GREGORY GROSSMAN


(go to Economic Systems)

 

Excerpts from

THE SECOND ECONOMY OF THE USSR  

by Gregory Grossman
PROBLEMS OF COMMUNISM, Vol. XXVI, # 5, September-October, 1977 

 

The standard Western image of the Soviet " command economy" is one of a state-owned, hierarchically organized, centrally planned and managed, price-controlled and otherwise regimented system, rigidly geared to the goals and priorities of the Soviet leadership, and operating in compliance with a myriad of state- imposed laws, regulations, and directives.  However valid this image might be ... there is another, very significant side to Soviet economic reality, where production and exchange often take place for direct private gain and just as often violate state law in some non-trivial respect.  This is the so-called "second economy" ...  Closely tied to it is widespread corruption of officialdom.  Both exist on a large scale in the Soviet Union and in Eastern Europe, and, of course, have many analogies in non-Communist countries, both developed and underdeveloped.

 

"Second Economy"   

... the second economy comprises all production and exchange activity that fulfills at least one of the two following tests: (a) being directly for private gain; (b) being in ... contravention of existing law. ... the second economy includes much of the perfectly legal private activity which is possible in the USSR. ... legal private activity, though formally sanctioned ... is nevertheless ideologically alien to the Soviet system.  Its operating principles are sharply different from those of the "first" economy. ... in many cases one cannot practically draw a line between legal and illegal private activity, ... 

 

The most extensive and best studied part of Soviet legal private economic activity is the "private plot"...in agriculture ... It has been estimated that in 1974 private agriculture accounted for almost one third of all man-hours expended in agriculture and almost one tenth of all man-hours expended in the whole economy. The land making up the private plots invariably belongs to the state, and the cultivator pays no rent as such. For kolkhozniki, or members of collective farms, the plot has lately averaged about three tenths of a hectare (three fourths of an acre), on which not only field crops are grown, but some fowl, smaller livestock, and a strictly limited number of large livestock are usually kept as well.  Urban "garden plots" tend to be even smaller.  Still, the approximately 50 million such tiny "farms," whose area represents only about 3 percent of the national total of cultivated land, have a gross output which is more than one fourth the gross output of Soviet agriculture. ... Their logical adjuncts are the so-called collective farm markets, marketplaces where producers sell directly to final consumers and where demand- and supply relations reign almost supreme. 

Although in principle the private plot and the kolkhoz market are legal, they are quite frequently associated with illegalities.  For example, limitations on plot area and on livestock holdings may be surreptitiously exceeded; various inputs-particularly fodder, but also fertilizer, water, implements, means of transport, etc.- may be illegally obtained from the "socialized" sector; and produce may be marketed with the help of middlemen.  The collective farm markets invite violations of the law as well, most notably, the disposal of stolen goods.

 

Considerable private activity is to be found in the housing sector of the Soviet economy also.  By law, the private ownership of housing is allowed only for the owner's occupancy, with some exceptions. ... it is worthy of note that even 60 years after the Russian revolution approximately one half of the Soviet total population, and about one quarter of the urban population, still resides in privately owned housing.' What is more, as late as 1975 some 30 percent of all new housing space (measured in square meters) was completed by non-state entities: housing cooperatives, collective farms, and individuals, with the last accounting for the greatest share.' Again, while in principle such construction may be legal, there is little doubt that much of it involves the acquisition of materials on the black market, illegal hiring of construction help, unauthorized use of state-owned vehicles, bribery of officials, and other violations of the law.

 

... the law also permits private activity in certain professions,... in the provision of certain ...services ...   in a very few ... crafts and trades; in the prospecting and extraction of some valuable metals, ... in the hunting of some fur-bearing wild animals; and in some other rather exceptional instances.  Private prospectors and hunters must surrender the fruits of their efforts exclusively to the state at posted prices.  Finally, the sale of used personal objects to other persons is permitted.

Other forms of private activity in production or exchange are proscribed.  The employment of one individual by another is prohibited, except in the case of household help ... Any purchase and resale with intent to profit... is illegal ... Private possession of foreign currency or of monetary metals is illegal also, ... all transactions with foreigners are against the law.

 

Within the state sector itself, the violation of the innumerable laws, rules, regulations, norms, directives, plans, etc., pertaining to the everyday activity of managers, technicians, workers, clerks, functionaries, administrators, and everyone else, is punishable either by law or by administrative sanction.

Nevertheless, ...  the breaking of economic laws and regulations and the passing of bribes are commonplace, everyday phenomena in which virtually the whole population of the USSR is continuously enmeshed, and in which some individuals are involved on a large and at times gigantic scale.

 

How can this be determined?  Readers ...  may wonder where one obtains information on "economic crime" in the USSR. ... the accumulation of data is no problem ... The Soviet press is replete with articles on the theme, ... Similar descriptive information can be found in Soviet juridical literature and in books on such subjects as public order, auditing, "people's control," and party activity. ... Such information contains obvious lacunae.  For example, Soviet printed sources rarely mention cases of failure of law enforcement. (Naturally, the most successful illegal activities, those that go undetected, are not publicized at all.) They pass by in silence such crucial problems as corruption of the party apparat, of high government officials, and of police and other law enforcement authorities, and they fail to mention, to this author's knowledge, the startling phenomenon of the sale, for high capital sums, of governmental and party posts. .. the printed media are typically silent about any shenanigans in the vast defense sector and in the armed forces.  They may deliberately distort the facts of individual cases.  They rarely print generalizing analyses about the second economy or corruption;" and, if the authorities dispose of quantitative estimates of the overall extent and incidence of second economy activities or some parts thereof, as they probably do, such never appear in the press.  Nonetheless, a researcher can learn a lot from simply reading the newspapers.

 

Other major sources of data available to the scholar include accounts by foreign correspondents in the USSR," the scholar's own personal contacts and observations in that country, and-of major importance lately-the written and oral testimony of recent emigrants." Of considerable help, too, are similar sources in or from the Communist countries of Eastern Europe, ...   Clearly, then, there are sufficient sources of raw data on the subject to allow the researcher to assert that illegalities exist in all sectors of the Soviet economy.  Given this conclusion, it is necessary to examine the forms which these illegal manifestations of the second economy normally assume.

 

Forms of Economic Illegality         

Doubtless the most common economic crime in the USSR is stealing from the state, .. including collective farms. ... it is practiced by virtually everyone, takes all possible forms, and varies in scale from the trivial to the regal. ...  the public takes it for granted,... and sharply distinguishes between stealing from the state and stealing from private individuals. ...  one might perhaps assert that the right to steal on the job, within certain conventional limits, is an implicit but integral part of the conditions of employment in the Soviet Union.  It ... furnishes significant additional income in kind and in money to much of the public ... but also provides an important, often indispensable, basis for the second economy.

The peasant steals fodder from the kolkhoz to maintain his animals, the worker steals materials and tools with which to ply his trade "on the side," the physician steals medicines, the driver steals gasoline and the use of the official car to operate an unofficial taxi; and to all of them income from private activity on the side may be more important than the wage or salary they earn in their official jobs.    

 

An important variant of stealing on the job is the diversion and black-market sale by truck drivers of freight in their custody.  This is precisely the source of the apparently considerable amount of building material that enters illegal channels and makes possible much private, kolkhoz, and at times even state-enterprise construction.

A more lordly way of stealing, if one is highly placed, is to use the resources of one's own firm or organization to personal advantage.  The Soviet press is full of examples: have the firm build you a summer house (dacha) at little or no cost to yourself, or have it remodel your apartment in town or provide a company car for your wife.  Such illegal perquisites-in addition to the legal ones that important officials and 'managers enjoy-seem often to be taken for granted.

 

Theft from the state does not take place only on the job, however.  By all indications, a great deal of it is perpetrated by what might fairly be called professional criminals...and even by well-organized gangs of criminals capable of pulling off daring and large-scale feats.  There is little doubt that the merchandise so stolen in large measure enters the black market as well and partly feeds illegal production in the second economy.

There are also less crude forms of stealing from the state.  A very common one consists of the diversion of finished goods, supplies, or materials by enterprise managers themselves.  The goods might be recorded in the books as legitimately spoiled or lost in transit, for the books must of course show everything to be in order.  But the diverted goods in fact are disposed of on the black market, or, .. used to manufacture items that can then be profitably sold.  The proceeds ... may have to be shared with those within and outside the firm who are privy to what has happened.    Soviet production statistics may not only be overstated by managers eager to show plan fulfillment in order to earn their bonuses, but may also occasionally be understated, ...  ... in an economy with pervasive goods shortages ...  physical or administrative control over goods often confers both the power and the opportunity for economic gain to the individual, ... many take advantage of this fact.

 

Thus, when goods in high demand arrive in state-owned retail stores, it is common for salespeople to lay them aside for favored customers from which they can expect good tips, ... The salesperson usually has to split any gains with his or her supervisor, ...   the additional net income gained may easily exceed ...  the salesperson's salary and legal bonuses, ...     Functionaries in the administrative bureaucracy who handle the allocation of producer goods...and those who are in charge of waiting lists for automobiles, other major consumer durables, and housing also have considerable opportunity for graft and apparently take advantage of it,..

 Finally, ... there is widespread speculation in goods which are hard to come by.  Given the invariable maldistribution by the state of goods over time and space, and chronic shortages of many items in the USSR, the opportunities for black-market trading for profit are nearly unlimited.  The objects of speculation run the gamut from food, through foreign-made clothes purchased from visitors from abroad or in foreign currency (valuta) stores, to precious metals and foreign currency.   In addition to illicit trade there is illicit production. ... A large number of household repair and building services, typically provided by people "moonlighting" outside, or even during, working hours; ... On a larger scale are the operations of seemingly well organized migratory gangs of builders who contract themselves out, chiefly to collective farms, for specific jobs at preagreed and relatively very high prices.

 

Lastly, there are the underground entrepreneurs in the full sense of the word: i.e., individuals who promote and organize production on a substantial scale, employ the labor of others, obtain materials and machinery on the black market, and distribute their output widely.  They invest their own capital, for underground firms are privately bought and sold at capitalized values that presumably reflect their expected profitability discounted for risk. ... Large-scale private operations such as these commonly take place behind the protective facade of a state-owned factory or a collective farm-naturally, with appropriate payoffs to those who provide the cover  Another variant ... is the following: the enterprise is in fact state-owned and produces the output called for by its plan, but is operated virtually as a private firm by the manager, who pays a fixed sum or a proportion of enterprise revenue to the state and pockets the rest.

 

Widespread Corruption    

Given the plethora of administrative superiors, controllers, inspectors, auditors, law enforcers, party authorities, expediters, and just plain snoopers that beset every economic activity, legal or illegal, in the Soviet Union, anything done out of line requires the buying off of some and often very many people.  ... law enforcement officials in the USSR are apparently frequently bribed.   ... some bribes are far from petty and can add up to substantial sums over the year. ... the Russian tradition of prinosheniye  the regular bringing of valuable gifts to one's superiors .. satirized, ... by Gogol in his immortal comedy The Inspector General. ... is not bribery in relation to a particular act or event, but a general and regular way of ingratiating oneself with authority, and one which is expected by both parties.  Prinosheniye ... on a large scale it is dispensed by enterprises, collective farms, and, needless to say, underground entrepreneurs to their various "protectors." The major beneficiaries are highly placed authorities, ranging up to the ministerial level; local government chiefs; and, not least, local, provincial, and possibly higher party secretaries and first secretaries.

 

The next logical step in the development of corruption would seem to be the capitalization of expected future streams of graft, and hence the purchase and sale of lucrative official positions.  This step, too, seems to have been taken in the USSR.  Zemtsov reports the widespread purchase and sale around 1970 of high party and high government positions in Azerbaydzhan for sums ranging from 10,000 rubles for lesser posts to 250,000 rubles for that of Minister of Trade.   Who receives such capital sums?  Are they appropriated by one person in each case, or are they split among cliques of individuals?  How do the buyers of positions raise such huge amounts?  What return do they expect?  How secure are they in their acquired "property rights"?  Indeed, to what extent has an aura of property rights arisen around certain positions?  At the very least one can deduce that the purchase and sale of positions for large sums of money signifies the profound institutionalization in the Soviet Union of a whole structure of bribery and graft, from the bottom to the top of the pyramid of power; that considerable stability of the structure of power is expected by all concerned; and that very probably there is a close organic connection between political- administrative authority, on the one hand, and a highly developed world of illegal economic activity, on the other. .. the concept of kleptocracy, developed by sociologists with reference to corrupt regimes and bureaucracies in underdeveloped countries, does not seem inapplicable to at least certain portions and regional segments of the Soviet party government hierarchy.

 

Soviet Particularities       

Quite apart from the significance of the private plot in furthering illegal private economic activity in the USSR, the collective farm itself plays an important role in this regard.   The following are some of the reasons.   Formally, it is relatively easy to set up subsidiary enterprises at collective farms…..they seem readily turned into fronts for illegal private operations.  In fact, some enterprises exist on paper only and serve exclusively front purposes.  Furthermore, the farm often can provide illegal undertakings with premises, transport, and labor-all of which are hard to obtain in the city.  Finally, the collective farm is subject to less stringent controls than are state-owned enterprises and organizations with regard to conversion of bank money (i.e., deposit balances in the State Bank) into cash.  This point is crucial for underground operations which derive revenue from the state sector, because state-owned entities, which may find ways of paying for services rendered with bank money, as a rule dispose of very little currency.  Bank money must be converted into currency, however, to pay individuals for their productive contributions, to purchase materials on the black market, to grease the palms of officials where necessary, and to retain a profit for the entrepreneur himself.  The collective farm accomplishes this conversion.

Also important to the success of illegal economic activity is the role of persons in direct charge of small means of transport, i.e., truck drivers, taxi drivers, and, lately, owners of private automobiles.

 

……alcohol suffuses and penetrates much of the second economy.  Vodka… is a major object of black-market trading.    Furthermore, vodka itself occasionally serves as the means of payment of illegal wages or petty bribes.  It also functions as a standard of value, in that the price of the shabashnik's services is sometimes specified beforehand as so many halfliter bottles of standard vodka, even though the ultimate payment may be the current ruble equivalent thereof."  Soviet second economy has a geographic and regional pattern.  Since a significant component of supply on the black- market consists of foreign goods smuggled into the country by mer- chant-marine crews, port cities such as Leningrad, Riga, and Odessa are obviously major funnels that feed the second economy.  The Odessa black market enjoys high renown.  In fact, illegal private activity and corruption seem especially highly developed in the southern regions of the country, in Transcaucasia, and in Central Asia.  Some aspects of venality and illegality in Azerbaydzhan have already been cited.  However, Georgia has a reputation second to none in this respect.

 

The Georgian unofficial economy seems to have at least two distinct, if not unrelated, parts.  The first rests on the fact that for climatic reasons Georgia has a monopoly on citrus fruit production in the USSR and shares with only a few other regions considerable advantage in growing out-of-season fruit and flowers.  The state attempts to obtain these goods for distribution throughout the country (one wonders if it could handle the latter task) at prices that are a fraction of what the products bring growers in the open markets of the Soviet Union's northern popu- lation centers.  Naturally, Georgian peasants prefer the open markets.  In effect, there has been for some time now an undeclared war going on between state authorities and the peasants, a contest in which the peasants have shown enormous determination and remarkable ingenuity in overcoming the formidable obstacles which the state has placed in the way of their pocketing the large economic rent offered by the open market.

The second part of the Georgian unofficial economy consists of private activity in industry, trade, and other areas.  In form this activity may not differ greatly from what takes place in other regions, but in Georgia it seems to have been carried out on an unparalleled scale and with unrivaled scope and daring.  Eyewitnesses report significant control by the largest underground entrepreneurs over major party appointments within the republic.  …

 

Because of the greater density of economic crimes in the southern republics, any attempt on the part of central authorities to enforce the law inevitably carries with it significant implications for the general pattern of relations between Moscow and the periphery and between the Slavic majority of the USSR and the respective minority nationalities.  These relations are already complicated enough.

 

Large and Growing?       

How large is the Soviet second economy?  So far as its lawful component alone is concerned, one can refer to estimates for 1968 prepared by the US Central Intelligence Agency, which show that 10 percent of Soviet GNP (in the sense of value added) originated in the legal private sector, and that of this, 76 percent originated in agriculture, 22 percent in housing construction (completions), and 2 percent in services.  Viewed in another way, legal private activity contributed 31 percent of value added in Soviet agricultural production and marketing, 32 percent of value added in housing completions, and 5 percent of value added in services.  Before 1968 however, the share of the legal private sector had been declining steadily-in 1950 it had been 22 percent of GNP-………..  Today the legal private sector is probably rather less than 10 percent of Soviet GNP.

Now, 10 percent of GNP may not be much, but considering the country, it is noteworthy.  What is more, the legal private sector produces almost nothing aside from consumer goods (including hous- ing services) and new residential construction.  Since household consumption in 1968 claimed only about one half of GNP (at factor cost), the contribution of private value added to household consumption must have been at least 15 percent, and, in regard to household food consumption, perhaps around 25 percent. It is probably still something similar today.

 

To turn from the legal to the illegal private sector  …… not even an educated guess of size can be attempted by an outside observer.  …….. one can assert with considerable confidence that illegal private economic activities are a major and extremely widespread phenomenon that for a very large part of the population is, in one form or another, a regular, almost daily, experience.        

….. while absolute levels cannot be estimated by the outside observer, a significant increase of the illegal economy over the last 20 years can plausibly be assumed.  The diminution of terror after Stalin's death; the spread of cynicism in regard to the official economic system and party rule, reported by many observers; the boost in consumer expectations created by successes of the economy in many fields, not least in the achievement of a sharp improvement in per-capita consumption, and by greatly expanded foreign contacts-all of these trends should have been expected to contribute both to mounting demand for consumer goods and services on the black market and to greater responsiveness of market supply.

 

Significance of the Second Economy      

Does it matter that the illegal economy and corruption are large and growing phenomena in the USSR?  Cannot the same be said of many non-Communist countries as well, developed and underdeveloped?  ………It is true that the illegalities of non-Communist countries are bad enough, and in certain underdeveloped countries are extremely serious,...  But, in Soviet society economic illegalities raise some peculiar and difficult problems for the system's directors.…  It erodes the authority of the Communist Party and the legitimacy of the Soviet dictatorship…..

   Furthermore, the prevalence of economic illegalities and corruption casts doubt on the ability of the Soviet system to provide minimal material benefits to its population or to administer its own socialist economy according to its own principles and rules.  In a sense, as shown earlier, it elevates the power of money in society to rival that of the dictatorship itself, rendering the regime's implements of rule less effective and less certain.  And it redistributes income between social groups and regions and seriously complicates the conduct of regional and nationality policy.

 

Yet the regime's attitude toward "economic crimes" may well be ambivalent, ……. since economic crimes in the USSR have their positive as well as negative features ………In any case, the ability of the authorities to effectively enforce the law on all counts seems to be severely limited-more so on some counts than on others…       

To turn to the more strictly economic …… the Soviet economy is in fact significantly different in its mode of functioning and in some of its dimensions than one would gather from a study of its legal and official portion alone.  Much of our quantitative data calls for revision, although even considerable effort may not produce satisfactory results in this regard, owing to the nature of the subject matter involved. As is frequently asserted, the illegal side of the Soviet second economy adds considerably to the consumer's well-being, both by enhancing the flow of goods and services available to him, qualitatively as much as quantitatively, and by providing him with extra income …        The state depends heavily on monetary incentives-promotions, bonuses, premia, prizes, piece-rate pay, etc.-to elicit performance from its workers and employees. 

 

Paradoxically, the effectiveness of such incentives is simultaneously strengthened and weakened by the presence of the second economy  There has been some discussion of late among sovietological economists as to whether repressed inflation exists in the household sector of the Soviet- type economy.  Based on the analysis presented here, it would seem that the very presence of a large second economy, and particularly of a black market, in a sense does away with repressed inflation, despite fairly rigid control of official retail prices.    In the second economy, prices tend to be high enough to eliminate any overall "monetary overhang"  

Also in need of possibly appreciable correction are our notions of levels of personal money income in the Soviet Union. Accordingly, serious doubt is thrown, for instance, on the recent attempts in the West to reconstruct and interpret the size distribution of personal incomes in the USSR.  Quite apart from the very scanty data base available for such exercises, and despite the truly ingenious methods used to circumvent this handicap, the attempts can hardly give us an accurate picture of income distribution unless unreported personal earnings are insignificant- which we doubt -or are distributed in relation to legal incomes so as not to affect the chief measures of inequality which remains to be demonstrated.

Mention has already been made in passing of the fact that production data for some individual commodities, especially consumer goods, may require significant upward revision to account for unreported, mostly illegal, production.  Similarly, some output data call for downward adjustment, owing to the deliberate overreporting characteristic of the Soviet economy.                     

 

 

Finally, one might ask about relationships between the second economy (and corruption) and prospects for institutional change in the Soviet economy.   
      
(1)  Soviet authorities may find it necessary to increase rates of remuneration and incentive pay …… it will probably be rather futile for them to try to compete.      

(2)  They may expand the scope of legal private activities,
       
(3)  As for the likelihood of another try at economic reform (decentralization, liberalization, etc.) in the state sector, it must be borne in mind that the second economy, grafted onto the present institutional setup in the USSR, is a kind of spontaneous surrogate economic reform that imparts a necessary modicum of flexibility, adaptability, and responsiveness to a formal setup that is too often paralyzing in its rigidity, slowness, and inefficiency.  It represents a de facto decentralization, with overtones of the market.   

In any case, it seems clear that the Soviet second economy and the phenomena associated with it are here to stay for some time, and with them the social institutions and public mentality that have helped make them what they are today.

 

 

 

 

 

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