Soviet citizens were probably relieved at the selection of Mikhail Gorbachev as general secretary of the Communist Party of the Soviet Union, for he stands in sharp contrast to his aging and ailing predecessors. At 54, he is young enough to be their son. More important, the mortality odds are that he will be around for a decade or more to implement those programs he wants. The likelihood of such continuity is in itself an important change. Also impressive are the speed and the purposefulness with which he has assumed control and addressed himself to the country’s problems. This is clearly a man in a hurry who realizes he has to deal with some significant dilemmas, particularly in the economic sphere.

Gorbachev’s tasks are not simple. His immediate concern is to halt the industrial decline which set in just before Konstantin Chernenko’s death. Production during the early part of 1985, especially in February, was very disappointing. Output dropped in more industries than not. To some extent, this was due to the very cold weather this year, and to the chance of an extra working day in early 1984. But whatever the explanation, the production decline strongly resembled that faced by Yuri Andropov after Leonid Brezhnev’s death. Then, as now, the new leader moved with dispatch and immediately began to fire key officials. In the limited period he was in power, Andropov fired over 20 ministers and deputy ministers, along with 20-30 percent of the party and government officials at the local level. This not only served to rid the system of incompetent and corrupt officials but also to warn others that unless they put in more and better efforts they might be next.

In the short run, Andropov’s "get tough" strategy worked. Under Brezhnev, Soviet work habits had deteriorated; alcoholism, corruption, inefficiency and disinterest made poor quality and decreased output inevitable. As the former head of the KGB, Andropov realized full well the source of the problem and moved quickly to try to correct matters. By emphasizing discipline (in a single speech he used the word "discipline" 13 times), he managed in a few weeks to reverse the drop in production and "to get the country moving again." Like Andropov, Gorbachev has already found that the even stronger medicine he has prescribed has an impact. Economic growth has, in fact, accelerated.

In addition to the emphasis on discipline, however, Gorbachev has added an emphasis on "intensification." By intensification, he apparently means retooling of industry, but the word in the Soviet context also means more efficient use of equipment, which in turn implies greater discipline as well. Gorbachev stresses the need to intensify the development of the machine tool industry. He apparently believes that if better and more energy-efficient machine tools can be produced, many of the Soviet technological and economic problems will be solved.


All of this is fine in the short run, but increasing the output of steel and machine tools does little to fill the Soviet Union’s long-run needs. The Soviet Union already produces twice as much steel as the United States and two or three times the number of machine tools. However, the long-run needs of the Soviet Union are much more complex. It is not so much a question of more, but rather of better. The Soviet Union must improve the quality of production and, more important, find some way to foster innovation and master the production of the new high technologies, including information technologies—computers, computer-aided design and manufacturing, microprocessors, fiber optics, ceramics, electronics, copying machines, robots, lasers, optics, and bio- and medical technology, products seldom the center of Gorbachev’s concern.

The inability to invent and master the production of such products, or in many instances even to copy their production when imported, is perhaps the Soviet Union’s most serious economic shortcoming. The solution to these problems will not come overnight nor will it come about simply from improving discipline. If Gorbachev is to solve the Soviet Union’s economic shortcomings, he must impose on the country a structural economic reform—or, as he has called it, "a profound transformation in the economy"—that will set free the Soviet Union’s inventive, productive and investment spirits.

The implications of such a far-reaching reform are potentially very disruptive. For a starter, most proposals involve the abandonment of central planning. It is ironic, but because the alternatives are so far-reaching, the more successful Gorbachev is in reinvigorating the Soviet economy in the short run, the more likely he is to encounter opposition to any long-run structural change. If things appear to be going well, why take the risk? This paradox explains the reaction of the chairman of the State Planning Committee (GOSPLAN), Nikolai Baibakov, to the improved production results during Andropov’s first few months in power. When asked about the prospects for extensive reforms, he replied that since the economy was again growing "normally," there was no need to give up central planning. Since the Soviet Union was growing faster than many Western countries, why give up a good thing?

In some ways, it is too bad that Brezhnev did not live another four or five years. Then the structural shortcomings, which he did nothing to correct, would have been highlighted more and presumably Baibakov would have been less complacent. Baibakov might not have been so smug if the Soviet Union had undergone severe political and economic convulsion comparable to China’s Cultural Revolution, or that experienced by Hungary. After their trauma it was clear to the Hungarians and the Chinese that the status quo, or even marginal improvement, would no longer suffice. Luckily for the Soviet Union, it has so far been spared such trauma, but in the long run, this good fortune may actually impede Gorbachev’s efforts at meaningful change. In other words, the Soviet Union might have been better off if it had been worse off.

For Gorbachev, then, the long-run challenge is the Soviet Union’s inability to master the new high technology that is sweeping the rest of the world. Whereas in the developed and many developing economies the microprocessor is becoming increasingly sophisticated and already has become an essential component of almost everything from toys to production processes, in the Soviet Union it is just beginning to appear.

The Soviet technological lag is compounded by the fact that the life cycle for modern high technology products is seldom more than two to three years. That means that today’s products become obsolete faster than ever. The rapidity of technological innovation is a significant change from two decades or even a decade ago, when the product life cycle was more likely to stretch a decade or more. In those days, before the advent of cheap semiconductor chips, product change generally meant little more than a change in style or a new set of tail fins. With the advent of process control, minicomputers and robots, even heavy industry operations such as steel mills and automobile factories have changed markedly. Forty years ago, if you had seen one steel mill or one automobile plant, you had seen them all. Today they are continually evolving.

The emphasis on high technology has been accompanied by an increased role for services. Engineers, scientists, secretaries, repairmen, installers, customer representatives, salesmen and consultants have all become a much more important part of the production process. Only about 30 percent of the employees in most high technology companies are actually blue-collar workers. The rest are service employees of one sort or another. That is a very different profile from the one that exists in the traditional heavy industries.

Changing technology and an increasing role for services have become a much more important, if not the most important, ingredient in economic growth. Marx would say that the mode of production has changed, but the Soviets have not yet responded to the changing nature of technology and services. Services, for example, are still regarded as frivolous. The Soviet Union’s strength has always been in its ability to mobilize large amounts of capital in an economically poor or backward environment and, year after year, to invest that capital in basic industrial products such as steel mills and machine tool factories. This worked well for decades because technology was so stable. Indeed, the Soviets considered "obsolescence" to be an artificial creation of the capitalist world. Foreign businessmen have been struck by the fact that the Soviets use imported equipment as much as two or three times longer than Western managers operate similar equipment. In effect, Soviet managers use one blueprint over and over again. As a number of Soviet economists have acknowledged, this was the essence of the Soviet central planning system.

There is little doubt that if technology had remained relatively stable, the Soviet economy probably would have continued to perform well relative to the rest of the world, in much the same fashion as it did until the 1960s, and Gorbachev would have fewer problems. But as Gorbachev himself has acknowledged, "In the early 1970s, pronounced difficulties in [Soviet] economic development became evident." Technological change has become increasingly important, and as a consequence, the Soviet centralized planning system and the central mobilization and control of capital have become increasingly counterproductive. As Marx would have said, the central plan has become a fetter.

Central planning in the Soviet Union penalizes rather than encourages innovation. Soviet industrial ministers and factory managers have traditionally been rewarded for producing more, rather than improved, products. Any manager who shuts down the production line in order to change models or upgrade product quality risks a drop in production and thus a drop in his or her bonus. Seldom is any bonus provided for better quality. Even when managers want to innovate, they invariably find it impossible to obtain the necessary capital funds for any innovation not anticipated well in advance.

By contrast, what is important in the high-tech industrial world of today is not the centralized mobilization and allocation of capital but flexibility and quick response time. In most societies, response time is usually faster when there are decentralized sources of capital. A few bureaucrats sitting in Moscow making ponderous committee decisions involving massive sums cannot deal with the high risks involved and the rapid product turnover of the high-tech economy. That requires many decision-makers with immediate access to varying quantities of capital.


Some Soviet economists are aware of the unsuitability of the Soviet economic system for the new technology. As early as the mid-1960s, when the disparities and the rate of technological change were not as pronounced as they are now, the so-called Liberman reforms were aired. This was an effort to decentralize control and replace the role of production quotas with a new emphasis on quality and profits. Unfortunately, the reforms were quickly circumscribed by bureaucratic obstruction, and there was little to show for the effort. Yet the debate about the need for reform continued.

More recently, academicians Tat’iana Zaslavskaia and Abel Aganbegian, of the Academy of Sciences in Novosibirsk, have written particularly penetrating analyses of the problem. Both call for a thorough reassessment of the suitability of the central planning system. Other specialists such as Evgenii Ambartsumov have gone so far as to advocate a return to the New Economic Policy (NEP) of Lenin, with its legalization of a market and small private enterprises. Outside the U.S.S.R., countries which once adhered to the Soviet economic model—such as Hungary, China and even Bulgaria—now have concluded that progress and industrial competitiveness lie in a different direction. The Chinese have even begun to question the very relevance of the ideas of Marx, Engels and Lenin for some aspects of modern-day economic development.

In contrast, the Soviet bureaucracy staunchly defends central planning. As unsatisfactory as the present economic situation may be, Soviet authorities worry that meaningful economic change may produce unpredictable results. Reform of the central planning system would almost inevitably mean a greater reliance on the market and on prices. Such a shift brings with it the threat of disruption. Even under the best of circumstances, market systems are afflicted periodically by unemployment and inflation. Certainly this has already happened in Yugoslavia, Hungary and China.

Soviet leaders repeatedly denounce unemployment and inflation as two intolerable aspects of capitalist life. For the record at least, the Soviet Union has no unemployment or inflation. In reality, however, there has been unofficial inflation. One estimate puts it at about four to five percent a year or more. Similarly, there is unemployment, but it is disguised by the inefficient use of workers.

This situation has led Soviet officials periodically to authorize experiments to discover whether enterprises can reduce their work forces and still increase production. The inducement is the promise that the wages not paid to the workers who were fired will be shared, at least in part, by those who stay. When in 1968 the Shchekino chemical plant near Tula significantly reduced the size of the work force and yet increased factory output, it was widely agreed that if similar experiments were introduced in other Soviet factories the same thing would happen. But even though overemployment is the norm and the Shchekino results were promising, the experiment was not widely replicated.

One explanation has to do with the dynamics of the Soviet bureaucratic system. Soviet planners decided that if the Shchekino factory could do so well by cutting off the first layer of surplus labor, it could do even better by cutting off the second layer and raising the work norm, and so on. Most Soviet managers and workers quickly concluded that the Shchekino example was a treadmill to be avoided.

There was also criticism from those who were fired. A reasonable number simply found jobs elsewhere in the plant. But many workers were not so fortunate. To them, being fired was little different from what happens in the capitalist countries. This was a breach of the implicit social contract that supposedly compensates the Soviet population for a lower standard of living and more stringent political controls.

The social contract provides for law and order and a slow improvement in the standard of living, without inflation and, most significant, without overt unemployment. As the Soviets see it, the right to a job is as important, if not more important, a human right as the right to free speech. That is why the Soviets insist that only their system with its guarantee of full employment offers truly meaningful human rights to its citizens. In fact, the new Soviet constitution adopted in 1977 has a clause guaranteeing each citizen a job. Any reforms that jeopardize this commitment in a significant way are likely to generate enormous bitterness and, ultimately, political protest.

Because the Soviets have been using state control and central planning for almost six decades, the distortions that have developed during that time are considerably more pronounced and thus more difficult to deal with than those facing the Yugoslavs, Chinese and Hungarians, who have had a shorter history of using the system. There is no way to measure the exact size of the economic disproportions within the Soviet economy but some idea can be obtained from the size of the subsidies that are paid. The annual subsidy for the production of meat and milk totals 40 billion rubles (about $52 billion a year), and still there are shortages. The annual housing subsidy totals 6.5 billion rubles (about $8.5 billion). Similar subsidies are also required in other basic sectors; the coal industry, for instance, continues to operate at a loss, despite a considerable increase in wholesale prices in January 1982.

Another distortion is the large consumer savings. In 1983 the increase in savings bank deposits alone of 12.6 billion to a total of 187 billion rubles actually exceeded the 10-billion ruble increase in retail sales. Thus enormous disposable income is available, largely accumulated because of the relatively poor selection of consumer goods in the shops. Were the state to unleash market forces, this disposable income would constitute an enormous potential for inflation.

Some Soviet economists have argued that the transition to a market system need not be so traumatic. It could be done piecemeal, as in Hungary or China. The case of Hungary seems to indicate that piecemeal change is possible without too much disruption. Efforts to reduce the scope of Hungarian central planning began as early as 1957. The role of the market was increased further in 1968, and again recently, without dispensing completely with the central plan.

Can such piecemeal change work in the Soviet Union? The Soviet Union is different enough from Hungary to cause doubt. With some reason, Soviet economists explain that Hungary is much smaller in size and population. The Hungarian population is relatively homogeneous; working with 273 million diverse Soviets versus 11 million Hungarians makes a big difference. Nor should it be forgotten that the last time the Soviets authorized economic and political decentralization was right after the revolution, when several of the republics tried to declare their independence. Much of that sense of nationalism remains today and, in a market-oriented, decentralized economy, might reexpress itself in similar calls for political independence.

There are also some questions about just how successful the piecemeal reform in Hungary has actually been. Hungary has done well in agriculture, but Hungarian industry is still a long way from being internationally competitive. Also, the benefits of the reform have not been shared equally. In China as well as Hungary, the private landlord, peasant and shopkeeper classes have profited at the expense of the bureaucracy and the army, engendering considerable resentment.

To reform gradually, the Soviets would have to find ways to integrate the central planning process and the market, each of which leads to different and sometimes contradictory allocation results. In effect, they would have to deal with an economy heading in two different directions at once. A story still being told in Moscow about the effort made to improve Moscow’s traffic illustrates the fear of a collision. "The British have an efficient system; let’s switch traffic to the left side of the road," argued one Moscow authority. A wiser head warned that the switch might be too confusing if made at once. Instead, he proposed that only trucks and taxis with the most experienced drivers move to the left during the first stage of the experiment. Passenger automobiles would continue on the right side of the road for another six months, so they could prepare themselves, at which time they too would move to the left.

Not surprisingly, some of the initiatives adopted by Andropov and emphasized by Gorbachev, designed to "enhance the independence of enterprise," collide with the realities of the central planning system. The reform of July 26, 1983, initiated by Andropov, allowed a few industries to take a portion of their profits and place the money in a special development fund. The money from this fund was to be used by the manager to supplement the machinery assigned to him by the central planners. It was Andropov’s assumption that a measure of this sort would stimulate enterprise managers to greater productivity and innovation.

As anticipated, the enterprise managers accumulated large sums of rubles in their development funds. They soon discovered, however, that those rubles had no value. In a centrally planned economy, it is not money but allocation authorization that counts. As S. A. Sitaryan, the vice chairman of GOSPLAN, pointed out, "It is all very well to tell enterprises they should use the development fund to improve their technical equipment. But unless the development fund also provides the enterprise with the actual material resources, the whole effort is meaningless." In other words, it is not as easy as it might seem to graft features of a market economy onto a centrally planned economy.

If piecemeal reform is difficult, why not a comprehensive change? Some Soviet economic theorists argue that a massive switch from the central plan to the market can be implemented without enormous price fluctuations and significant unemployment, provided known monetary and fiscal tools are used. In theory at least, a skillful monetarist might be able to drain excess money from the system. This would take much of the pressure off prices and prevent too many windfalls. Yet even if the monetarist approach proved effective, it is hard to see how the Soviets would be able to reduce their output of obsolete steel without closing down some Soviet steel mills—and therefore generating unemployment. Conversely, the start-up of production of highly sought-after products such as computers or blue jeans would most certainly command high prices and, for a time at least, create windfall profits.

Theoretically, sophisticated monitoring of monetary and fiscal policy may reduce the magnitude of the disproportion, but since such techniques have not been used since the revolution, where will Soviet leaders find anyone with the requisite monetary and fiscal skill to implement such policies? Assigning a Soviet official the task of fine-tuning the economy by using money supply and tax policy measures would be like assigning a railroad engineer who has never flown before to fly a Boeing 747. It is not impossible, but it has its risks.

There is also the question of whether Soviet citizens will be responsive to less paternalistic economic stimuli. For over six decades now, Soviet workers have learned to live with a system that has discouraged initiative. A system that requires more responsiveness on the part of the individual workers is likely to meet with resistance. Admittedly, the growth of the second, or underground, economy in the Soviet Union indicates that there are still many Soviet citizens who have no trouble adjusting to a market environment. Yet success in the second economy does not necessarily entail an ability to cope with the market system as a prevailing norm. As a minimum, it is likely that the transition period would be difficult and lengthy, which means that Gorbachev would need patience and persistence in the face of confusion, qualities that his predecessors have not shown.

Nor can it be assumed that if agriculture were to be decollectivized, as in China, the Soviet peasant would respond as positively as the Chinese peasant. Unlike the Soviet peasant, the Chinese peasant uses very little machinery, chemical fertilizer or other capital inputs; Chinese agriculture is much more labor intensive. This means that it is not enough simply to unleash the Soviet peasant. For there to be a meaningful change in Soviet agriculture, something will have to be done simultaneously to "unleash" the market so that the newly motivated Soviet peasant will be able to obtain the necessary machinery, seed, fertilizer and storage facilities.


So far our discussion of the reform measures Gorbachev must undertake has focused primarily on how he must increase managerial and worker initiative. That is essential, but nonetheless only a first step. If Gorbachev intends to make the Soviet Union a contender in the world of rapidly changing high technology, he must also alter the way capital is accumulated and allocated. In effect, he must open the Soviet Union’s capital markets. This is so far-reaching in its implications that even the most thoughtful Soviet economists have avoided discussion of its ramifications. This may be because of their inability to appreciate the need for such a step or because they are worried about the ideological implications.

The Soviet system of centralized capital mobilization and allocation is counterproductive in the new age of high technology. The best way to generate greater flexibility, faster response time and an emphasis on service is to create a large number of independent decision-making bodies. But if this were done in the U.S.S.R., it would mean the breakup of the state monopoly over capital resources. Even that might be tolerable if it were still possible to retain control over the subcontractors. In all likelihood, however, once local authorities gained actual control over capital, the power of the central authorities would weaken. As this happened, priorities would be likely to change.

It is unlikely that the local authorities would continue to place so much emphasis on heavy industry and military expenditures. Having been deprived for six decades of material conveniences, local decision-makers both in industry and agriculture will find it hard to resist self-indulgence if they have the opportunity to make their own investment decisions. This is what seems to be happening in China. Professor Nicholas Lardy of the University of Washington reports that, now that the peasants have money to invest, 50-60 percent of their funds are going into peasant housing, rather than into production. Stalin warned Bukharin in the 1920s that there would be a similar diversion of resources if the peasants were not collectivized.

Decentralized investment in turn would be likely to spawn decentralized efforts, as in China and Hungary, to raise capital. This could lead to the creation of a capital or even a stock market to facilitate the generation and channeling of those funds. As ideologically far-fetched as it may be, the Hungarians have already established a rudimentary bond exchange associated with the state development bank; the Chinese are debating the implications of reopening the Shanghai stock exchange and have already had two public stock offerings.

Once a communist country has embarked on a course of far-reaching economic reform, it is hard to see how such ideologically distasteful measures can be avoided for long. If for no other reason, a financial market is needed to provide a balancing or rationing function. One problem continually plaguing communist countries without a developed financial market is the overexpenditure of capital funds. Again, this is not a malady unique to communist countries, but it seems to be more of a problem for those economies without developed financial markets than for those with them. Granted, as recently as five years ago there were few who would have suggested seriously that Hungary and China would even be discussing such steps today. Nevertheless, in its role as defender of the faith, the economic and ideological implications for the Soviet Union of taking such steps are reason enough to question whether the Soviets will ever even attempt such heretical measures.


The Soviet bureaucracy is perhaps the greatest obstacle to economic reform because such reform threatens their hold on power and their economic well-being. Any reform which attempts to separate economic activity from state administrative control promises to be particularly disruptive. Vast power, heretofore the domain of the bureaucracy, would be transferred to the market and individual enterprise managers. Consequently, the natural temptation on the part of the presiding bureaucrat is to obstruct rather than facilitate such a transition. Short of some radical purge or institutional upheaval, the likelihood is that party and bureaucratic interference will continue as before. Gorbachev will not find it any easier to deal with the Soviet bureaucracy than did his predecessors.

It is instructive to examine how the Chinese and Hungarian bureaucrats behave when confronted with an encroachment on their prerogatives. Resentful of the new power and wealth of the small entrepreneur, local Chinese authorities in Manchuria, for example, have begun to impose a multitude of taxes on the newly created private enterprises. The new taxes include levies for the care of drunkards, for colored lanterns and for gardening. However ennobling the purpose, these taxes eat away at the incentives for the newly established entrepreneurs and thus undermine the whole effort. Hungarian bureaucrats have adopted similar tactics. On the one hand, party and state officials "enunciate new policies" and, on the other hand, they "interfere with their implementation" by "siphoning off the profits" or by "the expropriating of local tax revenues."

János Kornai, a Hungarian economist, has emphasized how bureaucratic interference subverts the effort to give greater independence to enterprise managers. He finds that the more the bureaucracy interferes, the less willing managers are to assert their independence and respond solely to market mechanisms. There is a critical point beyond which too much administrative interference negates the effect of the market, which in turn then renders meaningless price and other economic stimuli.

Even if the market were to operate unimpeded, there is no guarantee that Soviet managers would respond properly. Few of them have ever experienced a market environment. To operate in a centrally planned system requires one set of skills—the ability to procure supplies and produce quantity, whereas to operate in a market environment requires another—the ability to cater to and generate demand, and to produce quality and variety. There is no reason why those with one set of skills should necessarily have the other. Thus, those who have succeeded within the Soviet system, which prizes the ability to produce quantitatively, have reason to fear that they will be unable to succeed in a system that prizes the ability to produce qualitatively. Consequently, their opposition to change and the unknown is understandable.

In addition to losing political power, both enterprise managers and party and state bureaucrats have reason to fear a diminution in their relative status as consumers. Heretofore, only the nomenklatura, or elite, have had access to the special shops of the communist world. There they find the best the state has to offer at officially set low prices. The other members of society generally do without or on occasion worm their way through the second economy.

With an open economy, the special shops will lose their meaning. Access to quality goods will no longer be a question of status but of money. In all probability, the higher-quality and more imaginative goods will find their way to the private markets and fetch higher prices. This is already the case in China and Hungary, where there is resentment at the ill-gotten gains of the "money-grubbing" and newly rich shopkeepers. As one member of a leading cadre family in Beijing complained to me last summer, as a result of the reform "the poor have become rich, and the rich have become poor." Such a reversal of roles has obvious potential for political disruption.


Finally, there is the problem of how any Soviet economic reform will deal with foreign economic influences. It is hard to see how the Soviets can continue to isolate themselves if they hope to keep abreast of current technology and export something other than raw materials. Any thoroughgoing reform is likely to involve much more interaction with the outside capitalist world than has been the case thus far. More interaction, however, will expose Soviet products to enormous competitive pressures—something they have been spared. To an economist interested in significant change, that is not such a bad thing. Indeed, a meaningful reform will seek to use the stimulus of foreign competition to generate improved quality and cost reduction among domestic producers. However, since the Soviet market until now has been completely sheltered, such an opening, even if made gently, would undoubtedly come as an enormous shock that would be reflected in numerous plant closings. This may explain why the Soviets have given so little thought to such foreign interaction when discussing economic reform.

Then there is the issue of foreign ownership. Will the Soviets allow joint ventures? This has proved to be one of the best ways to transfer and upgrade technology. It also spares the host country having to put up all the investment funds. So far, however, the Soviets have been the most rigid of all the communist countries in rejecting foreign input. Unlike Hungary, which allows foreigners to hold up to 49 percent ownership, or China, which now even tolerates 100 percent ownership, the Soviets have been hostile to the joint venture concept. In the 1970s, Soviet authorities, including several members of the Politburo, debated long and hard about entering into a joint venture with the Bendix Corporation to make automobile parts. Ultimately, they decided against the venture.

To allow foreigners to establish even partial ownership or management of Soviet facilities would make it much more difficult to insulate the population from foreign ideas and practices. The number of foreign businessmen and technicians would increase, and they would be much more intimately involved with the native work force. The KGB already has problems enough simply tolerating the presence of foreign salesmen. In a 1981 article in the journal Kommunist, the former first vice chairman of the KGB, S. Tsvigun, attacked one foreign businessman, who at the time was serving as a representative of the Burroughs Corporation, for trying to subvert the interest of the state. Imagine what would happen if manufacturers roamed around the Soviet Union looking for customers and suppliers. As it is, the custom of offering gifts and/or bribes in exchange for foreign trade contracts is already troublesome.


The challenge of high technology and what it represents is both a threat and a stimulus for Gorbachev and his generation. If the Soviet Union is to continue as a world economic power, the Soviets must master the new technology; but mastery will necessitate a fundamental change in the existing incentive and central planning process that will bring with it a host of economic, political and social consequences that are likely to threaten the very essence of the Soviet system. Yet because of the nature of the new high technology, the longer Gorbachev waits, the harder it will be to catch up.

Until recently it was widely accepted that there were advantages to being industrially backward. Let someone else make the costly mistakes that come with innovation, then import the latest technology and leapfrog ahead. That seemed to work in an era when technological changes came slowly and did not generate as much change as the computer and microprocessor industries do now. Given how the new fast-moving technologies complement one another, it becomes dangerous to fall too far behind. The Soviet Union runs the danger of becoming caught in what might be called a "systems trap": it is as if the rest of the world has accommodated itself to an AC electrical system while the Soviets are still on DC—conversion to the AC system requires a complete overhaul, not just the installation of one or two AC appliances.

The "systems trap" helps to explain why the Soviets have had a hard time keeping up with the computer and information revolution. Computer use and mastery works best when computers are interactive—i.e., when they communicate with one another. But such interaction requires a good communications system, particularly via telephone lines. In turn, an advanced telephone and communications system requires the extensive use of computers in the servicing of that network. It is not surprising, therefore, that neither has flourished in the Soviet environment. Since neither has been properly updated, it is now difficult to bring in one advanced component because it will be incompatible with the rest of the system.

The same "systems trap" helps also to explain the Soviet lag in developing a copier industry. Copiers in the Soviet Union are limited in number and are almost all of an early vintage; they are largely mechanically operated, with few if any of the electronic components that now govern the operation of modern-day copying systems. The mechanical machines serve Soviet short-run needs very well, because repairs can be made with non-electronic engineers. However, their dominance means that very few engineers are being trained to deal with machinery with electronic components and the support systems that prevail elsewhere in the world.

In addition to the economic complications, there are also ideological and security obstacles. Soviet authorities have closely regulated the use of computers and copiers for fear that they might lead to the creation of underground communications networks outside their control. Given the present political system, it is unlikely that the Soviets will be able to install a communications network and expect it to be system-friendly for computer and copier use.

In sum, Gorbachev will probably continue to hold out the vision of fundamental economic reform, but the likelihood is that he will have to settle for considerably less. He should be able to arrange for somewhat more private activity on the farms. He should also be able to manage an increase in the resources set aside for consumption, and he may also be able to increase the decision-making powers of the factory managers. But such reforms are unlikely to impinge on, much less transform, the central planning system and make it more responsive or innovative. As a consequence, the Soviet Union is likely to fall further and further behind.

The lack of far-reaching economic reform does not mean the system will necessarily collapse. With piecemeal reform the Soviets can anticipate a moderate economic growth. However, this growth will most probably be limited to the domain of the old technology, which even by Soviet standards will leave a lot to be desired. But unless the food supply system breaks down, the Soviet Union should be able to avoid political unrest and will probably continue to limp along as it has for the last decade or so. The fact that the Soviet Union has a rich raw material base should help finance such improvements and also allow the Soviets to buy some of the technology they themselves are unable to innovate.

Yet the fact remains that, without fundamental change in the existing incentive and central planning process, there is little likelihood that the Soviets will even be capable of the kind of product enhancement that the East Asian countries have achieved. This may be tolerable to the Soviet people, particularly if the rest of the world should experience an economic slowdown. But if the outside world—both capitalist and socialist countries, and especially China—shows vigorous growth and technological advancement, the pressure on the Soviet government to do something more far-reaching will grow.

Even so, while it may be acceptable for Gorbachev to allow experimentation by his satellite, Hungary, the Soviet Union, in its perceived role as "defender of the faith," will be under pressure to hold itself to more orthodox standards. That does not rule out change, but at the least it makes it more difficult to adopt the kind of radical reform being attempted by the Chinese. Moreover, the fact that the Chinese have acted first is awkward. Under the best of circumstances, it will be difficult for Gorbachev to follow the Chinese path, particularly if that path leads to what the rest of the world views as capitalism.

Gorbachev can probably settle for considerably less than the fundamental reforms he seems to envision. However, the longer he waits to transform the Soviet system economically and technologically, the larger the gap between the Soviet Union and the rest of the industrialized world is likely to grow, and the more difficult and traumatic the reform process will ultimately be.

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  • Marshall I. Goldman is The Class of 1919 Professor of Economics at Wellesley College and Associate Director of the Russian Research Center at Harvard University. He is the author of U.S.S.R. in Crisis: The Failure of An Economic System. Copyright © 1985 by Marshall I. Goldman.
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