China Is Not Ten Feet Tall
How Alarmism Undermines American Strategy
"Today our task is to tip the scales in world production in favor of the Socialist system against the capitalistic system, to surpass the most advanced capitalist countries in labor productivity and output per head of population, and to attain the world's highest living standards. In this stage of the competition, the Soviet Union intends to surpass the United States economically."--N. S. Khrushchev, "Target Figures for the Economic Development of the Soviet Union," Soviet Booklets, no. 47, London, 1959.
KHRUSHCHEV, in outlining these goals of the First Seven Year Plan, did not mean to imply that success would be attained overnight. He was realistic enough to realize that, at least with respect to the standard of living, there was a considerable gap to overcome. In fact, of all the areas of competition with the U.S.S.R., it seems safe to say that the Soviet Union lags farthest behind in its standard of living.
Yet Western commentators must be very cautious. We remember the plight of observers in other fields who at one time made similar statements and then found that in spite of everything the Russians had indeed "caught up." Soviet retail sales are continually increasing and 1960 sales of such items as refrigerators are to grow by 60 percent over 1958. In the light of the new interest shown by the Soviet Government in consumer goods distribution and an improved standard of living we should survey the state of consumption in the Soviet Union before risking an evaluation of Russia's chances of "catching up."
By the time Stalin died in March 1953, the wartime destruction of a large portion of Soviet manufacturing facilities had been repaired and the level of Soviet industrial production was above its prewar level. In the continually neglected areas of domestic trade and the standard of living, however, it is estimated that by 1952 real wage income, although slightly higher than prewar, was still below that which existed in 1928, the year before collectivization.[i] It was necessary to recover not only from World War II but also from the trauma of the five year plans and collectivization. While conditions slowly improved, the greatest transformation took place only after Stalin's death.
There seems to be little doubt that the Russian people welcomed the death of Stalin in more ways than one. The reforms and concessions granted immediately after Stalin's death are well known. Pardons, reduced tensions and the ending of the Korean War followed. The immediate improvements in the standard of living were also important. While it is clear that conditions improved from Malenkov on, the immediate increase in retail sales seems to suggest that consumer goods were used as a political tool--presumably to preserve stability.
A close inspection of the sales data by quarterly and semiannual increases indicates the rapidity of the change. Retail trade increased in the second quarter of 1953 by 23 percent, and by 26 percent in the second half of the year. This was double the increase of the earlier quarters and triple the increase of the first quarter of 1953. Moreover, there seems to have been an even greater improvement in rural trade. In the countryside sales increased by 30 percent the first half and by 32 percent the second half.
After the sales surge immediately following Stalin's death, retail trade volume continued to increase at a somewhat more subdued but nevertheless fairly rapid rate. While consumer goods production has continued to take second place to heavy industry, and while many of the more optimistic plans of Malenkov (at one time the outspoken exponent of expanded consumption) have been abandoned, the living conditions of the people have been substantially improved. By 1959, yearly retail sales were about double the sales of 1952, the last full year under Stalin.
Clearly the living standard of the Soviet consumer is rapidly improving. Whether or not such growth means that the Soviet Union will be able to overtake the United States will be considered later. At this point, attention will be focused on the pressures created by the recent expansion of consumption on both the population and the distribution network. The reaction to such pressures, it will be seen, has affected consumption goals.
From the point of view of the Soviet citizen, conditions are much better. There is no reason to believe that this increased availability of consumer goods has not served to whet Soviet appetites for even more. The Russians have found that new apartments create a need for new furniture, new suits create a need for new shoes. So goes the familiar and heretofore unending process.
It also seems clear that demands have been stimulated by the improved and more objective exposure to Western living conditions. The Russian people are obtaining more accurate information about the way of life in the West. To some extent this is gleaned from the magazine Amerika, and from the large number of foreign tourists in Russia. The American exhibition also was an especially effective method of conveying a picture of a country with a much higher standard of living. While some Russian citizens simply did not understand what was being shown at the Fair, many left convinced that it was time their society began to provide some of the same living conveniences.
Russian delegations for the first time are being allowed to visit Western or Eastern European countries. While the number is in no sense comparable to the number of foreigners visiting the Soviet Union, a strong impact is none the less made. Moreover, Khrushchev's recent visit to the United States and the descriptive and visual coverage of the sights he saw--supermarkets, private homes, superhighways and farm houses with swimming pools--should only increase the Russian hunger for consumer goods.
Finally, it is not just a matter of creating desires. The latent demand and the financial resources for implementing these demands are in abundant evidence. The author personally has met members of the Soviet upper and middle income groups who have the necessary 25,000-40,000 rubles (two and a half to four times the average yearly wage) needed to purchase a Russian car, but who nevertheless have been on a waiting list for three years and expect to wait several more. Khrushchev may be entirely correct when he asserts that the American system of individual automobile ownership and the resultant traffic problem demonstrate an irrational use of economic resources. However, his pledge to spare the Russians this problem by substituting a taxi pool for individual automobile ownership hardly coincides with the dream of many Soviet workers.
The contrasts in living standards, of which the Russian is becoming increasingly aware, have had a considerable demonstration effect. One frank letter-writer in a Russian paper went so far as to criticize the present Soviet emphasis on such technical triumphs as the sputnik and Tupoliev jet airliner. Instead he dared to suggest that a more important challenge to Soviet industry would be to produce a pair of shoes that would wear as long as those made in the West. The realization that other nations and even other members of their own society have a vastly superior standard of living only accentuates the desire of individual Russians to obtain the same things. As a result, there is a strong demand for an even more rapid improvement in the standard of living.
The growth in consumption has also had an important effect on the operation of the distribution network. This has led to considerable change, both voluntary and involuntary, in the operation and structure of the marketing system. The resulting innovations may be divided into two categories: those introduced to improve the efficiency of the existing trade network; and those used to cope with the phenomenon of "overproduction," an unusual planning problem for a Communist state.
Although the volume of trade turnover has shown an impressive increase, the trade network itself has been enlarged at a much slower rate. Whereas by 1958 the absolute volume of trade had increased by somewhat less than 170 percent over that of 1940, the number of retail and restaurant outlets had increased by only 30 percent.[ii] Although this is one way of holding down costs of distribution, the quality of service suffered. The existing network had to be made more effective until investment funds could be diverted from heavy industry and housing.
To facilitate the flow of goods through an inadequate distribution network the Soviet authorities have introduced a series of "progressive" marketing methods. Since 1953, over 1,500 stores have been converted to self-service in the Russian Republic alone. Similarly, vending machines dispensing everything from beer to eau de cologne have appeared throughout the country. A national mail order firm sends goods to provincial areas, thus reducing the need for retail outlets. It should of course be understood that these "progressive" measures are often altered to meet Soviet conditions and do not always evolve in the operational form familiar in the United States. Yet on the whole they have permitted the existing distribution machinery to dispense an increased volume of goods.
More recently, there have been other innovations of a different nature.[iii] The motivation here was not to make better use of existing facilities but to promote the sale of a few over-abundant items. In no sense does this mean that Soviet stores are now filled with overstocked counters and shelves of goods. None the less, in some localities the sale of certain high-priced commodities is below expectations and accordingly the inventories are too high. Instead of the usual annual increase, sales may actually fall off. This occurs primarily with the more expensive varieties of such goods as watches, bicycles, television sets, radios and cameras.[iv]
Unusual steps were taken to cope with this saturation of the market in certain models of four or five items. On July 1, 1959, the prices of almost all the expensive models of these commodities were reduced 15-30 percent. Subsequently it was announced that they would be sold on an installment basis, with interest charged on the unpaid balance. Moreover, they have been advertised and promoted widely. These phenomena, familiar to Western businessmen, are almost always associated with a buyer's market and overproduction. The decision to adopt such measures must certainly have caused quite a disturbance among some Communist leaders, both above and below ground.[v]
The phenomenon of advertising in a Communist economy warrants special attention. Recently it has become increasingly important, and not only for the four or five overproduced items listed above. In addition to the First All Socialist Advertising Conference, held in Prague in 1957, and a nation-wide competition for the best window display in the Soviet Union, the formation of several Soviet Republic Advertising Agencies in late 1958 represents a significant alteration of policy. Not only has there been increased emphasis on billboards and truck-side advertising, but radio and TV commercials are being used. What was regarded as heresy no more than two years ago is now considered an important marketing tool.
Finally, centralized planning of distribution and retail trade is yielding more and more to decentralized planning. Not only has the power to make major decisions been transferred to local planning units, but the operating enterprises themselves have been given increased discretion over their own operations. Moreover, Iarmarki (wholesale trade shows and exhibitions) have been greatly increased in number and importance. There has always been a strong ideological distaste for the participation of non-producing and non-consuming agencies in the flow of goods from producer to consumer; yet wholesalers of each commodity line now hold at least two shows a year for the traditional purpose of matching buyers and sellers.
To sum up, there clearly have been major innovations in Soviet marketing since 1953. While there may be many reasons for it, including the desire to improve the way of life of the Soviet consumer, increased sales volume was probably the most important cause. The latter phenomenon gave rise to two new developments. The larger volume of retail sales made it necessary to improve the operation of the existing distribution network, resulting in a series of measures which increased marketing efficiency and did not seem ideologically objectionable. The second development was the emergence in the Soviet Union of certain phenomena which usually indicate overproduction and lack of planning--traditionally stigmatized as distasteful features of capitalism.
It may well be that as retail trade continues to grow in the Soviet Union, marketing methods will come more and more to resemble those of the West. The questions to be considered now are the crucial ones--how fast will the Soviet Union grow, and will it overtake the standard of living enjoyed in the United States?
First, what is the significance of the future Seven Year Plan goals? By past Soviet standards, the goals as originally announced were somewhat modest in scope. Whereas formerly the average increase of sales had been almost 10 percent annually, the projected increase in sales volume from 667 billion rubles to 1,080 billion rubles in 1965 would mean an over-all increase of only 60 percent or about 7 percent annually. To some extent, of course, this is a problem of numbers. As the base broadens, a larger and larger absolute increment is needed to maintain a given percentage growth rate.
In October 1959, less than a year after the announcement of the Seven Year Plan goals, the Soviet Government called for a sharply increased expansion in the production of consumer goods. Although the goals were projected only three years ahead, the average annual growth from 1959 to 1961 was raised to 12 percent, or by a total of 42 percent. It seems fair to say that this sudden acceleration in goals is the fruit of the psychological seeds mentioned above, the most fertile of them undoubtedly being Khrushchev's visit to the United States.
As yet there is no indication that the Russians plan to maintain this pace beyond 1961. It may be assumed, however, that if the Russians succeed in meeting the 1961 goals, the 12 percent growth rate will continue into 1965, at least as an upper limit.
The most significant aspect of the Seven Year Plan concerning food targets was the call for the Soviet Union to surpass the United States in per capita production of butter, milk and meat. On December 26, 1959, Khrushchev announced that per capita production of butter and total production of milk exceeded that in the United States. Considering the levels of agricultural production during the collectivization famine of the 1930s, this is quite an accomplishment. But as D. G. Johnson and A. Kahan point out, the relation of Soviet production of meat and milk to American production of these goods has improved little if any over the pre-revolutionary era when Russia was a major livestock producing nation.[vi] Still, this does represent a substantial improvement for the average Russian, although the targets for other fresh foods are less spectacular.
It must be remembered that the standard of living is not only a matter of production. Distribution and marketing must also be improved. It is one thing to show that you can produce certain things; it is another to provide them to your consumer in a fresh state and when he wants them. Thus in the same speech in which Khrushchev claimed that butter production per capita is now greater in the Soviet Union than in the United States, he complained that Omsk had no butter in its stores and that milk and meat shortages were reported in Kharkov, Rostov and other areas.
Soviet production and consumption of soft goods other than foods have similarly improved in the post-Stalin years and are to continue to grow under the Seven Year Plan. While the over-all average increase in production of such items is to grow by approximately 50 percent, the output of specific items such as knitted underwear is scheduled to double. The Soviet production of wool fabric in 1958 already exceeded American production; and by 1965 it is slated to be double the 1958 American output.
Yet all the discussions having to do with foods and soft goods tend to be polemical in nature. Clearly, the Soviets have made vast improvements, at least over the dreadful days of the early 1930s. While they should have done much more, and done it sooner, the fact remains that they are on the verge of overtaking the United States in both the production and consumption of certain food and soft items. It is with regard to consumer durables, however--on which Americans especially pride themselves--that the test must be made.
As might be expected, sales of Soviet consumer durables are to increase at more than the average rate of growth.[vii] For example, the original plan called for an annual increase in washing-machine sales of 26 percent and the revised plan calls for 38 percent. For refrigerators, the respective figures were 22 to 30 percent and for television sets 19 and 25 percent. All were above the over-all average sales growth projections.
Taking the maximum variant, we find that by 1965, production and sale of 4,750,000 Russian washing-machines will surpass 1959 American sales of 4,010,000. For refrigerators, the original Seven Year Plan goals for 1965 as well as the revised goals are lower than 1959 U.S. sales. This is also true of the sales and production figures of the other durable goods. At best, sales of Soviet refrigerators in 1965 will be three-fifths of U.S. sales in 1959, or a little over two million units. Yet considering that sales of washing-machines and refrigerators in the Soviet Union totalled 3,600 and 50,000 in 1953 and 670,000 and 415,000 in 1959, this is a significant improvement (despite the fact that, at best, only washing-machines will exceed 1959 U.S. sales.)
The Russians are much further behind with respect to housing and automobile production. Even though housing construction in the Seven Year Plan is to be 2.3 times greater than it was in the preceding seven years, a noted economist, V. Nemchinov, asserts that 55 percent of the housing to be completed under the plan will be needed just to maintain the present low housing standards. Due to demographic growth and normal housing depreciation, it is necessary to run just in order not to lose ground.
While the Russians dream some day of duplicating many aspects of American life, they do not include automobile production in their aspirations for the time being. Thus automobile production is to expand from the 124,500 units produced in 1959 to 200,000 units in 1965, but the Government does not exhort the Russian worker to overtake the U.S. 1959 production of 5,590,000. It simply cannot afford nor does it desire to divert the resources from heavy industry which even a fraction of this production would require. Consequently, instead of a rate of growth equivalent to that of the other rapidly growing durable consumer goods items, the seven-year increment in auto production of 64 percent is not much larger than the lower over-all increase in retail sales.
With the goals in mind, let us now evaluate them and see if increases of the magnitude suggested are possible. The past record in this respect is not encouraging for the Russian citizen. The Soviet Government has always regarded heavy industry as the most important economic sector and thinks of consumer goods as expendable. During the prewar five year plans, the goals for consumer goods were almost never kept. This background warrants a certain amount of skepticism toward planned increases in the immediate future.
While heavy industrial production is still the major objective, it does seem fair to suggest that consumer goods in the Soviet Union today are more important than ever before. Yet retail sales in 1960 are to increase by only 6.9 percent over 1959. Moreover, Khrushchev apparently supposes that the great production increases are to be gained from increased efficiency and productivity and with little new capital investment. Better use of waste and scrap may indeed result in some added production. However, the expansion is unlikely to meet the revised 1961 goals of a 12 percent annual increase without substantial investment and a more rapid sales increase for 1960. If anything, the 6.9 percent rate of growth just meets the original Seven Year Plan goals of a 7 percent annual increase.
The 1961 goals seem to be exaggerated, especially since they are to be achieved in such a short period. Although Khrushchev certainly wishes to concentrate more of Russia's economic resources on producing consumer goods, he will find it difficult to meet the original 1965 plan, not to mention the revisions of 1961, unless he can route substantial quantities of materials from some other production sector. Since he shows no intention of reducing his emphasis on heavy industry, this may partially explain his strong support of disarmament.
Let us assume that the Russians attain their goals, that they do reach or surpass the production levels of various American consumer goods. Will this then mean they have overtaken our standard of living? To compare living standards is an extremely difficult statistical problem. Quantitative measurements are not the only criteria to be considered. Taste and variations in quality come into the equation too. To compound the problem, tastes change. Consumption of potatoes per capita has fallen in Russia; it was lower in 1958 than in 1957, and both these were lower than the 1953 figure. Does this mean the Russian consumer was worse off in 1958 than in 1953? We face both dilemmas when we discuss Russian woolen fabrics. As was pointed out earlier, the Russians now produce more of these than we do in the United States. Yet before this can be claimed as a Russian victory, it must be remembered that it comes about partly as a reflection of climatic tastes and needs and partly because synthetic fabrics have been substituted for woolen fabrics in the United States.
Many qualitative differences also exist. How is it possible to adjust for the fact that all but a fraction of the milk sold in the United States is pasteurized, while a much smaller percentage is so treated in the Soviet Union? Similar considerations hinder comparison of durable consumer goods. To say that the Soviet Union will produce 2,500,000 or 4,500,000 washing-machines in 1965 is meaningless unless there is some way of comparing their qualitative features with those of a washing-machine produced in another country. At the present time, almost all Soviet models are the wringer type with only a limited washing capacity. To say that by 1965 they will be producing 60 percent or 120 percent as many units as we did in 1959 under the circumstances may not have much meaning. And is it possible to compare Soviet housing with that in the United States? Our emphasis is on private homes while in the Soviet Union it is on semi-private apartments with jointly shared kitchens and toilets. Finally, because the quality of production is often so poor in the Soviet Union, all comparisons remain to some degree suspect even if one finds commodities somewhat comparable in nature.
There is a further element to be considered. Although we are concerned with the consumption sector, we run into many of the problems encountered by those who measure stocks and flows in the capital goods industry. While it is necessary to consider what is newly consumed this year, it is also important that some account be taken of what was purchased in previous years, but which still is in use and continues to satisfy and serve. Thus as a larger and larger share of annual total expenditure is devoted to durable commodities, the standard of living is improved not only in the given year, but in the years of the immediate future.
The special character of durable goods consumption has two implications. First, it means that actual living conditions prior to Stalin's death were even lower than the simple retail sales data suggest, because so large a portion of consumption expenditures were completely consumed in the same year. This also means that comparative studies of relative standards of living, both with other countries and between different periods, are even more difficult than has already been suggested by various researchers. How is one to describe in statistical language the relative standards of living when one of the countries has a large stock of consumer durables and the other does not?
An attempt has been made to calculate the stock of selected appliances in the Soviet Union as they existed in 1959 and as they will be in 1965.[viii] For 1959-65, two possible estimates are offered. The larger, a projection of the revised goals for 1961, is certainly the upper limit. On the other hand, the original goals of the Seven Year Plan are not necessarily a lower limit. If anything, they may be considered a median estimate.
In order to be as conservative as possible, the counterpart American figures do not refer to stocks, but to the number of households possessing these goods. Because many own more than one, the actual American stock of goods is much higher. An extreme example is that compared with a stock estimate of 155,000,000 radios, the number of households possessing radios is about 50,000,000. Because the estimate of Soviet stocks fails to take into consideration replacement of scrappage (important, considering the notoriously poor quality of Russian consumer goods), the comparisons tend to overstate the availability of Soviet durable consumer goods while the corresponding American figures are understated.
Regardless of the sudden growth in production and sales, the stock of Soviet washing-machines will equal only 16,000,000 by 1965 at best. This would represent 35 percent of the almost 47,100,000 U.S. households possessing washing-machines in 1959. If sales increased at the originally expected rates, the figure would be 25 percent instead of 35 percent. The relevant comparisons for refrigerators is a maximum of 10,000,000 units by 1965 compared with 49,600,000 in the United States in 1959.
A similar disparity will continue to exist far beyond 1965 between other stocks of Soviet and American consumer durables. This is not meant to imply that washing-machines, refrigerators, television sets and radios are the only items to be considered in evaluating relative standards of living. Many more comparisons are necessary (and not just of material goods) before one can make a final judgment. None the less, if precise comparative considerations of such stock variables as housing and automobiles were possible, they would only work to our advantage.
An approximate indication of the difference in Soviet and American housing conditions is suggested by the fact that in 1957, each Soviet urban resident had 83 square feet of living space. Nemchinov, the Soviet economist mentioned earlier, says that the Soviet goal of 129 square feet per person will not be achieved until much after 1965. An exact estimate of comparable American data is not available. However, the most informed guess is that American living area per capita in 1950 was approximately 269 square feet, or more than double the eventual Soviet goal. Considering the housing boom since 1950, it is logical to suppose that the present U.S. living area per capita is even higher.
What does all of this imply for the United States? First of all, it appears that the Soviets are determined to match not only the heavy industrial production of the United States, but also its standard of living. In their attempt to do so, they have shown that improved retail trade is a convenient political tool for assuring public allegiance. They have also discovered, however, that in trying to overtake the United States in the pleasures and joys it derives from a high annual sales rate, they also encounter many of our problems. As long as the consumer is kept at a low consumption level, and is given more money than goods to buy with it, there is no difficulty. Whatever is produced is sold. However, when conditions improve even slightly, new troubles arise. The Soviets have found that the consumer is fickle and that demand cannot be precisely estimated and planned, as they had always assumed. Where the market is thinner, certain commodities (usually those with higher price tags) simply do not move. The result is that they must fall back on the capitalistic expedients of advertising, consumer credit and middlemen.
The standard of living will doubtless continue to improve in the Soviet Union. This is to be expected regardless of any decision about total disarmament. However, a personal visit into any Soviet apartment off the main street or a drive through any Russian village will answer the question whether the Russians will overtake the United States during the next few seven year plans. There is little doubt about the capability of Russian heavy industry. But the disparity between the simple two-wheel horse cart of the typical peasant and the supersonic Tupoliev jetliner of the transcontinental passenger is immense.
At the opening of the American Fair in Moscow, Khrushchev asserted that "after the fulfillment of the Seven Year Plan, we will need five years, maybe less, to overtake the United States in total and per capita production." Even if this were so, he should know that overtaking the United States in production of specific commodities is not enough. Production must be sustained over a long enough period of time to allow the acquisition of these items by the average citizen. This is not to say that the Russians will never have a stock of consumer durables as large as exists in the United States; but considering the distance to be overcome, and the past record in regard to consumer goods, the possibility of the Russians catching up within the present generation seems very remote.
[i] Janet Chapman, "Real Wages in the Soviet Union, 1928-52," Review of Economics and Statistics, May 1954, p. 147. Even though it is probable that there were more workers per family in 1952, consumer goods production was always of minor importance.
[ii] Voprosy Ekonomiki (Problems of Economics), no. 8, 1959, p. 55. Naum Jasny disputes the increased sales figure of 170 percent. The Soviet 1956 Statistical Handbook: A Commentary, Michigan State Press, East Lansing, 1957, p. 178.
[iii] For a more detailed discussion of these as well as the preceding category of changes, see the author's "Marketing--A Lesson for Marx," Harvard Business Review, January-February 1960, p. 79.
[iv] Tsentral'noe Statisticheskoe Upravlenie, Narodnoe Khoziaistvo SSSR v 1958, Gosstatizdat, Moscow, 1959, p. 704, indicates that radio, watch and bicycle sales in 1958 were lower than in 1957 and/or 1956. The First Deputy Minister of Trade of the R.S.F.S.R., D. D. Korolev, during a visit to Boston recently, stated, "A few years ago we discovered that we had produced too many radios and cameras. We produced more than we could sell under the existing conditions."
[v] Sovetskaia Rossiia, July 1, 1959, p. 4, describes the price reductions. The issue of August 16, 1959, p. 4, outlines the procedure for installment sales.
[vi] Joint Economic Committee of the United States, Comparisons of the United States and Soviet Economies, Washington, G.P.O., 1959, 1, p. 222.
[vii] The following statistics are derived from Planovoe Khoziastvo, No. 2, 1959, p. 63, Electrical Merchandising Week, January 18, 1960, p. 35, and Pravda, January 22, 1960, p. 3.
[viii] The past sales figures for 1950 to 1959 are found in Sovetskaia Torgovlia (Soviet Trade), Gosstatizdat, Moscow, 1958, p. 57, Sovetskaia Torgovlia, January 1959, p. 12 and Pravda, January 22, 1960. The original 1965 figures are given in Vestnik Statistiki, no. 5, 1959, p. 91, and the revised figures are derived from Pravda, October 16, 1959. To obtain an estimate of existing stocks, it is necessary, however, to find a sales figure for the years prior to 1950. Since sales of most consumer durables before 1950 were almost nil, the danger of making any significant error is small. If anything, the estimates are purposely high. The figures for the United States are taken from Electrical Merchandising Week, January 18, 1959, p. 59.