Chapter V.2 Distribution
- International Monetary Fund
- Published Date:
- December 1991
With the progressive dismantling of central planning and growing macro-economic imbalances, the distribution system has become one of the focal points of reform of the Soviet economy. The problems of the distribution sector and some possible solutions are the subject of this chapter. Section 1 discusses the systemic problems and the structure of the distribution sector under central planning, as well as economic and reform developments thus far. Section 2 analyzes the problems confronting the industry in the transition to a market mechanism, and discusses the main steps of a possible reform and the potential role of external assistance.
1. THE PRESENT DISTRIBUTION SYSTEM
a. Structure and systemic problems
The distribution sector in the USSR is made up of three major segments. First is the system for the distribution among production enterprises of material inputs. This system for allocation, which lies at the heart of the planning system, is run by the State Committee for Material Technical Supply (Gossnab), headed by a deputy chairman of the Council of Ministers. Second, there is the system of procurement of agricultural and food products from the agricultural sector, purchases of consumer goods from industry and imports of industrial products. This system is managed by the State Commission for Foodstuffs and Supplies, headed by a first deputy chairman of the Council of Ministers, and it has the overall responsibility for ensuring adequate supplies to consumer markets. In 1988, these two distribution systems employed about 1.65 million people or about 15 percent of those employed in the entire distribution system.
Finally, there is the system of wholesale and retail trade, run mostly by the Ministry of Trade, which is responsible for distribution of consumer goods and services to the population. This third system is made up of three retail subsystems, each also having a small wholesale trade sector. The retail trade branch employed about 8.4 million persons in 1988, around 6 percent of the entire labor force. The entire wholesale trade employed only 205,000 people. The total number of employees in the distribution branch in 1988 was just over 10 million or 8 percent of the entire labor force.1
There is a state retail trade system, run directly by the Ministry of Trade (some trade lines such as automobiles, medicines, and books are run by other ministries); a “cooperative” retail system (a separate government organ organized separately from the state system, concentrated mostly in smaller cities and rural areas);2 and a legal private system of collective farm markets, where privately grown or prepared food and related items (as well as surplus produce of collective and state farms) can be sold at market clearing prices.
The direct responsibility for distribution to the consumer sector lies with the republican and local authorities. According to official data for 1988, the state system accounted for 71.3 percent of the entire retail sales, the cooperative system 26.2 percent, and private markets 2.5 percent. Newly-established trade cooperatives and private operators may have provided about 1 percent of the entire retail turnover in 1989. There are reasons to believe that the data on sales in collective farm markets have been underestimated, and that this is also the case with respect to the private trade sector.
The retail trade systems also include, in addition to retail stores, public catering establishments, including many cafeterias and kitchens inside enterprises and institutions. In 1988, public catering establishments accounted for about 8.2 percent of the entire retail trade, but only part of their sales (two thirds to three quarters) took the form of meals. The rest of the sales consisted of regular deliveries of goods to employees of the enterprises and the institutes in which they operated.
Although the entire distribution system has been governed by the principles of the central planning system, there are a number of important differences between distribution among producers and distribution between producers and consumers. A well-functioning interenterprise supply system is a primary, indispensable condition for the functioning of the entire system. Traditionally, it has been at the core of the whole planned system, and any disruption in it creates bottlenecks and upsets the entire plan. In this respect, distribution at the retail level has been less critical for plan fulfillment and, until recently, consumption had a distinctly low priority in the entire system.
On the ideological level, distribution, as an economic activity, suffered (and still suffers) from two major disadvantages. First, Marxist thought regards services in general as “nonproductive” and thus inferior to material production. This is so despite the fact that all distribution activities are included as part of so-called material production in Soviet national accounting practices. In the traditional view, the distribution of goods across space and time does not carry the same economic value as their production; this helps to explain the poor shape of the logistical system of transportation, storage, and distribution. Second, a related factor is the negative approach toward “unearned” income (property income as well as “speculation” income derived from trade), in contrast to income earned through material production. The combination of these two biases against trade resulted in the almost total elimination of private trade (and services) in the USSR,3 as well as a constant effort to minimize trade markups at all stages, resulting also in a limited allocation of resources to the distribution sector.
Distribution was considered the passive outcome of the production plan. All distribution tasks were part of the plan and had to be performed accordingly. While most distribution enterprises were run on the basis of Soviet style business accounting, they had little independence, and operated essentially as a bureaucratic system. The centrally planned system created a continuing state of shortage for many goods. Shortages frequently worsened when production or distribution plans were not fulfilled, with resultant multiplier effects on the rest of production.
Enterprises responded to shortages in three main ways: first, by hoarding whenever possible, thereby accumulating substantial material reserves that were inaccessible to others and further exacerbating the shortages. Second, in response to the inefficiencies of the official distribution system, enterprises developed their own internal supply systems, producing—often very inefficiently—many of their secondary needs themselves, such as spare parts, auxiliary tools and materials. Third, enterprises made use of unofficial channels to fulfill their requirements. While such deals were to some extent beneficial, they increased the shortages in the official distribution sector as supplies were diverted to unofficial channels, and they also involved growing corruption and the development of a large “second economy,” using “company time” and materials and goods stolen from the state sector. Under central planning, a substitute distribution system for consumer goods also existed, through which goods in short supply (meat, coffee, household appliances, etc.) were distributed directly to enterprises, offices and institutions, without going through the regular retail system. This allowed planners to favor certain sectors, locations or workers, and was yet another source of corruption. No doubt it reduced the productivity level of the economy as a whole.
Another major systemic element that constrained the trade system was the pricing system.4 In the official system, there is almost no room for price negotiation and no possibility for reducing prices for fast sale of surpluses or in order to balance a market for a good in case of shortage. Prices in the production sector are determined according to a particular Soviet system of cost accounting. Given the predetermined production quantities and the production level prices, consumer prices were in theory determined by imposing a “turnover tax” or by granting a subsidy in order to match estimated demand with given supply. In practice, however, retail prices—especially for some basic foods (grain, meat and dairy products), housing rentals and public transportation—were simply fixed at low levels for extraordinarily long periods, with the difference between these prices and production costs covered by subsidies. The wide gap created over the years between prices and costs has imposed an extra burden on the distribution system.
Finally, the combination of central planning and shortages has created a permanent state of “sellers’” markets and eliminated the need for such services as marketing and advertising, voluntary trade deals and contracts, and the entire range of financial and legal services that accompany market-type trade relations. They have also eliminated the concept (and the operation) of consumer sovereignty for both intermediate and consumer goods and have contributed to the weakening of the position of the distribution system as serving the interests of the consumer. All organs involved with distribution, including the trade organizations themselves, recognize that they receive the lowest priority in the central planning system. The changing of this sentiment is one of the most difficult tasks in the transition to a market economy.
The foregoing applies particularly to the distribution system between the production and consumer sectors due to the strong bias against the consumer sector in general. In addition to the fact that few resources were allotted to the retail system (and the wholesale sector attached to it; which is henceforth referred to as “retail”), the retail system also suffered from the particularly low quality of consumer goods, more frequent disruptions in production, and generally a lower degree of fulfillment of production plans. Lines in front of stores and prolonged shopping time were the consequences, however, not only of problems associated with the shortage of goods but also of the poor distribution among stores, insufficient numbers of direct sales personnel, old modes of sale and the even lower level of other selling equipment in the stores and in the network. Indeed, it was sometimes alleged that at least part of this shifting of the burden of shopping onto consumers was deliberately planned as a means of extending the contribution of the population to production beyond the regular working hours. Finally, the fact that the entire household sector was operated on a cash basis, with no checkbooks and very limited access to credit, imposed another hardship on the population.
The system of fixed prices also contributed to very large stocks of low quality goods for which there was little or no demand at the existing prices, and which therefore accumulated at retail outlets at high carrying costs. These goods could be sold at lower prices, or be destroyed, but such measures were only taken to a limited degree. Given the uncertainty of supplies, frequent hoarding of certain consumer goods was also undertaken by households, enterprises and institutions, thus further exacerbating the shortages.
The combination of shortages and few resources, including low quality and underpaid labor in the trade sector, resulted in backward selling techniques. Specifically, this resulted from a lack of equipment, poor packaging, and the need to keep tight control over buyers. Self-service facilities were available in specialized stores until recently, but many were discontinued due to increased shortages. But even previously they existed in less than 50 percent of the stores. Most stores were still relatively small and highly specialized—each store sold a narrow range of goods. There was a very limited number of supermarkets and many fewer department stores as compared to Western countries.
The deficiencies in the distribution sector can be divided into those creating low efficiency in the use of existing resources and those limiting the amount and type of resources available to the sector; and there is, of course, much interaction between the two. The share of total resources, labor force and investment allocated to distribution was extremely small and in many cases consisted of inputs of low quality. In addition, there was an extreme shortage of transportation facilities, both in general and for specific goods. There was a very low level of specialization in transportation according to types of goods. This shortcoming was more serious with respect to food products whose maintenance—including of course refrigeration—between the production entity and the store was very poor. A similar situation existed with respect to storage. In addition to a general shortage of storage space, there was only limited specialization, a lack of loading and moving equipment, with most of the work still being done manually. Pallets, containers, and other bulk packaging materials were relatively few, heavy, and frequently in a decayed state. There was a very poor system of information on the availability and movement of products. Moreover, inside stores the same problems repeated themselves—little and poor equipment, including for refrigeration, and careless handling of goods. Prepackaging into small quantities was still lagging, which made the selling and preservation of goods more difficult.
b. A statistical profile
In the official statistics, the distribution sector is defined as “trade and public catering; material, technical supply and marketing; and storage.” Trade, which includes wholesale and retail trade, deals mainly with the consumer sector as does, of course, public catering. Material, technical supply and storage deal mostly in inputs and raw materials for the production sector. The following description covers the state and cooperative systems which are under the responsibility of the State Commission for Food and Supplies and the Ministry of Trade.5
(1) Retail trade
Between 1960 and 1988 the volume of retail sales increased by a factor of three, and significantly faster than GDP (Tables V.2.1 and V.2.2). The share of retail sales in GDP increased from 33 percent (36 percent including public catering) in 1960 to 38 percent in 1988 (42 percent). Likewise, sales per capita more than doubled over the same period. These trends are partly explained by an improving coverage of material consumption by the various trade networks, especially in rural areas.
|Stores (8-stalls) (thousands)||413.0||500.0||532.4||549.4||565.3||1.37|
|Area (millions of square meters)||17.6||31.5||46.1||52.3||56.5||3.21|
|Sales/employees (thousand rubles)||45.3||47.4||56.0||57.7||59.3||1.31|
|Sales per square meter|
|Capital/employees (thousand rubles)1||3.1||4.0||5.8||6.5||6.9||2.24|
|Square meters per store||31.0||46.2||66.3||73.7||76.8||2.47|
|Wages/employer (rubles per month)||79||120||139||132||155||1.95|
|Monthly wage (official data)||82||122||150||144||146||1.79|
|Relative wage 2||0.70||0.77||0.77||0.72||0.80||1.14|
|Sales per capita (rubles)||470||735||994||1,022||1,034||2.20|
|Per 10,000 inhabitants:|
For retail trade and public catering combined.
Implicit average wage in retailing relative to average wage in the economy.
Over the entire period, the allowed gross markup (related to sales above the costs of goods purchased for retail trade), was kept at 8-9 percent (9-10 percent, including public catering), and profits in relation to sales remained at about 2 percent, both with and without public catering (Table V.2.2). These margins are very low by international standards.
In terms of conventional inputs, since 1960 there was an increase in the capital/labor ratio, and as a result a rise in labor productivity and a decline in the productivity of capital, both per unit of sales. This is consistent with the outcome for the Soviet economy as a whole and reflects an inability to create enough technological change.
While labor productivity did increase over the period (at least until 1980), sales per unit of wages declined quite sharply, also mostly between 1960 and 1970. Over this period, there was a rise in the relative wages paid to trade workers, but this appears to have been mainly the result of large increases in relative wages in retail trade during the 1960s. The relative rise in wages of trade workers may reflect either an improvement in the quality profile of trade workers and/or an improvement in relative wages designed to raise their work incentives. Noteworthy, however, is the sharp decline in sales per unit of wages between 1985 and 1988 (which most likely continued during 1989 and 1990), which is the result of a rise in wages during the last few years that was not correlated with the rise in output.
Over much of this period, retail stocks of goods amounted to 20-25 percent of sales and have only declined in recent years, mostly as a response to the conditions of extreme market disequilibrium. These high levels of inventories were kept despite the general high level of shortages.
There are two main types of retail trade establishment: ordinary stores and kiosks (where sales are made to customers standing outside). From 1960 to 1988, the number of stores of all types grew by about 30 percent, but this growth did not quite keep pace with population growth in the 1970s and 1980s. A number of researchers have noted that the level of geographical store density is quite low in the USSR, and this situation has not improved much over the years. It may be claimed, however, that there may have been some improvement from the standpoint of consumers if the large population shift from rural to urban locations over this period is taken into account; in the city, people are closer to the stores than in the countryside.
Most of the new investment in stores was apparently directed at increasing the size of stores and replacing small stores with bigger ones. During 1960-88, the entire retail store area rose by a factor of more than three, and the average store area increased from 31 square meters in 1960 to 77 square meters in 1988. This is partly a manifestation of the urbanization process, but also of a trend of replacement of specialized stores by more general food stores and by department stores. Of the present stock of capital of the state retail system, only 14.4 percent consists of equipment and only 2.6 percent of transportation means. Since 1970 there was a very small increase in the share of the former, and a decline in that of the latter. As a result of these investment patterns, stores grew both in terms of employment size (from almost 4 to nearly 7 employees per store) and average sales per store.
With no rise in wages relative to sales and no improvement in inventory efficiency, and with a decline in capital efficiency per unit of sales, it is difficult to explain the small increase in the markup, from 8 to 9 percent of sales. Even so, there seems to be only limited improvement in the level of service per unit of sales to the consumers, especially due to the failure to correct for the extremely small number of stores (and due to the remaining low in-store technology and mode of sale).
(2) Public catering
The volume of sales of the public catering industry is only about 9 percent that of retail trade but the industry is highly labor intensive and employs nearly 50 percent as many workers (Table V.2.3). During 1960-88, the industry expanded somewhat more slowly than the retail trade industry, and along a somewhat different pattern. There was a faster expansion in the number of employees, resulting in only a very modest increase in sales per employee and in a much sharper decline in sales per unit of wages.6 Capital investment was diverted more to the expansion in the number of establishments, which did not grow much in terms of average sales or employees, but did grow substantially in terms of the number of seats, from 31 to 63 seats per establishment between 1960 and 1988. This led to a very sharp decline in sales per seat, much sharper than the decline in sales per square meter of store. Finally, also unlike retail trade, there was over the period quite a sharp increase in the markup of public catering, from 18 percent of sales in 1960 to 27 percent in 1988, and also in profits.
|Wages/employee (per month)||67.1||103.1||118.5||112.5||131.3||1.96|
|Monthly wages (official data)||68||105||128||123||128||1.90|
|Employees per seat||0.24||0.20||0.15||0.13||0.12||0.51|
|Seats per establishment||30.6||42.1||56.8||61.5||62.8||2.05|
|Relative wage 1||0.59||0.66||0.65||0.62||0.68||1.14|
|Sales per GDP||0.032||0.039||0.039||0.036||0.035||1.08|
|Sales per capita (rubles)||46.0||78.6||96.8||96.2||94.6||2.06|
|Establishment per 10,000 population||6.9||9.8||11.4||11.9||12.3||1.80|
|Seats per 10,000 population||210||412||646||731||774||3.69|
|Employees per 10,000 population||50||82||98||98||94||1.88|
Implicit average wage in public catering relative to average wage in the economy.
(3) Wholesale system
The volume of goods handled in the wholesale system grew more slowly than retail sales. However, the general storage area expanded faster than the volume of goods, as did the refrigeration capacity (Table V.2.4). The expansion of the volume of goods that needed refrigeration was somewhat less than the general expansion of retail sales. Even so, given the very low initial level of storage capacity and refrigeration, and of the quality of those capacities, the relatively small improvement was far from satisfactory. There was also an increase in the number of employees per unit of sales.
|Establishments wholesale bases (thousand)||1,216||1,381||1,699||1,715||1,708||1.40|
|Retail bases (thousands)||125||154||135||129||126||1.01|
|Wholesale secondary bases (thousands)||6,135||7,667||5,683||5,876||5,944||0.97|
|Refrigerating bases (thousands)||228||459||578||599||615||2.70|
|Area (million square meters)||2,343||4,793||6,378||7,041||7,762||3.31|
|Capacity of refrigerating bases (thousand metric tons)||766||1,752||1,999||2,181||2,231||2.91|
|Employees (per thousand)||77||153||198||195||205||2.66|
(4) International comparisons
International comparisons of the shares of retail and wholesale trade in the economy suffer from the problems of lack of consistency or comparability of the data (Table V.2.5).7 In the industrial countries, a significant proportion of those employed are independent store owners. In the USSR, until very recently, all those employed in trade were hired employees. Moreover, both the shares of employment and of investment in the trade sector are significantly lower in the USSR than in industrial countries. Likewise the share of trade in total wages is much lower in the USSR. Finally, the trade share in GDP is much lower as compared with selected industrial countries. The low shares of trade reflect the lower proportion of private consumption in GDP in the Soviet economy, as well as the completely different nature of distribution and the general bias against services discussed above. The Soviet trade shares are comparable to those of the East European countries; there appears to be a positive correlation between the share of trade in GDP and (presumed) GDP per capita (Table V.2.8).
|Of which: retail (1988)||…||3.5||…||…||…||4.8||…||7.7||…||…||…||…||…||7.8|
|Share of wages||2.8||2.6||16.2||16.1||…||…||…||12.0||7.8||8.9||15.1||14.4||11.7||12.1|
as Percent of
as Percent of
|Share of Trade Sector|
in Economy (in percent)
Various sales efficiency ratios between the USSR and selected Western countries are also notable (Table V.2.6). The differences in Soviet sales per unit of wages are much higher than the rest of the countries, but the level of inventories in retail trade is also consistently higher. The latter difference narrows, however, when the entire inventories of the trade sector are related to retail sales. The main Soviet peculiarity is thus the overconcentration of inventories in retail trade where they are less flexible to respond to shortages in the system.
Both the markup and operating surplus relative to retail sales are much lower in the USSR than in the industrial countries. The typical Western markup is in the range of 30-50 percent compared with a Soviet markup of 10.5 percent. The two corresponding operating surplus ratios are 10-30 percent and around 4 percent, respectively. The markup includes, in principle, all value added costs of distribution, and the operating surplus of all of the above, but excludes labor costs. Some non-value added type costs may also be included here and there. One particular cost included among the Soviet data is that of the loss of merchandise. According to official statistics, the total losses of goods in 1988 amounted to rub 500 million—10 percent of which was “above norm”—about 1.5 percent of total sales. This figure appears large in the light of much larger losses at earlier stages of the distribution system.
As compared with Western stores, Soviet outlets seem to be somewhat larger in terms of employment but smaller in terms of space, with a resulting higher ratio of employed per unit of space (Table V.2.7). This is one manifestation of the probably much lower capital to labor ratio in general in the trade industry, lower even relative to the Soviet national average. Given the fact that virtually the entire Soviet distribution system is run by large organizations and that there is no private sector in retail trade, the store size seems to be somewhat small in comparison with countries where individual stores are still important. Finally, in terms of number of stores, store space and employment, the level of retail service available to the Soviet population is lower than that in the West and even compared to most of Eastern Europe.8
Much more information would need to be collected and analyzed to formulate a detailed reform strategy, including the level of equipment in stores, modes of distribution and selling, the level and structure of expenses, and the qualifications of the labor force. Nevertheless, it is clear that the Soviet distribution sector is too small to adequately handle the distribution functions even in a centrally planned environment, and that under the traditional system there could also have been significant improvements had more resources been directed toward it. This inadequacy is even more apparent in the light of a transition to a market environment, in which the distribution sector must assume a number of additional functions that had not been performed by it under central planning. The seemingly higher “productivity” achieved by the sector (measured in terms of sales per unit of wages) came at the expense of the free time of consumers, of a lower level of service, and of higher rates of losses of goods for a variety of reasons. It follows that under market conditions the trade sector will have to expand significantly the number of stores, the level of equipment at all stages, but also the number of employees who will need extensive training.
c. Economic developments and reform, 1985-90
Since 1985, a number of changes has occurred in the distribution system, but the major impact on the system as a whole has been the growing disequilibrium reflected in shortages and a disruption of traditional supply links.9 The second major factor contributing to the present disruption of markets was the disintegration of the traditional system of planning and supply described in section a, without its replacement by a new smoothly functioning system.
Only a few of the changes closely connected with the distribution system should be mentioned here. Under the Law on State Enterprises which went into effect at the beginning of 1988, enterprises were allowed to sell to whomever they wished all production above their obligatory supply to the state (also to be concluded under voluntary contract), and to obtain inputs for that part of their output in similar fashion. It turned out, however, that the state did not release the allocation system for free transactions; instead, it continued to virtually monopolize the supply so as to assure the production of that portion of output covered under state orders. Enterprises therefore found it virtually impossible to produce for the free market and tried to receive the highest possible levels of state orders for which inputs were assured by the old system. Producers for free transactions could only obtain inputs at very high prices and had to price their outputs accordingly. This brought about an outcry against speculation, black-marketeering, and the exploitation of monopolistic power. There were also claims that some segments of the newly created private market had fallen under the control of organized crime. These responses tended to reduce the public’s acceptance of the notion of a transition to free markets.
In addition to the above, there was also some liberalization of prices, mostly at the wholesale level but also at the retail level. This provided producers some leeway to negotiate voluntary deals with the wholesale networks, and to accumulate experience in the operation of a freer market. The general state of market disequilibrium and the monopoly position of many industries, however, led to many cases of exorbitant price increases.
Finally, the economic reform did allow some degree of cooperative and private activity, and also the leasing of enterprises in both trade and public catering (and in other branches). According to official statistics, by April 1990, 23,400 thousand retail trade enterprises had been leased, accounting for about 8.4 percent of the entire retail sales volume. In addition, the Union of Cooperatives reported that by the first quarter of 1990 there were almost 35,000 cooperatives engaged in wholesale or retail trade, public catering, and the provision of other household goods and services.
So far the negative consequences of this transitional period, however, have far outweighed the positive ones, particularly in 1989 and 1990. Stores were much emptier and lines longer than usual, and local and general episodes of shortages of goods such as bread, cigarettes, and soap became more frequent. Basic products such as meat, sugar and butter were often rationed; residency requirements were imposed by many cities for the purchase of goods; higher proportions of agricultural products were spoiled; and many products were diverted from their traditional routes to alternative trade channels (including to state institutions and enterprises), to inter-enterprise barter deals, to various black or free market channels where prices were much higher, or were kept by the producing enterprises, regions and republics, for their own use. The pressures for economic independence by the republics disrupted the established supply network. The combination of increased excess demand and lax discipline also increased the level of corruption. In this way, despite a bumper grain crop in 1990, the government procurement commission found it very difficult to obtain grain for its system of central supply. Consequently, the price gap between official prices and those in collective farm markets widened. Between May 1989 and May 1990 most free market prices of fruit and vegetables and of meat products increased by 20-30 percent, and the typical gap between official and free prices (for the better quality goods) was a factor of three or four by official accounts.
A notable development was the worsening of the supply situation in some major cities. Traditionally, Moscow and Leningrad had been better supplied than other parts of the country. With the recent decline in the control of the central authorities, the opposite situation has occurred. Moscow and Leningrad also suffer more from black market trade in foreign currency and from the willingness of the relatively large foreign community to pay very high ruble prices in the free markets.
There are two major negative effects related to the recent developments in the distribution system. First, there is a general disenchantment—both at the political level and among the population—with the process of economic reform, resulting in calls for rationing and return to the old supply mechanisms. This endangers the success of the entire reform movement. Second, on a more technical level, there is much disappointment with the performance of the private and the partially reformed public system. Part of this frustration may be an inevitable consequence of the experimentation involved with early new modes of operation and of the very partial nature of the reforms. But part of the disenchantment comes from the major policy mistakes that led to the emergence of extreme macrodisequilibria. Not only have managers of public and private enterprises found it much more difficult to operate under such conditions, but the entire idea of free markets has lost much of its credibility as a feasible option.
2. REFORM EFFORTS
a. Requirements, conditions and directions of reforms
The necessary general direction of reforms in the entire economic system and, more specifically, in the distribution sector is clear not only to outside observers but also to most Soviet observers, namely, the movement toward a market mechanism in both production and distribution. The distribution sector should be a focal point of the reform, given the necessity to create new markets. Even under ideal conditions, the transformation from central planning to a market mechanism would be a very complex matter. Under the present Soviet conditions, it is even more challenging due to the problem of short-term market instability and the acute popular dissatisfaction with more intrinsic systemic problems.
Any reform program must include an early stabilization of macroeconomic policies that will minimize the danger of an uncontrolled inflationary process. It is unrealistic to expose enterprises and distribution organizations, in their first experience with markets, to an uncertain and unstable environment. Second, prices of most goods would have to be liberalized; at present, relative prices are so distorted that markets cannot function efficiently. In any event, it is difficult to envisage any efficient market system without at least some price flexibility. In addition, the stabilization phase might need to be cushioned with some additional reserves of consumer goods. An external infusion of some basic consumer goods (e.g., bread, milk, and meat) in the initial phase might be also needed in order to make the reform acceptable.
A third requirement for reform is the creation of a service infrastructure for the functioning of markets and of distribution, including an adequate body of laws, impartial courts, and law enforcement. Even more important is the development of the principle of equality under the law, with no preferential treatment of state entities. Also needed are functioning banking, financial and insurance facilities as well as a new system for economic and market information.10 There is also a need for a crash program for training personnel to operate a new distribution system under new rules. The training needed should be furnished by the regular educational system, specialized business schools, and, in the short run, possibly ad hoc programs. Initially much training would be done “on the job” whether in the USSR or, for some, in the West, and much learning will be accomplished from experience in response to the newly established market rules and incentives.
Fourth, the material infrastructure needs to be improved, particularly in transportation, including more adequate roads and trucks, and storage facilities and equipment of a wide range of types. No quantitative estimates of the needs are presently available, but they are clearly enormous. They will have to be shared by the public sector and by the distribution sector and there will have to be a strong sense of priorities so as to optimize the use of the very limited resources. These priorities can be at least partially established by the new independent enterprises that will emerge. There is room for international cooperation and assistance in developing both the service and material infrastructures of the distribution sector.
b. Reform of the distribution system and the role of external assistance
The basic, elemental unit of service in the distribution industry is the individual transaction between two parties. It must undergo a fundamental change, from fulfilling an order within a hierarchical setting—specifying amount, price, date and destination—to a freely determined, horizontal agreement between two parties. This will be a major revolution, the essence of a movement to real markets, and it is not surprising that this is a focus of anxiety among many of those thinking about the reforms. The concern is that during the transitional phase, the traditional supply lines would disappear without new ones forming. Against this background, the reform proposals prepared so far move carefully and gradually toward this transformation. The presidential guidelines suggest that markets are to be created in a slow and gradual fashion and that prices would be slowly liberalized, retaining central orders and control and preserving existing supply links for an extended period of time. In particular, only wholesale prices would be immediately adjusted—and these mainly on an administrative basis or subject to limitations—with a much slower movement with respect to retail prices. The possibility of rationing basic commodities is contemplated as part of a social safety net that would include also some degree of adjustment and indexation of wages, welfare payments and savings balances.11
If an adequate program of stabilization could be implemented, and markets could start operating on the basis of appropriate relative prices, then supply links on the basis of free transactions could be established so as to avoid disruptions, both at the interenterprise and retail levels. Monopolies should be restricted by eliminating all administrative regulations on regions of exclusive distribution and on lines of goods transacted by any trade enterprise, especially in wholesale trade. There should be complete freedom for all to buy and sell whatever and wherever opportunities for profit may arise.
An efficient distribution system will depend on as many firms as possible operating on a commercial basis. Several types of establishments in distribution could be envisaged. The most effective reform would be the rapid privatization of small and medium-size stores (the bulk of the retail sector). The replacement of alienated low-paid employees with independent storekeepers and restaurant owners could result in a significant improvement in performance with relatively little incremental resources. Such small-scale privatization does not entail many of the complicated doctrinal, legal and logistical issues involved in the privatization of large enterprises. The most important material improvements that may be needed include additional refrigeration facilities (in grocery stores), access to the use of small-scale transportation (such as pickups or small trucks), and improved containers. A somewhat more substantial investment may be needed in order to increase the number of stores, which at present are too few for adequate service levels and to assure enough competition. This process could be augmented by the expansion of collective farm markets.
Similarly, somewhat larger stores, and small wholesale organizations could be privatized by the creation of cooperatives or single-ownership enterprises. Such enterprises could also provide the important link between smaller stores and bigger suppliers. In addition, associations of store owners could provide the basis for the creation of wholesale supply systems for their members.
The most serious obstacle to the creation of such a sector of small operators is the present monopolization of supply at the wholesale and production levels. One solution would be the establishment of medium-sized private cooperatives and companies operating on commercial criteria, on the basis of the existing urban and rural wholesale organizations, provided that all exclusivity regulations are removed. This alone would immediately provide markets with enough competition to avoid monopoly power in distribution. Enterprises should also be allowed to open their own stores or store chains.
The same pattern of development could take place within the production sector, where existing supply bases will be at least commercialized (see Chapter IV.2) and where many previous enterprise informal “expediters” could become purchasing or marketing agents of companies, or establish their own supply bases. The likely model is that major supplies will be contracted directly by enterprises while auxiliary and secondary inputs will be purchased from the newly established companies.
Privatization or commercialization of the larger stores or store chains is much more complex on all counts, and could be expected to take longer. In addition to the internal problems, there are also the constraints imposed by the lack of business, logistic, technological, and human resources. Assistance in the establishment of a truly modern large-scale distribution sector that could provide the leadership role of reform in the sector might be provided through cooperation with large supermarket and department store chains and producer-marketers of consumer and producer goods in Western economies. The cooperation could take the form of joint ventures with existing Soviet state or cooperative chains; direct investments by Western companies; and technical assistance and training programs.
The benefits of foreign investment to the Soviet economy are self-evident: such operations could provide the Soviet distribution sector with new marketing, selling, management and business technologies, and could be joined with existing wholesale and supply organizations, either by purchase or by forming joint ventures. They could provide a base for the training of a new generation of sales workers, sales managers, and marketing experts. In the Soviet environment they would play a very important role as the setters for product quality, packaging, and punctual delivery. In this way the traditional Soviet pyramid of command, from production down to distribution, would begin to be reversed. Eventually, the raising of standards for manufactured goods could even lead to the development of competitive exports in this area.
There are many domestic obstacles in the USSR to the operation of foreign companies, which should be tackled as quickly as possible.12 The main obstacle is, however, the convertible currency constraint—the inability to raise convertible currency revenues for profit-remitting purposes. The present situation, under which the main scope for a foreign company to operate in the USSR and transfer profits is by creating exports, excludes the opportunity for foreign investors to attend to some of the most pressing and high priority needs of the Soviet economy, which are domestic. In the longer run, improvement in the production and quality of some consumer and other goods may provide a better base for export generation or import substitution. Early progress towards convertibility of the ruble will therefore be an important step towards providing foreign participation in the services sector. Under conditions of freer markets, and given the initial state of the Soviet distribution industry, there should be ample potential for profit-making, and therefore there should be adequate incentive to attract foreign investment in the distribution sector. At the same time, foreign investment would provide a spur to increased competition on the domestic market.
The impact of foreign participation, however, would take a few years to produce tangible results. It would usually involve, in addition to working out the business contract, construction and equipment. Early efforts might be concentrated on cooperation with existing trade organizations, which could take the form of technical and managerial assistance; training programs; assistance in arranging orders and contracts on a new basis; setting up the nucleus of a marketing department; and the supply of essential equipment, such as computers, communications equipment and software for inventory and shipment management. Such cooperation could also establish the joint planning and consultation bodies that could design and implement the next stage in the establishment of fully fledged distribution enterprises. Western technical assistance to city councils on programs of reforming and commercialization of their distribution organizations might also be useful.
Foreign participation might also be beneficial in the production sector, through joint ventures in supply companies, technical assistance with respect to the establishment of marketing departments inside enterprises, and the establishment of various enterprises that serve the distribution industry (see section 2a). A number of essential infrastructure projects in transportation, storage, communications and information technology could also benefit from extensive foreign involvement.
Perhaps the most difficult obstacles of all, however, are (1) to bring about a change in Soviet managers and distribution employees from a seller’s market mentality to that of a buyer’s market, and (2) to end their almost exclusive focus on problems of material production to the exclusion of the key role of the distribution system in satisfying consumers’ demand and creating pressure for improvements and better performance in the production sector. Immediate attention to the distribution system is a top priority, especially in view of its dangerous and accelerating deterioration over the past year. It is highly doubtful whether there is a way back to the old system of distribution by command. Maintenance of the status quo, however, is likely to mean only a further deterioration in supply conditions.
In sum, the distribution sector has long been one of the weakest links of the Soviet economic system and it has now developed into a major obstacle to the intended transformation into a market economy and the establishment of consumer sovereignty. Reform in the sphere of distribution should therefore be given a high priority in the allocation of resources, both domestic and external, and in the preparation of the needed business and legal infrastructures. Necessary conditions for successful reform of this sector are macroeconomic stabilization and comprehensive price liberalization. Reforms specific to the distribution sphere should also be initiated and could even be implemented simultaneously with and as part of the stabilization policies. These reforms would have three major interrelated dimensions.
First would be the rapid privatization of a large part of the retail trade sector, the part that consists of small and medium-size stores (the bulk of the retail sector). The privatization of small-scale businesses does not involve many of the complicated doctrinal, legal and logistical issues involved in the privatization of large enterprises. Moreover, larger, mostly wholesale, distributors should be put on a commercial basis along the lines suggested for other state enterprises.
The second major aspect is a program to revamp the logistical infrastructure of the distribution system, including transportation (especially smaller-scale road transportation), processing storage and refrigeration facilities, both at the production and the wholesale ends, and the provision of improved information-communication networks. The needs are enormous and the program should proceed by eliminating the most pressing bottlenecks first. Part of these investments could be provided by the foreign enterprises.
The third aspect of the reform is to eliminate the legal and licensing restrictions which prohibit and discourage new entrants. Such elimination might also promote foreign investment. The benefits of foreign investment to the Soviet economy are self-evident. Such corporations could provide the Soviet distribution sector with new marketing, selling, management and business technologies. They could be joined with the wholesale and supply organizations, either through purchase or by forming a joint venture, and could provide a base for the training of a new generation of sales workers, sales managers, and marketing experts. Similar cooperation could be established in the production sector, through joint ventures in the sphere of supply companies, and in technical assistance and consulting in the establishment of marketing departments inside enterprises, as well as in the creation of various enterprises that could serve the distribution industry.