Direct
Worker-Ownership: The Russian Formula
for Economic Reform
(1985-1994)*
by
Peter
J. Piveronus, Jr., Ph.D.
Department
of Humanities and Performing Arts
Lansing
Community College
*I am indebted to Professor Thomas E. Weisskopf
of the University of Michigan Department of Economics, Joseph Blasi, Professor
of Labor-Management Relations at Rutgers University, and Mr. John Simmons,
President of Participation Associates, Chicago, Illinois for their invaluable
assistance in the preparation of this paper.
In
July 1993, Sergei Stankevich, Yeltsin’s economic advisor, commenting on the
future of Russia’s reforms, told correspondant Andrew Solomon: “The reforms in this country come in waves.
The first was Gorbachev’s wave” which began in 1985 and culminated in Perestroika. “The second wave was Yeltsin’s,” whose aim
was to dismantle the Communist system, and “to establish basic freedoms: free
speech, a free press, and a parliamentary system.” The “third wave,” which Stankevich hopes will complete the
reforms begun by Yeltsin in the aftermath of the failed 1991 coup but left
unfinished, “is already in place.” Its
long-range goal is, “to invent a new Russia, to balance her racial and ethnic
and religious mix, to achieve the crucial joint goals of being market-oriented
and socially responsible.” In a more
immediate sense, Stankevich remarks, “the first goal of the third wave will be
to establish a constitution and a system of rule which allows for cooperation
among the branches of government. We
will create a representative government, so that the republics now acting
semi-autonomously will feel that they have a decisive voice in Moscow, that
their representatives are involved in establishing national laws and that they
are therefore bound by these laws. We
will remain socially responsible, because that is absolutely crucial in this
country but we will take responsible steps toward economic reform. I think we will accomplish these goals with
moderate, conciliatory behavior, to create a single, strong, united
Russia. We have passed the time when
you could rule in this country by standing on the top of a tank.”[1]
Four
months later, Stankevich’s up-beat predictions about Russia’s future were
sorely tested by the violent, bloody events of October 3 and 4, 1993, which
resulted in the fiery destruction of the Russian White House in Moscow. Since then, much of what Stankevich predicted
has come to pass. A new constitution
similar to that of France was enacted; a new Russian parliament, the Federal
Assembly, has come into existence replacing the factious Congress of People’s
Deputies, and despite setbacks, Russia has continued undaunted along the rocky
road to economic reform first begun in 1992 and bolstered by President
Yeltsin’s re-election in July 1996.
Amidst
the confusion and conflict surrounding Russia’s painful transition to democracy
and a market system, two things stand out: first, that for the foreseeable
future, the sharp political divisions between pro-reform and anti-reform forces
will continue unabated.[2] This fact was driven home by the outcome of
the most recent parliamentary election, which gave a majority of the seats in
the State Duma to anti-reform forces in particular to the Russian Communist
Party, headed by Yeltsin’s principal rival in the 1996 presidential elections,
Gennadi Zyuganov. Second, as most
economists of the Russian scene agree, Russia’s political turmoil is but a
sideshow to the economic reforms underway to transform Russia into a market
economy. All things considered, the major
issue dividing Russian politicians is not whether the reforms are necessary, or
if they should take place, but over which direction they should follow, how
quickly they should be implemented, and what their impact will be both on the
future of the Russian economy, and on the fate of Russian society as a
whole. The kind of country Russia and
her partners in the nascient Commonwealth of Independent States (CIS) become in
the years ahead is dependent to an enormous extent on the final outcome of the
economic reforms now in progress. For
what is at stake is whether Russia will evolve into a workable democracy with a
vibrant, prosperous economy and a relatively high standard of living for all
its citizens, or sink to the status of a Third World nation.
The
current difficulties experienced by the Russian economy should not obscure the
fact that in its heyday and as recently as 1990, the former Soviet Union was
the world’s second largest economy after the United States. Indeed, even today, devoid of the republics
of the defunct USSR, including industrially rich Ukraine, the Russian economy
still is seven times larger than the rapidly expanding economy of the People’s
Republic of China. Analyst Richard
Parker comments that “when you look at primary production... the Soviets [came]
out first globally year after year in things like natural gas, iron ore, and
steel.” In 1985, he observes, “they
produced nearly twice as much steel as the U.S. did. Taken together, all the things Marx, Smith, Ricardo, or any other
classical theorist of capitalism would tell you are important to industrial
success are hallmarks of the Soviet acheivement.”[3] Parker also points out that between 1985 and
1989, during the period of Peristroika, the Soviet GNP grew, according
to official statistics, by more than 3 percent a year. “Even by the CIA’s much more skeptical
estimates, the [Soviet] economy [grew] on average nearly one-and-one-half
percent -- not especially bad considering the tumult that Gorbachev’s reforms
and the resulting unrest [put] the Soviets through” at the time.[4]
Moreover,
up until the collapse of the Soviet Union in 1991, many of Gorbachev’s major
reforms appeared to be making progress.
In mid-1987, a rash of legislation on enterprise management was enacted
into law, setting into motion the enormously challenging task of dismantling
the gargantuan state-run, centrally managed Soviet economy and turning it into
a market-oriented system. By 1990, what
Gorbachev’s reforms had actually accomplished is anything but
insignificant. In Parker’s words:
“After seventy years of operating, often with only a dim awareness of their
costs and profitablility, nearly ninety-percent of enterprises [were] making
money -- in some cases (such as construction and engineering) so much money,
there [was] a debate whether profits of thirty-five percent are ‘socialist!’”
By the end of 1989, “reportedly twenty-five percent of transactions were taking
place directly between enterprises (instead of through ministries).”[5]
Meanwhile, employee cooperatives, which were given legal standing in mid-1988,
were booming. In 1987, the nascent
co-ops employed fewer than 200,000 people.
By early 1990, they were employing almost 5 million, “with no end to
their growth in sight.” Between 1987 and 1990 co-op sales increased from less
than 1 billion rubles to almost 30 billion. By the end of 1990, Parker
estimated that co-op sales would top 50 billion rubles, “one-eighth of all
Soviet retail sales. “That’s the
equivalent of adding the top ten U.S. retailers -- Sears, JC Penney, Safeway,
K-Mart, Seven-Eleven, and the rest -- to the U.S. retail market in twenty-four
months, a not insignificant feat.”[6]
Joint
ventures also gained momentum. Between
1988 and 1990, more than 1,200 joint ventures were registered. Among the more noteworthy were McDonald’s in
Moscow, and Gulfstream Aerospace, which began developing a new line of
high-priced corporate jets with Sukhoi, manufacturer of the vaunted SU-27
fighter. The Italian automaker, Fiat,
built a new plant to make 300,000 autos a year; Ferrugi Group, Europe’s largest
agri-business, began developing some 1.5 million acres of prime Russian farmland. A consortium of five of Europe’s largest
banks joined with Russian partners to launch Moscow International Bank which
will train budding Russian bankers and finance new trade and investments. By 1993, Chevron, Johnson & Johnson, and
Proctor & Gamble, were making multi-billion dollar investments in both the
Russian Federation and the Commonwealth of Independent States.[7]
Hardly
anyone who is aware of events in Russia following the aborted coup of August
1991 and the subsequent collapse of the Soviet Union in December of that year,
will deny that, for all practical purposes, Soviet-style Communism is dead in
Russia and that a return to the former system is highly unlikely.[8]
This fact of Russian political life was highlighted by the defeat of
anti-Yeltsin forces at the Russian White House in Moscow on October 4, 1993, an
event which, write New York Times reporters Adi Ignatius and Claudia
Rosett, “may mark the death-knell for Russia’s Communists as a viable political
alternative.”[9]
More recently, the results of the 1996 presidential election have demonstrated
beyond doubt that the majority of Russia’s voting population want President
Yeltsin’s market reforms to continue in spite of the many hardships they have
created.[10]
In
the midst of the often-times acrimonious debate over which direction Russia’s
economic reforms should take and how fast they will arrive, two opposing models
-- what can be categorized as the neo-liberal and the social-democratic -- have
emerged. The former favors, in the
words of former Financial Times Moscow Bureau Chief, John Lloyd, “an
‘American’ conception of economic reform and of economic existence: a form
whichs stresses the freedom and responsibility of the individual and leaves the
economy, as far as possible, to the operators of the private actors in it --
individuals, companies, and voluntary associations such as unions -- without
state interference.”[11]
This approach envisions a rapid transition to a market economy and has the
enthusiastic support of Boris Yeltsin’s former first deputy prime minister,
Yegor Gaidar. Other leading advocates
of the neo-liberal model include Larissa Piyasheva and Boris Pinsker, both
leading Russian free-market economists.[12]
By
way of contrast to the neo-liberal model is the gradualist or social-democratic
approach. The preferred example of this
model is “the Swedish... type, in which the state ensures comprehensive (and in
the Swedish case, generous) social provisions for all, and where the economy,
though largely private in the production sphere and encouraged to be
domestically and internationally competitive, is guided by the state --
especially in the determination of pay and investment.”[13]
Leaning toward this model is Arkady Volsky who, together with Aleksandr
Rutskoi, the former Vice President of the now disbanded Congress of People’s
Deputies, and Nikolai Travkin, comprise a powerful pressure group, the Civic
Union, whose membership includes former Soviet enterprise managers and
political functionaries.[14]
Volsky takes issue with the neo-liberal approach advocated by the Gaidar reform
program. His opposition centers around
what he terms the Yeltsin government’s reliance on Western consultants, such as
Jeffrey Sachs and Andrus Ĺnders. To
Professors Lynn Nelson and Irina Kuzes: “[Volsky’s] perspective [is] that
Russia could not forge a workable path to a market economy by trying to
duplicate procedures used in other countries,” in particular, the United
States. Russian capitalism, Volsky
insists, will develop gradually over time, a unique character of its own with
little, if any, reference to Western models.
“A real transition to the market is not possible,” he emphasizes,
“without considering national traditions and specific features of our country.”[15]
Furthermore, Volsky stresses that it is, “urgently necessary to strengthen
state influence on the economy, an approach that has been tested and found
suitable at the world level in global crisis and situations (for instance,
during the implementation of F. Roosevelt’s New Deal), with a subsequent gradual
cutback in the sphere of state intervention as the stage of crisis development
ends and the stage of economic revival begins.”[16]
Volsky’s
argument in favor of increasing state intervention in the economy during the
initial phase of reform runs parallel to that of economist Leonid Abalkin, who,
in 1990, along with then Soviet Prime Minister, Nikolai Ryskov, developed a
plan for economic reform which called for a “regulated market economy.”[17]
Abalkin draws a comparison between the Russian situation in 1992 and the Great
Depression of the 1930s in the United States reasoning that FDR used the
vehicle of state intervention and subsidies to help lift America out of the
crisis. Similarly in today’s
post-communist Russia, Abalkin insists that, “the only kind of market that
could work would be a regulated, socially oriented market. Only that kind of market could guarantee a
stable sociopolitical system.”[18]
Another
key advocate of the gradualist approach is Ruslan Khasbulatov, the former
parliamentary speaker. Khasbulatov’s
position on which direction the reforms should take is summed up in a speech he
gave before the Seventh Congress of People’s Deputies in December 1992 in which
he criticized the Yeltsin government and its policy of “shock therapy” which
was supported by then first deputy prime minister, Yegor Gaidar. Like Rutskoi and the Civic Union,
Khasbulatov also favors a mixed economy, “similar to those that exist in
Western Europe, with a substantial public sector and more emphasis on social
protection.”[19]
Accusing the Gaidar program of being driven by, “an American conception of
reform,” Khasbulatov argued that the neo-liberal model of reform in which the
stress is on the freedom and responsibility of the individual and on the
operation of the private exclusive of the public or state sector, was fast
losing its popularity in Russia. As he
put it, “the evolution of a mixed economy is becoming a general world-wide
trend and it would be naive to ignore this and try to Americanize our economy.”[20]
The
social-democratic model of Russian economic reform also has the support of Yuri
Kochevrin, a top advisor to the Moscow privatization program who, in recent
years, has worked closely with American neo-liberal scholars. “While I share, on the whole, the ideal of
minimal government,” he told Cathy Young, Contributing Editor of the pointedly
conservative magazine, Reason, “I see the realities that make it
necessary for us to borrow some important elements of the welfare state if we
are to have a civilized society in Russia.”
Even Ms. Young herself, despite her enthusiasm for the emergence of
“free markets” in Russia, is forced to admit, albeit with resigned
understatement: “To varying degrees, every professed free-market economist I
have met in Russia accepts state ownership in areas perceived as natural
monopolies -- highways, rail transportation, telecommunications, possibly
energy. And they do not question the
need for government aid to those truly unable to help themselves.”[21]
Also
reflecting the gradualist viewpoint, according to the findings of Katrina
Vanden Handel, were the “majority of Russians” who, at the time, favored “moderation to the pace and scope of
economic reforms,”[22]
suggesting that up to the outbreak of the violent confrontation between pro and
anti-Yeltsin forces on October 3 and 4, 1993, the weight of public opinion in
Russia rested squarely on the side of those who were in favor of the
social-democratic or gradualist model of reform.[23]
With
the above in mind, how did the outcome of the October crisis, in which both
Khasbulatov and Rutskoi played a prominent role, and from which they emerged as
losers, affect the pace and the future direction of economic reform? Would it signal a further acceleration of
the reforms toward the creation of a neo-liberal, Western-style free market, so
much favored by Gaidar and his allies in the Yeltsin cabinet?
There
can be little doubt that with Yeltsin in complete control of the Russian
government following the defeat of the anti-Yeltsin forces at the Russian White
House in Moscow, a major obstacle to his reform program had been removed,
making a speedier transition to a market economy possible. Sergei Vassilev, Director of the
government’s Working Center for Reform and Gaidar’s economic advisor, outlined
what the main goals of the new Yeltsin program would be, the most important of
which was a plan to reduce the federal budget deficit and drastically cut
inflation by severely limiting any further increase in the money supply.[24]
However,
despite Yeltsin’s dramatic victory at the Russian White House over his
opponents in the now disbanded Congress of People’s Deputies, the planned
reforms, it turned out, proceeded much more slowly than had been
anticipated. In fact, Yeltsin and his
new Prime Minister Viktor S. Chernomyrdin, did not move as far or as fast as
Mr. Gaidar and his supporters would have liked. Meanwhile, Yeltsin’s stated desire to run for reelection in 1996
made it unlikely that he would want to introduce hardships that would further
antagonize the voters.[25]
Even some of Yeltsin’s supporters in the United States at the time, most
notably Senator Robert Dole, then Senate Minority leader, “have wondered aloud
whether the pace of economic reform in Russia has been too fast for a society
that spent seventy-five years under Communism to bear.”[26]
Gaidar’s
return to the Yeltsin cabinet just prior to the outbreak of the October crisis,
therefore, did not portend a return to the “shock therapy” program which had
earlier led to his resignation as Prime Minister in December 1992. Although he would declare in a speech in
Rostov-on-Don on September 17, 1993 that economic stabilization would require,
“tough decisions in the area of state expenditures... and drastic changes in
state purchasing policies,” some observers wondered whether, by reappointing
Gaidar, Yeltsin, “was once more responding to a crisis by an essentially
symbolic gesture.”[27]
Moreover, pro- Yeltsin officials in the Clinton administration, although they
continued to voice their concern over Russia’s ballooning inflation rate, and
were exasperated that Moscow was not doing enough to reduce its burgeoning
budget, nevertheless, reluctantly admitted that Russia’s economy was, “not in
desperate shape and had made considerable progress over the last year [1993],”
in spite of Gaidar’s absence from the Yeltsin cabinet for much of that time.[28]
Thus,
notwithstanding the outcome of the terrible events of October 3 and 4, 1993 at
the Russian White House, the “shock therapy” program advocated by Gaidar and
Harvard economist and then Yeltsin economic advisor, Jeffrey Sachs, which
favored a rapid transition to a Western-style, neo-liberal capitalist economy, by
the end of 1993, had gone out of vogue among most of Russia’s reformers, to be
replaced by the gradualist approach advocated by, among others, Arkady Volski
and, ironically, by Boris Yeltsin’s now vanquished rivals, Aleksandr Rutskoi
and Ruslan Khasbulatov.[29] As Russia’s reforms progressed from the
chaos of 1992-93, what emerged out of the dismantled command structure of the
former Soviet Union, was a “mixed economy” containing, “a substantial state and
private sector but with the state still dominant in large-scale industry,
agriculture, transportation, and finance, while private enterprise flourishes
mainly in services trade and small-scale production.”[30] The new, emerging Russian capitalist system
began to resemble more the “communitarian” model of Western Europe and Japan,
rather than the “individualistic” model of the United States.
To
former Financial Times Moscow Bureau Chief, John Lloyd, however, the
argument over which model of reform best suits the needs of a rapidly changing
Russian economy is largely academic.
The real debate between Yeltsin and his many critics is not only over
the advantages of neo-liberal versus social-democratic models of reform. In a much more significant sense, what it
reflects is, “the polarization of the economic debate in the West” which took
place during the late 1970s and early 1980s and which has compelled economists
both in Western and Eastern Europe, including Russia, to rethink, in the midst
of the turbulent process of reform, “what works and what does not.”[31]
Without
doubt, the majority of Russia’s reformers and people today are convinced that Soviet-style
Communism does not work; but, as Russia’s leaders struggle to convert the
moribund command system of the former Soviet Union to a market economy, exactly
who owns what remains largely undecided.
What should be the nature of the new emerging economic system? Should there be a “mix” between state and
private property, and what should that “mix” be? Should private property exist at all and, if so, in what form? Should private enterprise be actively
encouraged or merely tolerated? And,
perhaps most important, who should own and control the state enterprises that
are privatized?
Professors
John Logue and Daniel Bell list a variety of ownership forms available to
Russia’s reformers which, in their view, are compatable with a market
system. These range, “from highly
concentrated private ownership, through a Jeffersonian pattern of widely
dispersed ownership in small businesses, family farms, and employee stock
ownership, to state and municipal ownership within a market socialist
structure.” To Logue and Bell,
“choosing which mix of ownership forms to replace monolithic state ownership is
crucial to the process of reform.”[32]
From
the mix of ownership forms, three principal options emerged: the state monopoly, characterized by the oil
and gas industry giant, GASPROM; the joint-venture with foreign corporations,
of which McDonald’s in Moscow is the more famous; and various forms of worker
control and external shareholder ownership along conventional capitalist
lines. Of the three, the most prevalent
ownership form which has taken root in Russia since the reforms began in 1992,
as we shall notice, is direct worker ownership with the workers as the majority
stockholders.
Worker-ownership
in Russia after 1991 occurred within the framework of the Russian Federation’s
privatization legislation of June 1992.
This legislation granted employees preference in purchasing voting shares
in the state owned enterprises which were slated for privatization. Also enacted was legislation which called
for giving every Russian citizen a voucher that could be exchanged for shares
or real property.[33] Under the June 1992 plan, small enterprises
of less than 200 workers and with a value of less than one million rubles
(based on the ruble value of January 1, 1992), were to be sold in their
entirety, without the formation of joint-stock companies. These were to be sold at auction or through
competitive bidding. Enterprises larger
than 1,000 workers or valued at more than 50 million rubles were to be
privatized by transforming them into joint-stock companies. In all, the 1992 privatization scheme
included roughly 20,000 medium-and-large-scale state enterprises all of which
accounted for the lion’s share of Russia’s total industrial capacity. It was, as one writer has said, the largest
single transfer of wealth in modern times.[34]
The
plan being proposed by the government included two principal privatization
options for Russian enterprises, both of which have since provoked intense
debate among Russia’s reformers. In
particular, major disagreements have arisen over the manner in which ownership
of enterprise shares should be structured.[35] One option calls for external ownership in
which investors -- individual owners or shareholders -- hold a controlling
share of the stocks. Enterprise employees, including managers and
non-managerial workers, could receive a total of 25 percent of an enterprise’s
statutory capital without charge; however, these were to be non-voting
shares. In addition, employees could
buy 10 percent more of the enterprise’s statutory capital with a 30 percent
reduction in the face value of the shares; management could purchase an
additional 50 percent at face value.
Shares not distrubuted to employees in an enterprise would be sold at
auction by the Property Fund. This fund
was set up as part of the June 1992 law and mandated to distribute dividends
from the sale of enterprises which would go to create special funds for social
welfare, environment protection, support and development of urban
infrastructures, and several other purposes.
Guidelines in the June 1992 law specified that Property Fund purchases,
“should include enterprises that could advance desired national or local
objectives, such as improving the environment or preventing the bankruptcy of a
larger enterprise that has a particular significance for a city’s economy.”[36] According to Professor Thomas Weisskopf of
the University of Michigan, the external ownership form represents, “those on
the Right of the political-economic spectrum of the debate over reform,” i.e.,
the advocates of the above mentioned neo-liberal model. It includes, “people whose attachment to the
enterprise is based on an ownership stake rather than on work within the
enterprise.”[37]
The
second major option in the government’s privatization plan provided for
internal or insider ownership in which a controlling share of the stock is held
by insiders, that is, the workers and managers of the enterprise itself. Here, the goal is to assure the workers a
significant role in the governance of the enterprise. Insider control may include control by the enterprise’s managers,
by its workers, or by some combination of the two. Worker control can be exercized directly or indirectly through
the election of representatives to a worker’s council.[38] Employees can purchase 51 percent of the
stock at 1.7 times the book value of the shares, with voting privileges. Half of the value of these shares could be
paid for with privatization vouchers.
Unlike the first option, employees could actually control as well as own
their enterprise. However, they would
not receive discounted stocks, and they would not be allowed to pay for their
shares in installments. Whatever shares
remained would be auctioned by the Property Fund.[39] In contrast to outsider control, insider
control, states Professor Weisskopf, “represents those on the left of the
political-economic spectrum of the ownership debate,” i.e., the supporters of
the gradualist or social-democratic model of reform.[40] Of the two, the latter option, insider
control, comments John Lloyd, “is the [one] most often chosen by the work
collectives (employees and managers), who will become shareholding
companies...”[41]
Under
Yeltsin’s projected aim of privatizing one-half or more of construction, food,
light industry, and retail trade by the end of 1992, the number of worker owned
enterprises grew rapidly to where, in terms of their numbers, they now
constitute a major segment of the reformed Russian economy. Between December 1992 and February 1994,
almost 9,500 large-scale state enterprises, employing 11 million workers, were
privatized, creating 40 million new shareholders. Professor Joseph Blasi of Rutgers University, in a survey he and
others conducted in 1994 of some 200 large privatized enterprises, discovered
that the majority -- 66 percent -- are employee-owned, with the employees
themselves as the majority stockholders (43 percent). Altogether, by the end of 1994, approximately 14,000 midsize and
large size enterprises were privatized in Russia as worker-owned enterprises,
all but dwarfing privatization programs in Germany, the Czech and Slovak
republics and in Poland. Indeed, “[t]he
speed with which the program has been enacted,” comment reserachers Ira W.
Libermann and Suhail Rahuja, “is impressive given Russia’s recent political
turbulence and its dire macroeconomic performance.”[42]
The actual beginnings of worker
ownership in Russia stem from the early years of Mikhail Gorbachev’s economic
reforms when what were then called “work collectives” (employees as a group),
were allowed to lease state-owned enterprises on an experimental basis. In 1985, Estonia became the first Soviet
republic to begin employee leasing on a small scale in the service sector.[43]
Two years later, in the fall of 1987, Dr. Valery M. Rutgaizur, then an
economist at the All-Union Institute for Public Opinion Research, adapted
employee leasing to industrial enterprises around Moscow. Those enterprises which were leased were
allowed to retain whatever surpluses they made and plow them back into the
enterprise in the form of capital improvements, increased wages, and programs
to improve living conditions. By early
1990, there were between 1,200 and 2,000 employee-leased firms employing
between one and two million workers.[44]
The
next major step toward the creation of worker-owned enterprises was taken in
January 1990, when the USSR Council of Ministers created BUTEC People’s
Concern. BUTEC was set up as an
experiment which combined collective employee ownership of former state
enterprises with market forces. It
allowed worker employees to purchase industrial assets directly instead of
leasing them from the state. Those
state-owned enterprises joing BUTEC were allowed to withdraw from the state
plan as soon as their work collectives bought out the enterprise’s assets. To place worker ownershp of former state
enterprises on a more permanent basis, The Law on Property was passed by the
Congress of People’s Deputies and went into effect on July 1, 1990.[45]
Over
the next eighteen months -- between July 1990 and December 1991 -- the work
collectives of approximately 66 enterprises, most of them located in the region
around Moscow, in light industry, construction, and retail services, took
advantage of the BUTEC model and bought out their enterprise’s assets. Besides existing enterprises, by July 1991,
BUTEC members had expanded to include 400 new businesses. In addition, 80 state enterprises, where
privatization was not allowed previously, became assoicated members of
BUTEC. All told, by the spring of 1992,
BUTEC members employed approximately 26,000 workers, with median employment
about 300.[46]
Although BUTEC enterprises were small by Soviet standards both in size and in
number, the BUTEC model, comment Logue and Bell, “provided most of the Russian
experience with direct worker ownership” prior to the June 1992 reforms.[47]
Unlike
their Soviet predecessor, the employee-leased enterprise, BUTEC enterprises
were permitted a broad range of activities in their day-to-day operations. They were allowed, “to determine their own
plans for production, obtain their own sales, deal directly with suppliers,
issue securities, hire skilled labor, set wages, and establish their own prices
within legal limits, ‘under the guidance of the market.’”[48]
BUTEC enterprises could also engage directly in foreign trade and could
establish a commercial bank to provide credit both to enterprises and to
individual employees to handle foreign currencies.[49]
Because
of their wide range of business activities, BUTEC enterprises constituted what
Logue and Bell recognize as, “a nascent market system, building market
relationships from below, though [BUTEC enterprises] could continue to buy from
and sell to state enterprises covered by the plan.”[50]
Profits made by the BUTEC enterprise belong both to the enterprise and to its
employees. Their direct relation to the
state was limited to paying taxes whose rates varied according to use. Earnings which were used for capital
improvements and social developments such as housing were taxed at 8 percent,
with the remaining income taxed at 17 percent.
Left-over earnings were allocated to employees in the form of bonuses
and dividends.[51]
Logue
and Bell point out that while the motives for joining BUTEC varied, in most
cases, “a crucial motivation,” for those enterprise managers they interviewed
while visiting Russia, “was escaping the straight-jacket of the state plan.” To
Valery Varvarov, BUTEC’s personnel director, the emerging BUTEC enterprises
represented, at the time (1991), in his words, “a new ownership and managerial
system” which allows employees to own the fruits of their labor while it
enables the enterprise manager to, “escape from the command system entirely.”[52]
As
the main focus of their study of worker-ownership in Russia, Logue and Bell
selected two recently privatized enterprises, both of which they considered
typical BUTEC enterprises, the Tveris plant, which produces consumer glassware
and art glass; and Stroipolymer, which is located in Golitsymo, about 30 miles
from Moscow and manufactures laminated polymer construction products, including
linoleum, wall paper, and vinyl coverings.
Stroipolymer, coincidentally, was one of the first plants in the Moscow
region to be leased by its employees.
The
Tveris plant, located in the city of Tver, was purchased by its employees on
July 1, 1990 for 6 million rubles. It
employs 1,000 workers and has an operating income of 10 million rubles. According to its director, Igor Seminov, the
enterprise’s real value, at the time of Logue and Bell’s visit in 1991, was
estimated to be at least 15 million rubles.
At first, Tveris was registered as a “People’s Concern” within BUTEC;
but in May 1991, it underwent restructuring as a shareholding society and began
issuing 6,000 shares at 1,000 rubles each.
About 70 percent of the total number of shares -- about 2,000 -- are
held by employees who qualify for them on the basis of seniority and salary. The remainder -- about 4,000 -- are held by
the shareholding society collectively, while an additional 500 shares were made
available for direct purchase by employees who were permitted to purchase them
on credit. In 1992, the firm initiated
an internal market which allowed employees to buy and sell shares to one
another.[53]
Like
the old Soviet enterprise, Tveris (and also Stroipolymer, as we shall notice),
not only manufacturers goods and pays wages, but provides its employees with
social amenities as well. At the time
of Logue and Bell’s visit, two major projects were planned, the construction of
a new plant to increase output, and 4.5 million rubles-worth of new housing for
its employees. As an alternative to
state supply of distribution channels, a small commercial bank together with
several trading firms were also established.
To Igor Seminov, these new agencies help to insulate Tveris against what
he calls, “the complete anarchy of supply,” and insure that Tveris will have an
adequate supply of credit to satisfy its operating expenses without fueling
inflation.[54]
Seminov
became the general director of the Tveris plant in 1988 when enterprise
managers were elected directly by the workers.
Since then, he has been made responsible to a seven member management
board which is elected by a fifteen member shareholder’s council, which, in
turn, is elected by employee shareholders.
The shareholder’s council includes the local trade union leader. Although the relative roles of management
and shareholders were not yet clarified, the shareholder’s council represents
the owners of the enterprise and has the right to democratize management.[55]
As
to actual performance, the Tveris enterprise, Logue and Bell discovered, did
quite well, especially in terms of increased worker salaries. During its first year as an employee-owned
enterprise, Tveris workers experienced an increase, both in wages and wage
differentials, from a range of 200 rubles to 600 rubles per month before
conversion to a worker-owned enterprise, to a range of 300 rubles to 1,200
rubles per month after conversion. This
compares very favorably with the average Russian industrial wage which, in July
1991, at the time of Logue and Bell’s visit to Russia, was approximately 250
rubles per month.[56]
Like
Tveris, the Stroipolymer enterprise also increased the average wage for its 700
employees from 220 rubles per month in April 1988, to 360 rubles by February
1990. The enterprise constructed 60 new
apartments for its workers and built a clinic.
Also planned were two additional apartment buildings for Stroipolymer
employees and 60 detached cottages.
Since the employees purchased the plant in 1990, the average wage
doubled to 700 rubles by July 1991.
Employment at the plant, however, was reduced to save costs. In 1992, Stroipolymer embarked on a 200
million ruble capital improvement project which is expected to more than double
existing production capacity, add more products to its line of manufactured
items, and increase the enterprise’s participation in joint ventures with
foreign companies.[57]
Besides
increasing wages, the managers at Stroipolymer we are told, are striving to
promote among their workers a knowledge of ownership as well as a sense of
responsibility for their work. In this
regard, the managers have met with some success. Those Stroipolymer workers who Logue and Bell interviewed seemed
knowledgable of and appeared relatively satisfied with the concept of worker
ownership. “Previously we were on fixed
wages,” responded Anatoly Aleshikov, a manual worker with thirty years
seniority at the plant and 90,000 rubles in shares. “Now when we get greater productivity, we benefit directly. So
now, we always try to implement new ideas.”[58]
The
workers at Stroipolymer are also encouraged by mangement to assume greater
responsibility for their work through decentralization and team decision making
-- what Stroipolymer’s general manager, Makharinov calls, “psychological
privatization.” Makharinov’s “greatest success,” write Logue and Bell, “has
been a group of eight employees involved in producing polymer stabilizers who
now run their department as a separate subsidiary. They produced eighteen tons of stabilizers the previous year
(1990); now they produce eighteen tons a month.”[59]
Summing
up, Logue and Bell conclude that direct employee ownership of privatized
enterprises is an ideal solution to the problem of economic reform in
Russia. Privatization through worker
ownership, they write, “can be carred out quickly, provides powerful incentives
for workers to increase production and reinvestment, and its labor-based
formula for allocation fits both ideological and cultural norms ... What we saw
at Tveris, Stroipolymer, and the four other plants we visited, was an
impressive demonstration of managerial initiative, improvements in production
and compensation (in real terms, at least through July 1991), a significant
expansion of existing production capacity, and the development of new products,
businesses, and joint ventures.
Production is up, wages are higher, and employees are beginning to
accumulate substantial capital.”[60]
Although both Logue and Bell acknowledge that significant technical and
cultural problems remain, “even in these innovative enterprises” -- the most
intractable one being, “the lack of a culture of ownership among Russian
workers” -- the “‘collective private property’ that BUTEC promoted,” they
conclude, “ties capital ownership to labor output. Although it can be [and is] combined with joint ventures and with
foreign firms and investors, its underlying premise has been that
privatization” utilizing worker ownership, “should spread productive wealth
broadly.”[61]
The
views of Logue and Bell on the advantages of worker-owned enterprises to the
reformed Russian economy are shared by John Simmons, President of Participation
Associates, a management consulting firm, who draws a comparison between
worker-owned enterprises in Russia, such as Moscow Ventilator, Veshky
Enterprises, and Sartov Aviation, and employee-owned companies in the United
States. Commenting on the profitability
of U.S. employee-owned companies, Simmons writes: In 1992, “the value of stocks
in employee-owned companies listed on American exchanges rose twenty-three
percent, compared with an increase of 4.2 percent for the Dow Jones Index
stocks.” Like their American
counterparts, Russian worker-owned enterprises have also witnessed their
“profitability, quality, and production [improve] dramatically.” In the drafting of privatization legislation
by the Russian parliament, it was generally understood, “that encouraging
employees to hold the majority of the common stock” (at least fifty-one
percent), “is a superior form of ownership.”[62]
At
the time of Logue and Bell’s arrival in Russia in July 1991 to study worker
ownership, about 100 firms had opted out of the command economy through direct
worker ownership. Since then, as was
mentioned above, thousands of additional state owned enterprises have been
added to the growing list of worker-owned enterprises, largely as a result of
Yeltsin’s privatization program, making direct worker ownership the chief
privatization option for Russian reformers.[63]
Precisely
what “direct worker ownership” means varies from one enterprise to another, we
are told; but, as Logue and Bell observed in 1991, on the whole, the concept of
worker ownership appears to be, “an attractive alternative both to state
ownership and to ... other forms of privatization...”[64]
As the notable Russian economist Jacob N. Keremetsky declared before an
audience of Russian managers of worker owned and leased enterprises:
“[E]mployee ownership is the most socially acceptable form of privatization
because it avoids the class conflict inevitable in all other types of
privatization.”[65]
Be that as it may, the experiment in worker ownership offers some relief from
the bleak picture of Russian reform.
“In the midst of the general Russian economic debacle, the evidence is
overwhelming,” conclude Logue and Bell in their study, “that employee owned and
leased enterprises have worked,” if only on a limited scale.[66]
In
spite of the importance of worker-ownership to Russian economic reform, several
questions persist: What, on the whole,
has been accomplished as a consequence of economic reform? Has any good come from the attempted
transformation of Russia into a market economy? What effect has privatization had on Russian society?
Russia’s
tumultuous transition to a market economy, writes journalist Steve Liesman, “is
a story of fired ministers, a plunging ruble, soaring inflation and even
violence...”[67]
And yet, despite the lingering fears about hyperinflation and the demise of
economic liberalization that are voiced following each government shakeup,
there are sure signs that, after years of decline, the reforms are succeeding
and that Russia has finally turned the corner on success. Russia’s gross domestic product, the
standard gauge for measuring an economy’s success, some economists estimate,
including the new president of Goskomstat, Yuri Yurkov, may be as much as 40
percent higher than the official numbers indicate. One Western economist discovered that, in dollar terms, Russia’s
gross domestic product had soared to $61.4 billion for the first quarter of
1994, implying a GDP for 1994 of $246 billion, compared with $174 billion in
1993.[68]
Private consumption, as a share of the GDP, has begun to rise, from a paltry 40
percent -- two-thirds being considered normal in the West. Real income rose by no less than 9 percent
in 1993; registered retail sales have expanded by 2 percent which Swedish
economist Anders Ĺslund feels are most likely underestimated; as much trade,
statistically, he points out, is in the form of what he calls, “elusive
informal street trade.”[69]
Increased sales of individual products, especially consumer durables, were most
impressive. Sales of television sets,
for example, surged 34 percent.
“Refuting ideas of approaching famine,” observes Ĺslund, was the 46
percent share of family budgets spent on food.
Througout the Russian Federation, a construction boom for individual
family homes is underway, a good indicator that as the twenty-first century
approaches, Russia may be changing from a society primarily of apartment
dwellers into a country of home owners, a sure sign of the rise of a prosperous
Russian middle class. The construction
boom has spread to Siberia where one in three families are building their own homes.[70]
In addition to home construction, the Russian auto industry continues to expand
as the total number of automobiles owned by Russians increased by 9 percent in
1993 and was expected to rise again in 1994.[71]
Ĺslund’s
optimistic conclusions about the success of the privatization program in
promoting Russia’s economic growth are shared by the findings of The
Economist.[72]
Moscow, it discovered, has all the markings of a classic boomtown. After a precipitous drop in productivity
between 1990-1993, when industrial production was cut in half, there are
definite signs that the decline in industrial output may have reached bottom.[73]
As a consequence of privatization, the private sector of the Russian economy
today produces 58 percent of the country’s official GDP which in June 1994 was
364 trillion rubles or $245 billion at the average exhange rate for the
period. In the year to July 1994, real
household incomes rose by 18 percent while real household consumption increased
by 10 percent. Savings are also
up. In July 1993, Russian households
had 1.6 trillion rubles ($1.5 billion) on deposit at banks. One year later, in July 1994, that figure
shot up to 14.8 trillion rubles or $7.4 billion. Critics can still be found who complain about Russia being forced
to live on imported food; yet, for the first eight months of 1994, Russia
actually enjoyed a trade surplus of $11.7 billion. Imports of chicken and red meat displayed a marked increase from
90,000 tons in January 1994 to almost 400,000 tons in August. Inflation, although still high, has levelled
off to between 4-8 percent per month.[74]
Ordinary Russians, The Economist discovered, are living far better than
the gloomy official Russian statistics suggest. One major reason is that Russians, on average, pay much less for
basic necessities than do their counterparts in the West. Even though prices for basic services like
rent, heat, water and gas have risen sharply, they still represent only a
fraction of the cost of delivering these services to consumers. For this reason, the proportion of
disposable income in Russia is far greater than in many other countries and the
number of people living below the poverty level has been cut in half, from
slightly over 40 million in June 1993, to 20 million in June 1994. According to Russian Labor Ministry
statistics for the first half of 1994, the income differential between the
richest ten percent of the Russian population and the poorest ten percent is 1
to 7.5, down from 1 to 11 in January.[75]
“A massive redistribution of income is taking place” in Russia today, comments
Ĺslund, and although income differentials “have widened... they are still
smaller than in the United States.”[76]
One
of the most significant results of privatization since 1992 has been its impact
on Russian society. According to a
recent survey in Argumenty I Facty, Russia is turning into a nation of
middle class citizens due chiefly to the economic reforms in progress. The popular weekly newspaper defined between
25 percent and 30 percent of Russians, approximately 50 million citizens, as
middle class, earning monthly salaries of up to 500,000 rubles (about $250). An additional 5 percent of the population,
about 9 million citizens, fall into the upper middle class, earning more than
500,000 rubles a month, while more than 2.5 million Russians, or 3.5 percent of
the population qualify as ruble millionaires with monthly incomes of $1,000 to
$1,500.[77]
Another
important consequence of privatization has been the emergence of the Russian
stock market which, by August 1994, had become the chief source of new capital,
replacing state investment. By the end
of 1994, the Russian stock market had a total capitalization of over 90 million
rubles. According to the Ministry of
Privatization, since the start of 1994, over $500 million a month is flowing
into the Russian market, most of it coming from foreign investors. For American and other foreign investors, comments
journalist Richard W. Stevenson, “Russia presents a business opportunity so big
that they can no longer afford to hold back.”[78]
Since Russia completed its first round of privatization on June 30, 1994,
“money has been pouring into the country ... from foreign companies and
investment funds that had previously been scared off by the near chaos of
Russia’s political and economic transition.”
American direct investment in Russia, which was practically nil at the
beginning of 1994, is projected to reach $50 billion in the next ten
years. Comments Dan Lubash, an analyst
who tracts Russia for Merill Lynch, “the actual wealth behind the Russian
economy is tremendous.” Danielle
Downing, the director of Russian investments at C.A. & Company, a
Russian-owned brokerage firm, expects emerging markets funds from the United
States, which have experienced rapid growth in recent years, to begin
allocating up to 12 percent of their assets in Russia, “making Russia one of
the largest targets for investment of that type.”[79]
A
major source of foreign investment in Russia has been in the area of
international joint ventures, where, declares Vladimir Kvint of Fordham
University, “the climate has never been better.”[80]
In a study Professor Kvint conducted of joint ventures attempted in Russia
between 1989 and 1993, it was discovered that between 35 percent and 38 percent
of consumated joint ventures, “are already profitable or well on their
way. That’s the highest success rate
for new businesses in the world.”
According to Professor Kvint’s statistics, by early 1994, there were
more than 18,000 joint ventures in Russia representing more than $10 billion in
foreign investment. The largest foreign
joint venture partners are from the United States, Germany, and the European
Community countries.[81]
The number of U.S.-Russian joint ventures has increased dramatically from a
mere 625 in January 1992 to 2,800 by January 1994. Professor Kvint’s study also found that approximately $1 billion
in U.S. investments flowed into Russia between October 1992 and December
1993. Many of the largest American
companies, including IBM, General Electric, Ford, Hewlett-Packard,
Eastman-Kodak, Playtex, Chevron and AT&T are already on location. In addition to the big corporations,
thousands of small and medium-sized ventures have also arrived. Most of the joint ventures, Professor Kvint
informs us, have been in software, heavy industrial production, tourism and
hotels. “There has also been an
explosion in the growth of research and development,” and companies such as
Bell Labs are cooperating with Russian scientists to study space, electronics,
optics, lasers, and nuclear energy.[82]
What
contribution has worker-ownership in Russia made to the success of economic
reform in general? What impact has it
had on the actual performance of those enterprises which have been privatized
since 1992? Has it improved
efficiency? Has it encouraged the
restructuring of the enterprises which were privatized?
In
support of the findings of Logue and Bell, a number of independent observers of
the Russian economy have discovered that the decentralization of ownership and
control rights from central state officials to enterprise managers and workers
resulting from privatization-cum-worker-ownership has, by and large,
dramatically improved enterprise performance.
Joseph Blasi of Rutgers University, has found, “considerable evidence”
that as the formal privatization process draws closer to completion, “the [privatized]
enterprises are becoming more efficient.”
After eighteen months studying 150 large and medium-sized state owned
enterprises that were privatized, Professor Blasi found that more than 60
percent of the sales of these companies are to private businesses. About 20 percent of the privatized
enterprises have had contact with foreign investors to explore investments,
joint ventures, and other projects. And
over one-half, he adds, “have already changed their product lines to reflect
the products that consumers really want to buy.”[83]
Professor
Blasi’s study also reveals that, between 1992 and 1994, direct worker ownership
was the centerpiece of the Russian privatization program. While it is true that managers “exercise
firm control” of most of the enterprises surveyed, and although outside
investors have a “growing influence” over many privatized enterprises, it is
also true that, “employees remain majority shareholders at most companies.”
Nor
does inside ownership imply, as opponents of worker-ownership argue, bad
governance and lack of economic dynamism.
For instance, in Nijny Novgorod, at Russia’s largest pasta plant,
although workers have acquired a 66 percent share of the stock, they have included
outside investors in order to improve the plant’s efficiency and profit
potential. Major outside shareholders
include two Russian companies that buy and sell pasta. In exchange for a share in the company’s
profits, “and a toehold in the Russian market,” Italian investors have agreed
to provide new equipment in order to update the plant’s facilities.
The
Nijny Novgorod experience, declares Professor Blasi, “is not uncommon”
throughout Russia. “In our study
employees bought 66 percent of each enterprise (senior managers got 8 percent);
21 percent went to outsiders. The
Russian government, for its part, retained 13 percent; these shares are to be
sold later to outsiders -- particularly Russian or foreign investors who agree
to put money into the enterprise.”[84] Clearly, despite some restructuring of
enterprises to include outside investors, worker-ownership, nonetheless,
constitutes a major segment of the economic reforms now underway in Russia.
Professor
Blasi’s findings are corroborated by Professor Thomas Weisskopf of the
University of Michigan. “Contrary to
expectations,” he writes, “workers in medium-and-large scale industries have
been voting heavily in favor of ... insider ownership by workers and
managers.” In most of these enterprises,
“insiders have acquired at least 50 percent of the shares; though they can in
principle sell these shares to outsiders, there is no sign of an active
secondary market as yet. Even where the
vote has gone in favor of [outsider control], insiders have often been able to
acquire a significant fraction of the voting shares; and in many cases a
substantial amount of equity remains in government hands.”[85]
What
lies ahead? What is the future of
worker ownership in the new Russia?
Will it continue to play the same significant role in reforming the
Russian economy in the years ahead that it has up to now? Moreover, who actually controls the
enterprises which have been privatized?
And finally, what does worker-ownership in Russia imply for social and
economic policy?
In
the coming years, the vast majority of state enterprises, Professor Weisskopf
predicts, “will become neither conventional capitalist firms nor worker
controlled enterprises.” Instead, the
likelihood is that, “they will be transformed into joint- stock companies owned
by some combination of insiders, outsiders and government agencies; insiders
will most often hold controlling shares, and companies will be predominantly
under the control of the same managers who have been controlling them for
years.”[86]
Although some enterprises may come under the control of outsiders, including,
no doubt, elements of the notorious Russian mafia, “a much larger proportion of
enterprises will be dominated by insiders -- typically members of the nomenklatura
-- the former Communist Party elites who have managed to parlay their
privileged positions in government or industry in the old centralized system
into advantageous positions of ownership and control in the new decentralized
order.” Nevertheless, “[i]t has become
clear,” concludes Professor Weisskopf, “that insider control -- whatever its
merits or demerits -- is likely to be a fact of life in most medium to
large-scale enterprises in Russia for a long
time to come.”[87]
Professor
Weisskopf’s observations are confirmed by Professor Blasi’s study which found
that fewer than 5 percent of the enterprises he surveyed had any rank-and-file
employee representation on company boards.
“If anyone has too much power in these companies, it will be the
managers and not the workers.”[88]
And yet, despite the prevalence of manager control, workers will still be able
to bring considerable pressure to bear on management to avoid large-scale
enterprise downsizing and layoffs.
Moreover, while insider control may “slow down the process of
restructuring... it will help to avert
what could otherwise be unmanageable social, political, and economic problems
of labor and community dislocation...”
This is extremely significant, emphasizes Professor Weisskopf,
“especially in the absence of publicly funded social safety nets.”[89]
Be
that as it may, the battle over the future of privatization and worker
ownership in Russia goes far beyond questions of worker control and economic
performance and is sigificant for another reason, namely, the future of social
and economic policy in Russia. Comments
Professor Weisskopf: “Whether... enterprises become owned and controlled
primarily by outsiders or by insiders will influence the nature of the social
system toward which Russia is evolving... If insider control continues to
predominate, it is more likely that Russia will develop into an alternative
type of market system -- one in which social restraints on the operation of
unfettered markets are more widespread.
Insider ownership even holds out the possibility that some kind of
labor-manged firms could evolve in the future -- but such a development would
require that workers mobilize to transform their currently passive enterprise
stakes into a basis for genuine worker control.”[90]
After
more than seventy years, Russia has abandoned its “utopian experiment” with
Marxism-Leninism and a command economy in favor of democracy and a market
system. Despite the seemingly insurmountable
problems Russia and her people have endured in making the difficult transition
from one-party dictatorship to parliamentary, multi-party democracy, Russia
today still remains what historian A.J.P. Taylor once called, “a showpiece of
European ideas.”[91]
With a minimum of massive violence and bloodshed (the possible exception is the
now concluded war in Chechnya), the people of Russia and their leaders, writes
Jude Wanniski, the president of the economic consulting firm Polyeconomics
Incorporated, “are now engaged in nothing less than designing the basic
architecture of a brand new country,” utilizing in the process, little
financial aid from the West.[92]
Not only that. Russia, declares Dimitri
Simes of the Carnegie Institute for International Peace, is the only world
power in recent memory to peacefully relinquish all of its once mighty empire
without being defeated by war. “It took
the British more time and travail to leave India,” observes journalist Martin
Malia, “and the French far more to let go of Algeria.”[93]
Russia has also voluntarily relinquished superpower status and is now in the
process of reevaluating her definition of greatness closer to home. In a word, Russia literally is reinventing
herself both as a nation and as a society.
In doing so, she is evolving new models of social and economic
development which are different and unique both from the highly centralized
command system of the former Soviet Union, and the individualistic, neo-liberal
economy of the United States. As such,
the Russian experience with economic reform could serve as the prototype for
other former Marxist-Leninist regimes making the transition to a market
economy.
Today,
new political and economic forms are emerging in the Russian Federation which,
in the words of Stephen Cohen of Princeton University, are neither, “a replica
of America’s present [nor] of the Soviet past.” Instead, “it will be, as is said increasingly in Moscow, some
‘third way.’”[94]
As Boris Yeltsin told the Russian people in his historic speech on October 28, 1991
as he was about to introduce his privatization program: “We are not leading
Russia to any kind of capitalism.
Russia is simply not suited for this.
Russia is a unique country. It
will not be socialist or capitalist.”[95] The “third way” is symbolized by direct
worker-ownership. As the centerpiece of
privatization, the worker-owned enterprise, the “collective private property,”
by combining the principles of state and private ownership, has become
virtually synonomous with Russian economic reform.