Tag: Development Planning

Learning to plan: Revisiting the Soviet experiment

Farwa SialLeave a comment

C.P. Chandrasekhar

Read the Full Article at IDEAs website

Webinar 2 Link https://www.youtube.com/live/f0xW7fIGNEY

When in 2017 the world marked the centenary of the Bolshevik seizure of power on 7 November 1917, many were unwilling to celebrate the economic achievements of the system that the revolution put in place. Soviet socialism was a failed system, they argued—one that did not work, leading finally to its collapse. Moreover, although the collapse of the Soviet Union occurred in the 1990s, the beginnings of failure are sought in developments since the collectivization of the late 1920s, which are seen as marked by much sacrifice by the ordinary citizen with little long term benefit in terms of growth.

The differentiating features

Many of these critical analyses ignore or dispute three key elements of the Soviet experience, the implications of which go beyond the Soviet experiment. The first is the fact that the Soviet Union, despite having to muddle through in the face of extraneous constraints, did manage to replace the market mechanism with the ‘planning principle’. The advocates of the planning principle saw in it the means to (i) overcome the anarchy associated with the atomistic decision making characteristic of systems based on private property and the market mechanism; and (ii) ensure the execution of socially beneficial projects, that are unlikely to attract investments in a system where investment decisions are driven by profit. A typical example of the latter are crucial infrastructural projects.

In market-driven and profit-oriented systems, the level and allocation of investment gets determined by the “guesses or expectations of a large number of independent decision-takers (entrepreneurs), in the long run ‘revised’ by ex post movements of market prices” (Dobb, 1960). Since the investment in fixed capital that results is by definition irreversible, decision errors are costly in individual and social terms. And such errors are bound to occur, since private investment decisions must be based on estimates of prices that would prevail over the lifetime of the project. The only basis for these estimates are ‘historical prices’. But it is the independent and subjective decisions of capitalists based on historically given prices that create the capacities and generate the pattern of demand that actually determine future prices. Expectations of future costs and prices based on historical prices are bound to be wrong. So the sum total of individual investment decisions result in shortages in some sectors, and over-investment, unutilized capacity and closure, in others. Moreover, the system would be incapable of ensuring full employment. Hence a system that seeks to supersede the anarchy of capitalism must coordinate investment and arrive at “prior” decisions on the total volume of investment, its allocation to different sectors and particular projects and the technical forms in which the investment would be embodied, to maximise growth and ensure full employment. That was the essence of the planning principle.

The second element of the Soviet ‘model’ that advocates of the superiority of the market mechanism want to underplay or rubbish, is its unusual choice between emphasising capital and consumer goods production, which amounted to privileging investment over consumption in a poor country with low per capita consumption and high unemployment. The Soviet development strategy (formalised in the Fel’dman model) managed to demonstrate in large measure the ability of a state representing workers and peasants to make the “social decision” to rein in consumption growth in the short run, in order to divert investment to the production of the machines that can more productively employ workers and accelerate the growth of income and consumption at a later date. This choice was essential not just to realise ambitious developmental goals, but was the principal factor explaining the consolidation of Socialism in One Country subject to capitalist encirclement and plagued by war. Soviet success was crucially dependent on the successful implementation of that strategy.

Finally, the third aspect of the Soviet model that disturbs those who want to undermine its achievements is that despite the emphasis on heavy industry and machine production that was so crucial to its success, the Soviet Union ensured rather early in its development path that the unemployed and underemployed in its largely rural labour force were absorbed into a more productive non-agricultural sector, with improved living standards involving increased consumption levels and access to basic services such as housing, education and health. According to one careful estimate of consumption trends during the years when the post-revolution economy was stabilised and before the Second World War, total consumption in the Soviet Union increased by 42 per cent between 1928 and 1937 and per capita consumption by 37 per cent (Allen 2003).

The record

Critics of the Soviet Union not only choose to ignore these essential elements of the Soviet path but also the fact that it is one among the few (actually four) examples in the 20th century of countries that made the transition from being an underdeveloped backward country to being an advanced nation (the other three being Japan, South Korea and Taiwan, since Hong Kong and Singapore were entrepot city-states and not really comparable). At the time of the October Revolution, while Russia had seen substantial development of the railways (though not as much as the rest of Europe relative to area and population) and was home to pockets of advanced industrial development, it was predominantly a backward and largely an agrarian economy. Only a tenth of the population was employed in industry and around 15 per cent lived in towns. Given the limits to productivity advance in agriculture defined by geography and climate, accelerating growth required faster and more diversified industrialisation. And given the constraints on obtaining technology and capital equipment from abroad, investment in machine and intermediate production to raise productivity and production in the consumption goods sector was crucial.

Long term, comparative GDP estimates from Angus Maddison establish that over the period 1928 to 1970 the Soviet Union was the second fastest growing economy in the world, after Japan. And when compared with Southeast Asia, West Asia (Mideast), China, British India and Africa, its performance was remarkable, resulting in the closing of the developmental gap between the backward Soviet Union and the advanced countries. Excluding the war decade of the 1940s, GDP growth stood at between 5 and 6 per cent a year over 1928-70. Deceleration began only after that, falling to 3.7 per cent per annum during 1970-75, 2.6 per cent during 1975-80 and 2.0 per cent over 1980-85.

The period of comparison starts in 1928 because the immediate post-revolution decade included the years of turmoil or War Communism (1918-20) when the battle of the Red Army forces with the counter-revolutionary White army was waged and won, and of the New Economic Policy (1921-28) when damage caused by War Communism was repaired and normalcy restored. In the course of the former, between 1917 and 1920, the industrial economy was devastated, with output of cotton yarn, for example, falling by 93 per cent and that of pig iron by 96 per cent. Besides having to overcome such damage, two decades later, the Soviet Union played a decisive role in defeating Fascism, suffering further damage, amounting to a near catastrophe. The Second World War not only forcibly diverted resources away from development but took a huge toll in terms of the loss of human lives and capital and material resources. Yet, development proceeded at a rapid pace to reduce the income gap between the Soviet Union and the advanced nations. Seen in that light, the relative performance of the Soviet Union over 1928-70 was remarkable, to say the least.

This ability to “catch-up” in GDP terms is also noteworthy because the Soviet Union’s situation was unlike that of South Korea and Taiwan, which by virtue of being ‘frontline states’ in the Cold War had the benefit of access to developed country (especially US) markets and capital. The Soviet Union was shut off from access to capital from abroad to finance imports of productivity-enhancing equipment and had limited access to markets abroad. Also, the facts that for long there was Socialism only in one country, and that country was encircled, meant that resources had to be diverted to defence expenditures, to deter enemies within, during the civil war, and without, subsequently. In addition, the Soviet Union’s achievements in the realms of ensuring full employment, universalising education and provision of health services are without comparison.

The remarkable record of the Soviet Union is often veiled by resorting to two devices. The first is to compare Soviet achievements with targets set by the Soviet leaders and planners themselves, which in some periods remained unrealised. The second is to compare Soviet performance with that of other countries over the longer period 1928 to 1989, which includes the two decades after 1970, that were characterised by a slowdown of growth, because of the failure of the reforms that began to be instituted in the 1960s and after, in the run up to the disastrous transition that Perestroika involved. When examined over this extended period stretching to 1989, the increase in per capita GDP in the USSR was less than that in South Korea, Japan, Taiwan, Portugal, Finland, Singapore, Italy, Norway, and Thailand. If the end-date is shifted to 1991, Spain, Jamaica, and Singapore also perform better than the Soviet Union. This, however, calls for an explanation of why the performance of the period 1928-70 could not be sustained, rather than for a dismissal of the whole experiment as an economic failure.

The ‘physical’ constraints on development

The Soviet developmental achievement, as noted, was based on a significant increase in investment, and therefore a rise in the share of annual output diverted to investment. This required in the first instance the postponement of consumption increases in order to release resources for investment. But what became clear was that this investible surplus had to take specific material forms. Agricultural surpluses were needed to feed the labour force employed in the non-agricultural sector, provide industry with needed agricultural inputs, and undertake exports that earned foreign exchange needed to import some of the essential capital goods needed for industry. A part of the surplus had to be in the form of capital goods (equipment and machinery) needed to employ workers in the non-agricultural sector as well as rapidly raise their productivity. This investment goods surplus had to be substantial domestically produced since the agricultural surpluses that could be transformed through trade into machines was limited, as were the opportunities for trade. Finally, some of the surplus had to be in the form of intermediate goods to service the requirements of agriculture and industry.

Thus, there were two kinds of imperatives that faced the post-revolutionary government. First it had to make the institutional changes needed to enhance the area of control of the state, allowing it to subordinate the market mechanism to the ‘planning principle’ so as to subsequently neutralise the former. The market mechanism was not benign and would favour the better off leading to increasing equality and the restoration of capitalism. And, as noted, the market was ‘anarchic’ with competing capitalists acting on their own and no possibility of coordinating investment to reduce social waste and allocate investment in ways that maximise growth. Second, it needed to delineate and implement a strategy that would maximise growth while overcoming the structural constraints set by the country’s backwardness and its internal and external conditions.

Macro-economic policy and planning economic transformation- Prabhat Patnaik

Farwa SialLeave a comment
Webinar 1: Why Revisit National Planning

Prabhat Patnaik. Download full Paper at IDEAs Website

The case for ‘planning’, in the sense of a co-ordinated set of policies to realise, at least in some key sectors, certain magnitudes of investment and output-growth, remains as strong today for developing countries wishing to achieve economic and social transformation, as it ever was. There are at least three reasons for this. First, the pace of investment in a spontaneously-operating capitalist economy depends upon the so-called ‘state of business confidence’. The state of business confidence may be such that it leaves the economy demand-constrained for long-stretches of time; what is more, even when the macroeconomy is not demand-constrained, the mix between consumption and investment in aggregate demand may be too much in favour of consumption relative to social requirements. Deliberate intervention by the State is needed not only to overcome demand-constraints, as the Keynesians argue, but, more importantly, to alter the composition of aggregate demand, and to do so in a manner which is socially equitable. The second reason relates to the need for sectoral balance. While the previous argument remains valid even in a one-good world, an additional problem arises the moment we recognise the real life multiplicity of commodities. For a spontaneously-operating capitalist economy, the pattern of supplies adjusts to the pattern of demand through episodes of profit-inflation located in particular sectors. These provide the signals for supply-adjustments to occur over a period of time. In short, the episodes of sectoral profit-inflation are more or less protracted, less protracted, depending upon the speed of adjustment of supplies. But such episodes of profit inflation, if they are severe, protracted and relate to certain essential sectors, are capable of causing extreme social hardships and devastation. The most notable case here relates of course to the supply of wage-goods. A sharp profit inflation in the wage-goods sector can cause, and is known to have caused, severe famines. Deliberate State investment is needed to eliminate supply- adjustment lags in wage-goods and in other key sectors. In sectors like agriculture, it is essential in any case to activate private investment, i.e. for the process of supply adjustment itself. In addition, by anticipating profit inflation and activating supplies before the event, it can in fact eliminate the very need for profit-inflation, and hence the attendant economic hardships. The third reason tums on the distinction between spontaneous and non-spontaneous structural change. Even if a system is not demand- constrained, and even if sectoral imbalances are instantaneously eliminated through the perfect shiftability of capital from one sector to another, the accumulation process is accompanied by a process of spontaneous structural change. The introduction of new processes and products which are perceived to be marketable gives rise to spontaneous structural change. The market in other words responds not only to visible signals, but also to a certain range of invisible signals. What it does not respond to is a range of other kinds of invisible signals, e.g. the social discontent inherent in a situation of unemployment, poverty and sub-human existence. The latter require the deliberate introduction of non-spontaneous structural changes, and this can only be done through deliberate State intervention.

It may be thought that the elimination of poverty is a matter merely of raising the rate of accumulation further, leaving the market to decide where this accumulation goes, so that this case is merely a part of our first reason. This however is not necessarily correct. Raising the rate of accumulation, if it simply accelerates spontaneous structural change and thereby raises the rate of growth of labour-productivity, may have a negligible additional impact by way of absorbing the poor and the dispossessed into higher-paid wage-employment. And if the population is expanding rapidly, then this absorption may require rates of accumulation which are impracticably high if a reasonably meaningful time-horizon is chose. The need arises therefore for introducing non-spontaneous structural change, and curbing to an extent spontaneous structural change. Both this introduction as well as this curbing require State intervention

Taken together, these three reasons for State intervention constitute an argument for more than mere fiscal interventionism, for more than mere public investment policy. They amount to a case for the state shaping broadly the trajectory of growth itself. While this is what I mean by planning it is obviously not synonymous with central planning, with detailed output targets, that was current in the Soviet Union earlier. There would be a range of public investment targets that the State would try to meet. It would seek to realise complementary private investment targets, and hence certain minimal levels of output growth-targets in some key sectors. These would determine the overall trajectory of development, within which there would be sufficient room for the operation of the free market, with the State imaginatively improvising responses to the strains that would inevitably arise from time to time owing to the operation of such a mix between the plan and the market. As is obvious from the above, the operation of such a system is not only not predicated upon universal public or collective ownership of the means of production, but is even compatible with private capitalist (not to mention petty) ownership in several spheres, provided of course the capitalists are responsive to the social need underlying the trajectory of development articulated by the state.

II

I should like to distinguish this vision, which I think has relevance for a democratic South African economy in the current conjuncture, from two other possible visions. The first of these believes in a ‘minimalist’ State. While the need for State intervention for undertaking certain infrastructural investments which the capitalists may be unwilling to do, for providing certain social services, and for weaving a ‘safely-net’ for the poor and the unemployed (the need for which is often seen to be only transitional), is recognised, the basic solution to social and economic problems is seen to lie in rapid economic growth, and the chief means of growth are seen to lie in the provision of freedom of operation to capital, both domestic as well as multinational, in the domestic economy. Allowing markets to function without interference, removing domestic controls of various kinds, and liberalising trade, are visualised as ushering in an internationally competitive, efficient economy which would exhibit rapid and sustained growth. While a certain amount of taxation by the state is accepted as being necessary for meeting its spending obligations, such taxation, it is suggested, should neither result in domestic price-distortions nor destroy capitalists’ incentives by being excessively high (at any rate by international standards).

A variant of this argument in the South African context would state that since tax-rates here are already very high by international standards, the State should meet its expenditure obligations, especially for the uplift of the oppressed in a democratic South Africa, by privatising State owned assets. This particular argument is palpably wrong. In a supply-constrained system, an increase in State expenditure on the upliftment of the blacks would not cause any additional macro-imbalances only if there is a simultaneous reduction in aggregate demand elsewhere i.e. in other avenues of public expenditure or in private consumption or investment (apart from foreign capital inflow). Now, unless the sale of State-owned assets to the private sector results in a reduction of private consumption or investment in order to finance their purchase, privatisation financed State expenditure would cause serious macro-imbalances by generating excess aggregate demand. Putting it differently, if private purchases of State-owned assets are financed by credit-creation, then using the proceeds from privatisation to expand State expenditure is no different in its macro-impact from a straight-forward credit-financed expansion of State expenditure; while causing exactly the same macro-imbalance as the latter, it amounts to a gratuitous transfer of State-owned assets to private hands. The fallacy of this argument incidentally is a replication of a fallacy which one finds in IMF-stabilisation policy packages. For stabilisation, the Fund argues, fiscal deficits should be cut; suggesting targets for fiscal deficits is a part of the Fund’s usual ‘conditionalities’. But in calculating the fiscal deficit, the Fund takes the proceeds from the sale of State-owned assets as an item of receipt, which in general is analytically illegitimate. The Fund may have ideological reasons for treating the sale proceeds of State-owned assets as if they constituted flow-receipts, but to accept this argument amounts to subscribing to a fallacy.

Let us however get back to the vision of a ‘minimalist State’. In a ‘liberal trade’ regime, assuming a given exchange rate, assuming a given import propensity, assuming that there is no deficiency of aggregate demand arising on the domestic side, i.e. that the State and the private sector taken together spend what they get, and ignoring all capital flows and debt-servicing, the rate of growth of output would be tethered to the rate of growth of exports. Those who argue for a ‘minimalist State’, therefore, pin their hopes for rapid growth on the ability of a ‘liberal’ regime, because of its acquired international competitiveness, to achieve high export growth-rates as well as a progressive lowering of the import propensity. The argument in other words is that such an economy would hold on to, or even improve upon, its share of the world market in a period when this market itself is believed, on the whole, to be a rapidly expanding one, and to witness no further increases in restrictive trade practices.

Even if we concede for a moment the last two beliefs, the argument is an invalid one for the following reasons. First of all a ‘liberal trade’ regime is a weapon that cuts both ways. While it is a truism that, if the world market is expanding rapidly, a country that retains or improves its share of it would witness rapid growth, a ‘liberal trade’ regime is as likely to allow others to encroach upon the country’s own home market as it is to allow the country to encroach upon the markets of others. In a typical third world context in fact, it is the encroachment by others upon the country’s own home market which is the fall-out of ‘trade liberalisation’. What is more, whatever prospects might have existed for the country’s eventually encroaching upon others’ markets get sabotaged in the very process of transition to a ‘liberal’ regime; in other words, the very nature of the traverse from a dirigiste to a ‘liberal’ regime determines the eventual position the country finds itself in, no matter what potential a ‘liberal’ regime held for it in the abstract.

Trade liberalisation brings immediately in its train a process of domestic de-industrialisation (together often with a lowering of the domestic savings-ratio), which is financed by borrowings from the Fund, the Bank, and, through their courtesy, from multinational banks. The beneficial effects which are supposed to accrue to the export profile from trade liberalisation, can after all manifest themselves, if at all, only after a considerable length of time. Meanwhile, the debt incurred at the initial stage of the traverse has to be serviced, and for this a further deflation of the economy is undertaken. The unemployment initially engendered by de- industrialisation is added to by the subsequent deflation. The running down of infrastructure because of the deflation subverts to an extent the prospects of export growth. And even if perchance exports do eventually pick up, the additional exchange earnings go largely into debt-service payments, somewhat easing perhaps the magnitude of domestic deflation, but by no means lifting the economy to the promised higher growth-profile. This picture of the traverse is made only grimmer to the extent that the exchange rate is depreciated as an accompaniment to the deflationary policy. This accentuates inflation, lowers the real wages especially of the unorganised workers and gives rise to speculative capital flight. In other words, the deflation-cum- devaluation package succeeds in ensuring that the burden of domestic adjustment during the traverse falls precisely on those sections of the population which are least able to bear it.

But this is not all. The argument for a ‘liberal’ economic regime is flawed for a second, even more important, reason. If it entails freedom for capital flows, then it makes the growth-process of the domestic economy dependent entirely upon the caprices of domestic and international investors. In any case, a theoretical flaw in any conception of a free global economy, where each country accepts the world prices of commodities and adjusts its production structure to these prices, lies in the fact that, even assuming that there are no problems of global aggregate demand, the locations where capital accumulates remain indeterminate; the fact that underdeveloped countries have lower wages does not by any means ensure that capital would flow towards them, rather than away from them as has historically happened. But when we superimpose freedom of capital flows upon a situation of traverse as discussed above, the problem becomes acute. Domestic deflation, growing unemployment, accelerating inflation accompanied by repeated depreciations of the exchange rate, declining real wages of unorganised workers, and the growing discontent that all this gives rise to, together with the increasing criminalisation of the society, provide the setting for capital flight; and this only exacerbates the problem ensuring that the promised turnaround in the economy is postponed still further.