

It is difficult to reach any positive conclusions about Soviet economic performance in 1989.  Productivity was down, inflation was up.  Even in such high priority sectors as oil production and housing construction, production was down in 1989.  Moreover, the leadership seems to be treading water on key questions of economic reform.  The published economic plan for 1991-95 gives the nod to moderate administrative refinements, not real economic reform.  It is debatable whether even the more radical reformers in the Supreme Soviet -- perhaps the last hope for a meaningful program of reform -- can get together and agree on a coherent platform before their legitimacy is tarnished by further economic deterioration and social chaos.  There has been a debate in the last few years about whether the Soviet Union will be able to muddle along and avoid a meaningful modernisation of its society.  That seems to be a moot point now;  even muddling along seems to be beyond the reach of the Soviet economic system.

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ENDNOTES

1.  See Anders Aslund's article in The Washington Post, January 28, 1990.

2.  Thus far, this trend has developed more rapidly in the Eastern European countries than in the USSR.

3.  For a discussion of the plan, see John Tedstrom, "The 1989 State Plan:  A Sharp Break with the Past?", RL 493/88, 3 November 1988.

4.  This view is supported by the flight of Soviet consumers from the ruble to gold and other precious materials, a trend that became common during 1989.

5.  The figure of 2 per cent reflects increases of state-controlled prices only and does not reflect price increases in the cooperative sector and on the black market or increases in retail prices in the state sector that are not centrally controlled.

6.  For a Soviet discussion of these issues, see A. Shmarov and N. Kirichenko, "Inflatsionnyi 'vsplesk':  masshtaby i prichiny", Ekonomicheskaya gazeta, 13, 1989, page 12.

7.  Narodnoe khozyaistvo SSSR v 1988 godu, Moscow, 1989, 636.