Granick D. the Ministry as Maximising Unit in Soviet Industry

8/11/2019 Granick D. the Ministry as Maximising Unit in Soviet Industry

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JOURNAL OF COMPA RATIV E ECONOMICS 4, 255-273 (1980)

The Ministry as the Maximizing Unit in Soviet Industry1

DAVID GRANICK

Departme nt of Economics, University of Wisconsin, Madison, Wisconsin 53706

Received Decembe r 1978; revised July/November 1979

Granick, D.-The Ministry as the Maximizing Uni t in Soviet Industry

Microanalysis of Soviet industry has customar i ly chosen the enterpr ise as

uni t of analysis. This paper recommends that choice of the unit be made according

to the criterion of the lowe st hierarchical unit custo mari ly receiving plans that

hold unchanged for the entire planning period. It expe riments with use of the

ministry as unit of ana lysis. Conc lusions from statistica l data are (1) absen ce

of taut planning during normal years ofthe 1% 9- 1977 period, contrasting sharply

with the situation during 1949- 19.56; (2) absence of any ratchet effe ct in planning

during either period, with greater statistica l confidence in this result for the 1%9-

1977 period. J. Comp. Econ. Sep t. 1980, 4(3), pp. 255-273. Unive rsity of

Wisconsin, Madison, Wisconsin.

Journal of Econom ic Literature

Classi f icat ion Numb ers: 052, 113.

1. INTRODUCTION

In the use of maximization-under-constraints models of an economy,

a key choice for the economic

analyst

concerns the decision-making unit

that is held to do the maximizing. Conventionally, the analyst of capitalist

economies takes the firm as his unit; he does not take a subunit of the

firm (a division, a wholly owned subsidiary) because he is content to

accept the firm as a black box. Nor does he mount higher than the firm

to the common-ownership group or banking group; this is justified

partly by the nebulous nature of such groups, and partly by the degree

of managerial control expressed in individual large firms. The firm is

chosen as the relevant unit on the grounds that it is the highest-level body

that clearly makes direct supply choices.

This justification, however, wil l simply not do in making a similar choice

for Soviet industry. The links leading from the Council of Ministers

I Support for the writing of this article wa s provided through a fel lowship by the Kennan

Inst i tute for Advanced Russian Studies of the Woodrow Wilson Center and by the Graduate

School of the Universi ty of Wisconsin-Madison. I am indebted to Francis Seton, Daniel R.

Kazme r, and El izabeth Clayton for their com men ts.

255

0147.5967180/030255-19 02.00/O

Copy nght 0 198 0 by A c ademic P res s, I nc .

A l l r i gh t s o f reprod uc t i on i n any f a rm res e rv ed .


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256 DAVID GRANICK

to the individual shop level are administrative rather than market-

determined. Although each hierarchical level could be treated as a maxi-

mizing unit, it is doubtful (see below) that such an analytic route would

yield substantive results; yet the choice of a specific level on which to

concentrate inevitably has a somewhat arbitrary character.

This article explores the implications of choosing the ministry, rather

than the enterprise, as the maximizing unit in Soviet industry. What is

significant here is that this alternative choice yields a rather different

picture of Soviet planning and industrial operation than does the con-

ventional choice.

2. THE CRITERION OF CHOICE OF UNIT

Symbols Frequently Used

performance of the unit in period (t),

expectation of performance held by superiors in higher units,

expectation of performance determined prior to period (t), with any

change of its value during (r) being independent of Pt,

G,t

constraints upon the unit that are imposed by higher units prior to

period (t), with any change of their values during (t) being inde-

pendent of P,.

Within any hierarchical system (including but not limited to Soviet

industry), the performance of any unit below the peak of the hierarchy

will be judged against the expectations of the higher units rather than

against some absolute standard. One might think of the units manage-

ment as maximizing I&, (Pt - EJ(1 + r)l, where Pt represents the unitss

performance in period (t), E, the expectation of performance held by

superiors in higher units, and r the rate of time discount used by the

management of the unit. Constraints placed upon the unit are partially

predetermined by events in earlier periods (e.g., capacity of plant and

equipment), and are partially imposed by the higher units (e.g., allocation

of materials). These constraints are labeled C1 and CZ, respectively.

Both Et and Cz,t may be determined prior to period (t), with any

changes in their values during (t) being independent of P,. This form of

expectation and constraints (& and CZ,l) represents a firm plan

established for the unit. The unit managements problem is to maximize

C& (Pt - . ?&/(I + r) subject to C,,, and C,,,. This still leaves the units

management with the gaming problem of estimating fi, fi, and f3 in the

simultaneous equations Z?t+i = fi(Pt,~I,Cl,t,Cl,t_+i,62,f,C2,tfi): d_z,t+i =

f2(Pt,~z,t,~t,~l+i,Cl,t,Cl,l+i) and C

I,t+i = f3(Pt,Cl,t,Et,~*.t,E(El+i)rEo)t

where E = the value expected during the previous period by the planners.2

* The functions fi J; are written, solely for simpli fication , witho ut inclu ding as

arguments the performance, plans and constraints of units other than the one under

examination.


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THE MINISTRY AS UNIT OF ANALYS IS 257

But this gaming problem (labeled in the literature of the Soviet firm as

describing the response to the ratchet effect in planning) is not more

serious than the gaming problem imposed upon the firm operating under

monopolistic competition in capitalist economies: the maximizing analytic

approach is no more and no less applicable.

What can be said, however, when Et is determined at the end rather than

at the beginning of period (t), and when C,,l consists of constraints that

change during period (t)? This form of expectation and of constraints (Et

and C,,,) represents a changing plan for the unit, since it can be

cksribed as .h = f4(Pt,~:I,Cl,t,~.2.t,E2,t) and e2,, = fS(Pt,Cl,t,~2,t),

where & and C2,1 epresent the plan and the constraints provisionally

imposed at the beginning of the year. The definition of changing plan is

that a(&, -C,,JIM, # 0, where the vector (E,, -C& represents Et as an

implicit function of Cz,t. If the plan for the unit is changing in the above

sense, particularly if a(E,, -C,,,)/I%, varies between periods and is

frequently a substantial fraction, then one may argue that the units

management is concerned almost exclusively with the gaming problem,

thatP, enters only very weakly as an argument in its objective function, and

that such a unit thus represents a poor choice for the analyst as the basic

maximizing unit.

In the above case, a simultaneous solution based upon maximizing

behavior on the part both of the plan-making body (e.g., the ministry)

and of the unit receiving changing plans (e.g., the enterprise) also

appears to be a poor analytic strategy. Since the formulation of the maxi-

mizing strategy of the plan-receiving unit is primarily a problem in

gaming, the results of a simultaneous solution will depend heavily upon

the assumed gaming strategy of the plan-making body. The introduction

of alternative gaming assumptions with regard to the plan-receiving unit

simply muddies the analytic waters, vitiating the possibility of testing

hypotheses. In any case, if one wishes to adopt the simultaneous-solution

strategy, it should be recognized that the maximizing behavior by plan-

receiving units must differ fundamentally from that posited in treat-

ments of the Soviet enterprise which assume-explicitly or implicitly-

unchanging plans (for recent examples of such treatments see Berliner,

1976, and Granick, 1978).

The suggested criteria for the choice of a unit of microanalysis within

Soviet industry is the following:

constraint: the unit should be subject to firm rather than to

changing plans;

element to minimize:

the level of the unit in the planning-administra-

tive hierarchy.

The minimization criterion here arises from the desire to deal with units

that are as microeconomic as is feasible.


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258 DAVID GRANICK

How should we reconcile the fact that microeconomic theory applied

to capitalist economies takes as its unit of analysis the highest hierarchical

level making supply decisions within an organization (i.e., the firms top

management rather than the management of any of the firms subdivisions),

while my criterion for Soviet industry is to choose the lowest such unit?

The choice of neoclassical microeconomics is dictated by its concern

with market relationships and lack of interest in administrative relations;

its choice permits administrative relations within a firms hierarchy to be

capsulated in a black box. Put in our terms, this choice can be restated

as resting on the implicit assumption that-to the degree that planning

for the subunits internal to the firm exists at all-such planning should

be characterized as changing rather than firm. In this sense, the

enterprise is the lowest unit in capitalist economies that meets our con-

straint, and thus the choice rule in traditional microeconomic theory is

the sole choice permitted by our proposed criterion.

3. DISCUSSION OF THE RELEVANT UNIT

Traditionally, microanalysis of Soviet industry takes the enterprise (or

now, possibly, the association) as the unit of analysis; this applies to

analysis conducted by both Soviet writers and foreigners. Thus, relations

within the enterprise are treated as a black box, whileglavki, ministries

and other bodies up to and including the Council of Ministers are lumped

together as the Center. This choice of microunit can be justified on the

grounds that subunits of the khozraschet unit are controlled by methods

other than firm plans, but that the khozraschet units themselves are

objects of firm planning. My discussion will ignore the question of

subunits within the enterprise, and concentrate instead on the issue of

whether the hierarchical level of the unit of analysis should be raised.

Although my treatment is in terms of the enterprise vs the ministry,

the latter should really be categorized as gfavk-or-ministry; the discussion

is couched in terms of the ministry solely because the statistical data

available are ministerial.

It is perfectly clear that Soviet annual enterprise plans are neither

perfectly firm nor changing. A study of Romanian industry around

1970 indicated that their plans were

changing to such a degree that

the unit of microeconomic analysis should be taken as the ministry

(Granick, 1976, Chap. 4). The degree of plan change in Soviet industry,

particularly in the sense described above as relevant to our problem,

is unknown. Yet it is the quantitative dimension of such change that

should be decisive in our choice of unit.

The logic of making the assumption of firm plans is that the basic

structure of the Soviet incentive system of enterprises, both currently

and in the past, is predicated on it. Bonus rewards based on the difference


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THE MINISTRY AS UNIT OF ANALYS IS

259

between enterprise performance during the year and planned performance

(as of the end of the year) make little sense if such plans for year (t)

are themselves a function of enterprise performance in year (t).3 If we

assume that the incentive system is in essence structured rationally as

judged from the standpoint of the Center,4 then we must also assume

that plans are essentially firm.

The author finds that the above argument presents a convincing case.

Nevertheless, there is nothing binding us to the assumption of rational

incentives. There are two pieces of evidence pointing us away from the

enterprise as the basic unit for analysis.

The first of these is a study of plan fulfillment within two groups, each

comprising about 100 Soviet industrial enterprises (SHaikin, 1974).

Comparison is made between the amount of actual sales of each enterprise

during 1970 and both the enterprises original sales plan for the year (which

might, however, include changes up to February 3, 1970) and its final sales

plan. The results are shown in Table 1. However, there is nothing to

indicate the representativeness of SHaikins sample; he himself makes no

assertions as to representativeness, stating only that he is dealing with a

question that has not been studied by others in the Soviet Union.

In presenting these data, SHaikin points out that, using a x2 test, we

cannot reject the hypothesis that deviations of plan fulfillment by individual

enterprises around the average plan fulfillment of their group are

distributed normally-when the plan is defined as the original plan.

But the hypothesis can be rejected for the final plan. Normality in

both cases is what SHaikin would expect if plans were firm; the present

author would expect in this case the same degree of normality (whatever

this might be) with respect to both types of plans, but with a smaller

standard deviation in the case of the final plan because of plan alterations

that take account of environmental changes from the planners original

expectations.

In any event, SHaikins sample displays changing plans at the

enterprise level; this is sharply the case for the nonfulfilling enterprises of

both groups, but for the high-overfulfilling enterprises it holds only for

group 2. Some slight slack presumably existed between the sum of the

original plans of the enterprises within each group and the total plan of the

Ofcourse, there is noth ing in this argumen t to suggest that plans are not altered at all, Pla n

alterations that result from changes i n the environme nt surrounding the enterprise, rather than

from the enterprises own performance, should, if anything, affect the incentive system

positively.

See Granick (forthcoming, Sect. 1) for an argumen t as to why neoclassical economists are

obli ged to make this assumption if they are to remain with in the neoclassical rules-of-the-

game . Note that the Rom ania n incentive system in 1970 was constructed alon g lines radically

different from the Sovie t one (Granick, 1976, Chap. 4).

5 The source does not state how these groups were formed. One wou ld presume from the

logic of the authors analysis that each represented a different administrativ e unit.


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260 DAVID GRANICK

TABLE 1

FULFILLME NT OF THE ANNUAL SALES PLAN FOR 1970

BYTWO SAMPLE GROUPS OF ENTERPRISES

Group 1

Original Final plan

plan (%)

m

Group 2

Original Final plan

plan (%)

(%I

Plan fulfi l lment

Average percentage s for the group

(standard deviation)

Enterprises not fulfil l ing plan

Enterprises fulfil l ing 106% or

more of plan

(Enterprises in category)/(enterprises

predicted to be in catego ry under

assum ption that the distr ibution

is normal)

Enterprises not fulfil l ing plan

Enterprises fulfil ling 106% or

more of plan

102.2 102.8 102.5 103.5

(2.68)

(2.29) (7.45) (3.69)

17.7 2.4 33.1 5.6

7.1

9.4 26.6 14.5

86

16 90 33

91 116 83 58

body administering the group, since the final total plan was between 99.0

and 99.4% of the original total plan of each group.

The second piece of evidence pointing away from the enterprise as the

basic unit for analysis arises from the introduction, in the 1971- 1975 Plan,

of the system of 5-year planning of annual control figures for ministries and,

at least supposedly, for enterprises. Incentive systems for the enterprises

were supposed to be linked to their own control figures. In fact, however,

as annual plans for industrial ministries fell sharply below the ministerial

control figures, it was the ministries-not individual enterprises-that

were penalized in 1973 and again in 1975 with regard to their bonus funds

(Rzheshevskii, 1975, pp. 82, 85). It was the ministries that were here

regarded by the Council of Ministers as the basic units that had to allocate

these reductions (33% in 1975 for the Ministry of Forestry and

Woodworking, and 15 to 18% for the Ministries of Chemical Production

and Nonferrous Metals) among their enterprises. This was similar to what

had occurred earlier in the late 1960s.

Even if, on balance (as the author believes), enterprise plans should be

considered as sufficiently firm so that the enterprise should be taken as

the unit of microanalysis, clearly the level of firmness is a matter of

degree. The present article can be interpreted as examining the sensitivity

of various standard interpretations of Soviet industrial reality to the choice

of unit of microanalysis. It may be viewed as comparable to Solows


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THE MINISTR Y AS UN IT OF ANALYSIS 261

explorations of models of both disembodied and capital-embodied

technological change, with Solows personal preference between the

models being a matter of no great significance to his readers.

4. RESULTS OF USING THE MINISTRY AS

THE UNIT OF ANALYSIS

Tautness of Annual Plans

Let us define plans as being taut when they are difficult to meet even if the

environment surrounding the planned unit is in fact the same as that

originally predicted by the planners. The term is devoid of meaning if plans

are changing. At the extreme, taut plans act as a set of constraints that

allow no room for maximizing behavior by the units. Under taut planning

we would expect that, even if the mean level of plan fulfillment should be

above lOO%, it will not be very much above that level. Second, and more

significant for our testing procedure, we would expect that the distribution

be reasonably normal in the area between such a mean and the point of

100% plan fulfillment-although the expected value of the integral of the

area between the mean and (100% - E) would be somewhat higher than the

one predicted under conditions of normality.

Data are available by industrial ministry for fulfillment of annual

f i There are three sources of deviation of performan ces from plan. (1) Planners ma y set their

targets with the expec tation that execu tant units wil l overfulfi ll them by an average of.r%. This

would presum ably be done for incentive reason s, and can explain the fac t that mean plan

fulfi llment is generally greater than 100% . (2) Planners m ay ma ke incorrect assu mption s as to

the environme nt within which the exec utant units wil l be operating. Wh ile i t is true that a

planning error w ith regard to one unit affects the plan-fulfil lment indices o f other un its,

neverthe less it does not seem unreasonable to consider that w ithin a given year the net

planning errors for different u nits wil l be random ly distr ibuted around a value

equal

to the

observed mean of uni t per formance plus some K that is constant over years close to one

another. (3) Performan ce by exec utant units may show a pattern of distr ibution around (-K)

plus the level that could be reached given their actua l environm ents. Due to consideration of

the ratchet effect (see the text below), we might expe ct the manage ments of such uni ts to avoid

exces sive overfulfi l lment; thus the performance deviations should not be normally

distr ibuted in the area at and above the mean of unit plan fulfil lment. But how about the

norma lity of performance deviations on the lower side of the mean?

It has been argued in the l i terature that a mana geme nt that know s that i t canno t fulfil l i ts plan

wil l permit sharp underfulfil lment in the hope that this behavior wil l lead to a lower plan in the

fol lowing period. Assu ming this to be true, i t sti l l does not affe ct the norma lity of the

distr ibution in the area of 100% or more plan fulfi l lme nt which is below the mean: i ts only

effe ct is upon the distr ibution of plan under-fulfil lment, and this distr ibution is integrated in our

stat ist ical treatment below.

There is, however, one factor that would cause the expec ted distr ibution of plan fulfi llment

in the relevant area(where 100% plan fulfi llment 2 realized fulfi llment by a given unit < mean

fulfi llment by al l units) to be above that predicted through use of the normal curve. This is the

fac t that the personnel of a unit that, given its environm ent, would narrowly mis s 100% plan

ful fi llment wi th custom ary work e ffor t and degree of concentration on the measured goat,

ma y exert su ppleme ntary and unusual effort or concen tration so as to me et i ts plan (Bonin and


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262 DAVID GRANICK

production plans during 1949-1956 and for annual sales plans during

1969-1977.7 The latter period covers 21 to 23 industrial ministries each

year; during this time, there were two years (1969 and 1972) in which 29%

of the ministries missed their targets

.R But in the remaining seven years,

there was only one ministerial underfulfillment out of 157 ministerial

observations. If we take these seven years as a sample, calculate a mean for

each year and a standard error for that mean, and assume that the area

between (100% - E) plan fulfillment and the mean plan fulfillment (> 100%

in all years) is normally distributed, then we would predict eleven

ministerial underfulfillments instead of the observed one. As indicated

above, the predicted underfulfillments under tautness should be less than

11; but I would not expect that their deviation from the integral of the

relevant portion of the normal curve would be anything approaching the

observed 11: 1 ratio. (Observed cases of plan fulfillment were: [< lOO%] - 1;

lOO%- 1; lOO.l- 100.3%-9; 100.4- 100.5%-4. Under the normality as-

sumption, predicted cases ~100.3% of plan fulfillment-22, and

5 100.5%-30.)

This record differs considerably from that of 1949- 1956, during which at

least one ministry underfulfilled its plan during all but one year (1949).

Excluding for comparison with 1969-1977 the two years in which the

proportion of ministries under-fulfilling was the greatest (1952 and 1953),

underfulfillments constituted 56% of the number predicted under the above

normality assumption as opposed to 9% in the later period. Furthermore,

the unweighted arithmetic mean of the standard error of the mean of

fulfillment declined sharply as between the normal years of the two

periods: from 2.1% of plan to 0.9%.

Marcus, 1979). Moreover, such supplementary effort migh t wel l slightly overshoot the mark,

and thus the plan fulfillment observed could be a minor amount above 100%.

Our concern is with the join t distribution of the plann ing errors and the performance

deviations in the relevant area. Assuming that these deviations are independent, the net

effect is that the expected value of the integr al ofthe distributio n in the relevant area should be

greater than would be predicted on the basis of the normality assumption, but only to the

degree that the effort/concentration factor is at work. T he less the importance of this factor

in the distributio n pattern-and, particularly, thegreater the relative importance ofpla nning

errors to performance deviations -the more the expected fina l distributi on in the area of

interest wil l approach normality.

i Data exist also for 1978. but these are not comparab le to those for earlier years. In 1978, for

the first time , counterplans were includ ed as part of the annu al sales plans (Rzheshevskii,

1978. pp. 7-9).

Ministries processing foodstuffs are excluded on the ground that their results are

exceptionally subject to acts of God.

o During 1949-195 6, 17 to 23 ministries were covered during seven years and 10 in the

rema ining year (1953). The average number o f ministries covered annua lly during the

normal years was 20.2 during 1949- 1956 compared with 22.4 during 1969-197 7. This

difference accounts for some part, but presumably not much, of the difference betwe en the

two periods standard errors of the mean .


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263

In summary, there has been very loose planning as to sales volume

during seven of the past nine years, a situation differing substantially from

that of the previous period for which we have data. The central planners

twice retreated during the 1969- 1977 period after each interspersed year of

taut planning, when under-fulfillments reached 75% of the number predicted

under the normality assumption stated above. The statement as to the

degree of tautness is predicated on the assumption that plans set for the

ministries were firm, but without- this assumption no meaning can be

given to the concept of tautness as discussed here.

However, there is a fundamental difference between planning during the

two periods, which modifies the implication of the above summary. For

1949- 1956, one can realistically describe output as being the single plan

indicator that really mattered.

But this was not the case during

1969- 1977-in particular, the rate of profitability was of major importance

throughout, at least at the enterprise level. We have no data as to fulfillment

of annual ministerial plans for profitability; it is conceivable that the

combination of sales and profitability plans constitutes planning at the

ministerial level no looser than that of the earlier period. In any case, it is

of no litt le significance that there has been a radical change in the degree of

looseness of plans along the traditional Soviet output/sales dimension.

The Existence of a Ratchet Effect in Planning

The ratchet effect hypothesis holds that planners learn from

experience by increasing the level of their plans for a given unit as a

function of that units performance relative to plan in the preceding period.

It can be stated in two variants. The first states that the level of a units plan

is a positive function of the units performance in the immediately prior

period. The second states that the above is the case only when the plan for

the previous period was overfulfilled; in the case of under-fulfillment or

exact fulfillment, no functional relationship exists.

Variant (1): aEtiapt-l > 0.

Variant (2):

a&/apt-, > 0

if

Pt-,/El--l >

1,

a&tap,-, = 0 if P,+,/E~:t_l d 1.

Variant (1) and the first part of variant (2) yield the following result (see

the Appendix): lo

a(P,/~,)ia(P,_,/~,_,) < 0

iff aP,/aE, < P,E,.

I The reason for empl oying the transformation below , rather th an running a regression in

terms of the hypothesis itself, is that the transformation reduces the errors of measurem ent of

the indep enden t variables. In the transformation, all variables except CR,, which is used in

only some of the equation s of Table 2, are taken directly from reported data. If, instead, the

terms of the hypothesis had been place d in the regression, then the values of the indep ende nt

variables P,-, and P,-, woul d have had to be calculated-with resultant substantial roundin g

error.


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264

DAVID GRANICK

The second part of variant (2) yields

(aP,/~,>la(P,-,l~,_,) = 0.

Thus both variants, if we linearize them and assume that for at least one

period and one unit in the economy Pl-,/&, > 1, yield the OLS equation

PJE , = (Y(P~-~E-~) + /IX + et,

where the matrix X represents the constant and the other independent

variables, and where CY< 0 [since a(P,/~,) la(P,_,/~,_,) < 01.

If we are willing to define i? and P in terms of output and sales, this OLS

matrix equation is transformed into one using the variables of Table 2, with

AFt

defined as

P&:

AFt = aAFtml + PX + e,,

where (Y < 0.

We have here a testable form of the ratchet-effect hypothesis, so long as

we combine it with the assumption that

aPtIt& < Pt/&.

This auxiliary assumption says that the marginal effect of plan change on

performance (when the level of the plan increases between periods (t - 1)

and (t)) is less than the average relationship. Clearly, it always holds if we

further assume that

~P,/c~I?,

= 0; i.e., that the plan is used simply as a

prognosis and/or as a measure (for incentive purposes) against which to

evaluate performance. If, however, we make the more realistic assumption

that aPJa& # 0 for most likely values of &, and further assume that the

marginal effect of plan, on performancet is both continuous and subject to

diminishing returns (see, e.g., Hunter, 1961), then the auxiliary assumption

holds provided that ,?:t s notfar below that level that will maximize Pt (see

Fig. l). Thus the auxiliary assumption is fairly weak so long as we assume

both that Soviet planners are concerned with maximizing

Pt

and that over the

years they have gained even the roughest notion of the effect of 8, on Pt.

There are, however, two additional nonstatistical arguments that might

be advanced for rejecting the auxiliary assumption, and thus the sign of a in

the OLS equations above, as a proper test of the ratchet-effect hypothesis.

The first of these is that positive externalities exist; i.e., where (k) and

(k + h) are industrial ministries, that (P& is a positive function not only of

(PJkfh

but also of the degree of assurance that (k) will receive its allocated

supplies of the products of (k + h). Thus for some ministries (k + h), the

Center may wish to set & at a lower level than that which would maximize

expected Pt; at the extreme, the Center may wish to maximize that portion

of [(expected

Pt)/l?l]k+h

which lies in the second and third sections of Fig.

l-depending upon the maximum value of this fraction that lies in these

sections.

I The draw ing of the curves in Fig. 1 begins only slightly to the left of the boundary betwee n

sections 1 and 2, rather than at the P, axis, because the ratchet-effect hypothesis does not

define M,l&, for small values of the ratio .??,/P,.


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265

This position rests on the foundation that material allocations (cZJk are

determined simultaneously with (I? )k+h and that their magnitude is

determined on the assumption that (Pt)k+h will equal (I?.f)k+h. The latter

however, is an unnecessary restriction placed on the Center. There is no

reason why (Pt/I?t)k+h

cannot be set by the Center with a view to

maximization of (Pt)k+h

subject to the constraints placed upon (k + h),

while (c:2,f)k is determined as a function of the minimum value of (Pt)k+h

which the Center expects to be realized rather than in terms of (I?,),,,.

Such a planning procedure need not undercut the moral significance of (I?,)

to (k + h) if ministry (k + h) is instructed to sign normal contracts for a

volume of its products equal to the minimum (PJkfh expected by the

Center, and to retain the remaining portion of its planned production for

shipments during the year to undesignated customers.

The second ground for objection to the proposed test is more substantial:

the existence of trade-offs between output/sales performance by ministries

and performance along other planned dimensions (such as rate of

profitability) or unplanned ones (e.g., product mix at a disaggregated level).

Because the Center believes that such trade-offs exist, it will not wish to

maximize Pt as expressed in output/sales. Thus it may set the ministerial

plans to the left of where aP,/& = 0 in Fig. 1.

The author cannot evaluate this objection. Certainly it must be valid as

stated above, but it has force as related to our problem only if ministerial

plans have typically been set at or to the left of the point that maxi-

mizes P,lEt.

We turn now to the OLS regression equations of Table 2. Two periods


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266

DAVID GRANICK

TABLE 2

INDEPENDENT VARIAB LES IN OLS REGRESSION EQUATIONS

Eq.

NO.

AFf.1

CR,

Dummy

variables

YRS MIN C D.F. ds

Test for serial correlation

1950S I 0.667***

2 0.2391

3 0.531** X

4 X X

5 X

6 X

1970s 7

8

0.530***

0.260

X X 87 0.47

X X X 69 0.55

X X 56 0.28

X X X 38 0.35

X X 57 0.12

x x x 39 0.36

X X 160 0.40

x xx 139 0.52

Reject at 5% contidence level

Test fails

Test fails

Test fails

Test fails

Test fads

Accept at 10% confidence level

Reject at 5% confidence level

9 0.581***

X X X

138 0.48 Accept at 20% confidence level

IO 0.32 6** X x xx

117

0.52 Test fails

II 0.420*** X X 139

0.27 Reject

12

X x xx II8 0.47 Reject

13 0.445*** 0.093*** x X 159 0.48 Reject at 5% confidence level

14 0.226** 0.214*** X X X 138 0.61 Accept at 20% confidence level

15 0.506 X 0.076 X X 137 0.53 Accept at 10% confidence level

16 0.282** X 0.203 X X X 116 0.56 Accept at 20% confidence level

1950s and 17 0.234

x xx 208 0.57 Test fail s

1970S 18 0.234* X x xx 156

0.47 Test fails

AF, is the depen dent variable.

Symbols. X-The indep ende nt varia ble indicate d at the head of the column is used as an argument in the regression; for

variables other tha n dummies and the constant, the r value o f the coefficient is less than 1.65 (two-tailed f). t-l.65

c f < l.% [IO% confidence level]. *-I.% < r c 2.575 (5% confidence level]. -2.575 < f < 5 [I% confidence level].

***-I > 5. D.F. -Degree> of freedom. AF,+-Percentage overfulfi llment of the annu al output (saks)plan in year (r - i).

CR,-Percentage growth rate of absolute gross sales in year (1). C-Constant of regression. YRS-Dummy

variable for each year include d in the regression equat ion. MN-Dummy variable for each ministry include d in the

regression equa tion. A dummy variable used for any given ministry in the 1950s is different from that used for the 1970s.

Comments. The test used for serial correlation is the Durbin large-sample test (Johnston, 1972, pp. 312-313). Reject

(unless otherwise specified) means the rejection of the hypothesis of zero autocorrelation of error terms at the 1% con-

fidence level. Accept means that, at the specified confidence level, the hypothesis of such zero autocorrelation cannot

be rejected. Both p lans and performance refer to gross o utput durin g 1949-19 56 and to gross sales during 1%9-1977.

are studied: 1949- 1956 and 1969- 1977. The source consists of the annual

Soviet reports of plan fulfillment by ministry; these directly provide the

figures for AF during the first period, and for AF and GR (growth rate of

sales) during the second period (TsSU). Sample sizes differ among

alternative specifications of the equations because of the need to omit one

or niore years for the dependent variable when a two-period-lagged

independent variable is introduced; for the same reason, the number of

dummy variables (described below) also varies even though this is not

indicated in the table by the dummy-variable matrices.

The 1949- 1956 period was subject to considerable ministerial reorgani-

zation; thus most ministries show gaps for at least one year, and several

that were abolished and then recreated had a slightly different coverage in

varying years. Although nineteen ministries were covered over 8 years, the

largest samples here (having a l-year lag embodied in the regression)

consist of only 95 observations.


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The 1969- 1976 period is much better. Data are available for each year for

twenty ministries; for 6 years for another ministry and for 5 years for

the last.

Turning now to Table 2, the basic regression equation takes the form of

AF, = C, + alAFt-, + &YRS + e,,t,

where the matrix of YRS is a set of dummy variables for the years treated.

The use of these dummy variables seems essential for testing the ratchet-

effect hypothesis since, as seen in the preceding subsection, each period

,contained highly atypical years with regard to Pt/l?I.

The result here is very strong. Each period (see Eqs. (1) and (7) of Table

2) as well as the two combined, shows a positive sign for (Ye, with a

confidence level substantially greater than 99%. This leads to rejection of

the ratchet-effect hypothesis.

Estimation of the remaining equations of Table 2 can be properly

regarded as a fishing expedition. Such fishing is normally considered bad

practice from a methodological standpoint, and that would be the case here

as well if the different equations yielded varying results. What is striking,

however, is that the same hypothesis rejection follows from all the equation

specifications and for both of the periods studied. To continue with the

fishing simile: our first cast suggested that the pool is empty of the

hypothesis; further casts were then made in different parts of the pool, and

yielded the same results; thus the additional casts reinforce our original

view as to emptiness.

Justification for introducing the additional independent variables is as

follows: AFI-* is a two-period lag of plan fulfillment; one might argue that,

since 8, is determined at a time when

AF,-,

can only be estimated by the

Center, this body also (or only) uses the latest plan-fulfillment figure that

can be reliably established. In fact, however, Table 2 shows that AF,-, has

no effect except for what it may pick up as a proxy variable forAF,-, (as in

Eq. (11)).12

GRt

is the growth rate of sales; one might suspect that

high-growth ministries-since mastery of new plant and equipment is

particularly important in these cases-might be subject to only a very

attenuated form, if any, of the ratchet effect. Indeed, GR, does have a fairly

strong influence in the most properly specified equations (Eqs. (13) and

i* An F test has not been used here because of the different size n in equations including and

excludingAF ,-,. It could b e appl ied, of course, for samples restricted to the ones used in the

equation s including AF,-,, but the resulting coefficients for equation s excludingAF,-, wou ld

then be less reliable than those reported. Comparison of fi2 in paired equations strongly

suggests the results indica ted as to the absence of effect ofAF,-,. Add itio n ofAF,-, increases

A* only i n the two cases of Eqs. (9) vs (7), and (15) vs (13)-both cases in which the

dummy-variable matrix MIN is omitted.

If one of the lagged-A F variables serves as a proxy for the other, it woul d seem thatAF,+, is

a proxy for AF,+,. This is strongly suggested by comparison of the I? for all of the paired

equations containing either AF,-, or AF,+,, but not both.


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268

DAVID GRANICK

(14)), and this is strongest in the one (Eq. (14)) that has both the highest 2,

and does best in a test for serial correlation.13 But the introduction of GRt

has no effect on the sign of the coefficient ofAF,-,. Dummy-variable matrix

MN (the individual ministries in the sample) is introduced on the ground

that the Center may treat different units in a systematically different

fashion, thus reflecting the Centers views as to their differential effort and

efficiency; if such views changed only slowly, then these dummy variables

would represent an important addition to the regression equations.

Turning now to statistical matters, we cannot use the F test for

homogeneity between the two periods with regard to the coefficient of

AFteI because of the existence of different dummy variables in the two

periods, since a dummy is introduced for (n-l) individual years in each

period. The Durbin- Watson statistic is inappropriate due to the use of

lagged values of the dependent variable as independent variables, but the

Durbin large-sample test for serial correlation of the error terms can be

used. Unfortunately, the test breaks down for the 1950s (Eq. (2) here

seems to be the one best specified); but for the 1970s it leads to the absence

of rejection of the hypothesis of zero autocorrelation at the 10% level for

the basic equation, Eq. (7), and at the 20% level for the best-specified

equation, Eq. (14).

The apparent absence of autocorrelation of error terms in Eqs. (7) and

(14) is particularly gratifying; it implies that OLS here yields consistent and

asymptotically efficient estimators (Johnston, 1972, p. 305), since the bias

existing in small samples is irrelevant here. On the other hand, our

confidence in the results of the hypothesis test for the first period is

considerably weaker (Johnston, pp. 308-309), a conclusion that we had

previously reached on other grounds.

While measurement error of the dependent variable introduces no bias,

measurement error of the independent variables depends on the

variance-covariance matrix of these measurement errors. (In the case of

AFt-, and AFt-2, these measurement errors are not only due to inadequate

knowledge by the Central Statistical Administration and to differing degrees of

rounding that have been employed in reporting plan fulfillment, but are also

due to changes made during the year in the ministries plans. Such possible

changes should be considered as measurement errors since the hypothesis

is stated in terms of fixed plans. GR, suffers from the first two types of

measurement error plus error due to rounding introduced by my

calculations from the reported data.) For at least the two basic equations,

Eqs. (1) and (7), the measured coefficient of

AFt-,

is biased toward zero.

This makes the observed positive sign of this coefficient in the two

equations even more significant than it might otherwise be; on the other

hand, it implies that if the true coefficient of AFteI were significantly

13 Data for GR, (whether in the form of sales or output growth) are not avail able for the

1950s period.


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negative, its measured value might be indistinguishable from zero because

of measurement error.

The regression models tested are all single-equation models. A further

step would be to build in simultaneity by making

(AF&

a function of

(AFdk+h,

where (k) and (k + h) are different ministries. Such simultaneity

might be expected as a result of input-output relationships. The problem is

that we do not know how a shortfall or excess of actual over planned sales

by (k + h) is allocated by the Center or otherwise to individual user

ministries. This extension of my single-equation estimates must be left to

others.

How can we explain our rejection of the ratchet-effect principle? Unless

it is due to the absence of firm plans at the ministry level, to the auxiliary

assumption of our test being incorrect, to statistical problems, or to

specification errors, we may conclude that in forming (Z?,),,, the Center

either assumes that its earlier (Z?t-l)li+h was a justified plan in terms of the

capacity of ministry (k + h) in year (t - 1) if (k + h) were working at

normal efficiency, or that the Center makes a de novo evaluation each year

of the current potential of ministry (k

+ h). The fact that the introduction of

MZN into the regression equations has no effect on the sign of (Y einforces

this either/or conclusion.

However, not only does (Y not have the negative sign called for by the

hypothesis, but the sign is consistently and highly significantly positive. A

story explaining this is that the Center interprets (AFf-l)k+h as a true

indicator of the efficiency of ministry (k + h ), and that it follows the policy

of capturing (positively or negatively) a portion of such efficiency and

leaving the remainder to the ministry as a quasi rent. A glance at the

coefficients of

AFT-,

in Table 2 suggests that the Center captures some

one-half to three-quarters of such efficiency advantages. An alternative

story within this framework is that the Center does not capture any of this

quasi rent, and that (Ydiffers from + 1 simply because of regression toward

the mean in period (I) either of the efficiency of ministry (k +

h)

or of

special circumstances and chance factors which in (t - 1) caused the

ministry to appear to be particularly efficient or inefficient.

5. SUMMARY AND CONCLUSIONS

This article has been predicated on the assumption that the unit of

microanalysis within a centrally planned economy should be chosen

according to the criterion of being the lowest-hierarchical-level body

whose annual plans are firm; i.e., for whom a(E,, -C,,JaP, = 0.

Starting from the fact that the plans of Soviet enterprises are not perfectly

firm, we have explored the implications of choosing the industrial

ministry as the appropriate unit.

On the basis of the choice of the ministry as the lowest unit making


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210 DAVID GRANICK

decisions by maximizing under constraints, two conclusions were drawn

through testing the null hypothesis. Both conclusions are based on the

fundamental assumption that annual plans at the ministerial level

are firm.

(1) Unit annual plans for sales have been loose rather than taut

during the normal years of the period 1969- 1977. This contrasts sharply

with the situation during 1949- 1956 for a close proxy of sales (production).

(2) No ratchet effect existed in annual plans of units during either of the

above periods. Both the data and statistical tests are considerably stronger

for the more recent period.

The author believes that the well-informed reader will find these two

conclusions surprising. But what is significant in terms of the theme of this

article is a comparison between them and their counterparts drawn from

microanalysis of the Soviet economy which takes the enterprise as the unit

of analysis. Unfortunately, the data underlying the latter type of analysis

are nonstatistical in nature.

With regard to conclusion (l), the conventional Western wisdom

concerning Soviet enterprises is that their plans are taut; this statement

is made in terms of production (sales) plans, and so is directly comparable

to our data. However, such conventional wisdom arises from analysis of

pre-1969 Soviet literature and here it is confirmed by our 1949-1956

ministerial data. Furthermore, there seems to be an impression that such

tautness has been reduced in recent years. Thus the treatment of the

ministry as the unit of microanalysis substantially amplifies, but does not

really contradict, the conventional Western wisdom based on the

enterprise.

Conclusion (2), however, sharply contradicts both Soviet and American

conventional wisdom applied specifically to the late as well as to the early

period. A major goal of the Soviet reforms of the 1960s was to weaken the

force of the much-deplored ratchet effect on planning, and this has been the

justification for the Governments effort to bring 5-year plans down to the

enterprise level along with dividing them into annual periods. If we assume

that Soviet writers and administrators are correct in their description of

planning as it reaches the enterprise, then we find that our understanding of

the working of the Soviet economy is significantly different depending upon

the unit of microanalysis that we select.

Three additional conclusions can be elaborated which do not come from

the body of this article, but which also depend heavily on the unit of

micro-analysis chosen.

(3) What happened during the reform period of 1968- 1973 to the degree

of detail in which goods were allocated to the microeconomic units? If the

enterprise is taken as the unit, then the number of separately allocated


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products increased by 197%; if the ministry is taken as the unit, it declined

by 42% (Ivanov, 1969, p. 340; Kurotchenko, 1975. p. 82).- Depending upon

our definition of microeconomic unit, we obtain a radically different picture

as to whether the reform has been accompanied by decentralization in the

critical realm of supply, and thus as to whether the unit is more or less

constrained. Furthermore one would suspect, although we do not know,

that the production plans of the units producing these products are

disaggregated (and thus constrained) to much the same degree of detail as

exists in the distribution plans of the products.

(4) What is the significance of precontract negotiations and arbitration

among Soviet enterprises? Such negotiations occur annually on the basis of

the producing enterprises output plan and the purchasing enterprises

materials-allocation plan: they relate to such matters as packaging,

delivery dates, and, of particular importance, to details of product mix.

Precontract arbitration can also occur (Kurotchenko, 1975, pp. 164- 165).

While it is certainly true that, regardless of whether the relevant

maximizing unit is the enterprise or the ministry, it is the producing unit

that has the upper hand both in negotiations and arbitration, our choice of

unit would seem to make a significant difference. If it is the enterprise, then

it is usually far from being in a long-run monopoly position. Its future

negotiating power will be greatest when its reputation with purchasers,

relative to the reputation of possible alternative suppliers, is high. Thus it is

market forces combined with a concern for the future which act as a

constraint on the unit in its negotiations. Here is a market explanation for

why neither the product mix described in contracts nor the actually

delivered detailed product mix varies so severely from the needs of the

purchasing units that the physical planning system breaks down (Granick,

forthcoming, Section III).

However, if it is the ministry that is the basic maximizing unit, then

virtual-monopoly conditions with only limited entry frequently prevail and

the market explanation collapses. Such choice of unit would force us to

turn to quite different types of explanations.

(5) Is it substantially easier, compared to the standard of practice in

developed capitalist economies,

for R&D innovations of products

(especially for minor products) and of major process changes to be

I The 42% reduction is calculated by excluding those goods whose distribut ion was

plan ned by ministries and departments (the latter bein g organs at the same level as ministries

in other sectors). This is done on the basis that the ministries distributin g these products are

their prime users (Kurotchenko, 1975, p. 83: Berline r, 1976, p. 68). This meth od ofcalcula tion

exaggerates the difference in results betwee n the two defini tions of unit, since some or most of

the ministe rially distributed goods are also used in enterprises of other m inistries. But it seems

to capture the fundamental issue.


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272 DAVID GRAN ICK

successfully implemented in Soviet enterprises that are newly formed than

in established enterprises? This author has argued this case positively

elsewhere (Granick, 1978) on the basis of an analysis of the incentive

system facing existing enterprises. But this argument was predicated on the

assumption that the enterprise is the maximizing unit.

If it is the ministry that is the microanalytic unit, the argument fails

completely and there is no reason for a distinction in behavior between old

and new enterprises. Unfortunately, the facts themselves have not been

systematically investigated by anyone; thus we cannot currently use the

differing factual predictions as a means of evaluating the two conflicting

assumptions as to the proper unit of analysis.

APPENDIX

To prove: a(P,lB,)la(P,_,/~,-,) < 0, given either variant (1) of the

ratchet-effect hypothesis or variant (2) for the case Pt-,/bt-, > 1, if and

only if r3Pt/d~t < PtlEt. a(P,/~,)la(P,-,l~,_,) = 0 in variant (2) for the

case PI--ll&--l 5 1.

Proof. Differentiating a(P,/~,)la(P,-,l~,_,) % 0, and using 1.h.s.

= Z[13(P,/~,)lc?l?,], where Z = t&l~3(P,-,&,), we get (Z/l?,)(8Pt18&

-

P,/E,)

I 0. Differentiating Z in turn, since

~8,-,l~Pt-, = 0, Z = (a~??,/

c~P,-,)(~,-,).

In the case of variant (2) of the ratchet-effect hypothesis,

when Pt-Ji?-, 5 1 (and thus L3k,/W-, = 0 by hypothesis), Z = 0 and

thus the 1.h.s. of the original equation = 0. In the case both of variant (I),

and of variant (2) when Pt-,/Etml > 1, Z > 0. This implies that for these

cases the 1.h.s. < 0 iff aP,/& < P,l&.

REFERENCES

Berl iner, Joseph S., The Innovation Decision in Soviet Industry. Cambridge, Mass./London:

MIT Press, 1976.

Bonin, John P., and Ma rcus, Alan J., Information, Mo tivation, and Control in Decen tral ized

Planning: The Case of Discretionary Manager ial Behavior. J. Cam p. &on. 3,

3:235-253, Sep t. 1979.

Granick, David,

Enterpr ise Guidance in Eastern Europe.

Princeton, N.J .: Pr inceton U niv.

Press, 1976.

Granick, David,

Soviet Research and Development Implementat ion in Products: A

Compar ison wi th the G. D. R., In F. Levcik, ed., Znfernational Economies-

Compa rison and Znterdependencies, Festsch r i f t f ii r F. Nem schak . Vienna/New York:

Springer-Verlag, 1978.

Granick, David, Soviet Use of Fixed P r ices: Hypothesis of a Job-Right Constraint,

for thcoming.

Hunter , Hol land, Optimum Tautness in Development Planning, Econ. Developm. Cult .

Change 9:561-572, July 1961.


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THE MIN ISTRY AS UNIT O F ANALYSIS

213

Ivanov, N. V., Lokshin, E. lu., and Dem ichev,

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Econometr ic Methods,

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Materialno-tekhnicheskoe snabzhenie v novykh usloviiukh

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Granick D. the Ministry as Maximising Unit in Soviet Industry

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