23. Sub-Rosa Privatization

and Marketization in the USSR(1)

Gregory Grossman

An international committee of experts seeking to define the social conditions that maximize the scope and size of a country's underground economy would in effect rediscover Soviet-type socialism. Of course, the underground economy in some form or other the aggregate of a country's ongoing illegal economic transactions and supporting activities is a universal and venerable phenomenon that spares no social system. One exists wherever there are taxes to be evaded, price or wage controls to be violated, a principal's property and prerogatives to be abused by the principal's agents and employees especially when the principal is the state and other legal norms regulating economic behavior to be infringed which is to say everywhere, and not the least in a Soviet-type society. The specific features of a particular underground economy are largely a reflection of the ambient socioeconomic, legal, and political institutions. Change the ambient system and the underground economy will adapt and change, but it will hardly disappear. Moreover, its vigor and vitality are probably not unrelated to the culture and prior history of the population, though, with time, cultural resistances to corruption and "economic crime" to introduce a Soviet phrase may be expected to recede before the force of economic self interest working within the given institutional setting and economic conditions, as seems to have happened in once relatively clean East European countries, such as East Germany Prussia and the Czech lands. In addition, it seems to be virtually impossible to extirpate an underground economy or its inevitable concomitant, corruption, by police methods alone, not even under a Mao or a Stalin.

Underground business is usually conducted on private account though governments and their subdivisions have been known to trade in violation of their own, not to say other countries' laws and because it operates out of reach of all administrative authority, its prices and markets are necessarily free. It is also likely, except in the case of relatively small transactions, to employ money as the main medium of exchange, rather than to transact by barter. Hence, in capitalist market economies, the distinction between the underground and the aboveground economy is more legal than systemic. On the other hand, in the Soviet-type system, it is precisely the cited attributes, in addition to the legality criterion, that set the Soviet underground economy off from the ambient that is, official, Stalinist economy, which at least until very recently was almost entirely non-private and devoid of free markets and free prices and in which money has played largely a passive role.

An interesting question, therefore, implicit in this article's title, is whether the Soviet sub-rosa economy may not, in some manner or other, perform a significant constructive role in the course of the Gorbachevian economic reform, which reform, as we know, aims to introduce substantial and, of course, legal privatization of business activity; to marketize the economy, that is, to supplant the command system with a market mechanism of sorts; and to increase the overall use of money as the economy's primary exchange medium. We shall return to this question; but first a quick glance into history and a closer look at the Soviet sub-economy.

A Glance Back

One need hardly stress that the USSR's underground economy is as old as Soviet rule indeed much older. Gogol's Inspector General(1836) and Dead Souls(1842) depict official corruption and elaborate schemes of bribe extraction that might as well be taken from contemporary Soviet reality. Writing about the first years of Soviet rule, Thomas Remington has vividly described the dependence of the young revolutionary regime, as well as of the population, upon black markets during the period of so-called war communism (1918-21), a time of extreme shortages and of severe repression of private economic activity. Moving on to the late 1920s, we find in I. and E. Petrov's Twelve Chairs(1928) and Golden Calf(1931) the fictional but almost believable images of the con man Ostap Bender, making the most of the partly capitalist era of New Economic Policy, and presciently of the reclusive Koreiko, already scheming to snatch riches from the emergent Stalinist economy by exploiting its weaknesses and rigidities from within. Turning from fiction to the Communist Party's own archives, we find, with Fainsod, conclusive evidence of official concern with illegal economic activity during the early 1930s.(2)

Nonetheless, historical information on the Soviet underground economy is scant and spotty. It would seem that its main growth occurred after World War II, when it swelled, ramified, and matured into the major and highly complex and potent social, political, and economic phenomenon that it came to be in more recent decades. Khrushchev's campaign against "economic crime" in the early 1960s, to the point of reintroducing the death penalty, appears to have produced only a brief setback, judging by private eyewitness information. The Brezhnev-Chernenko period was doubtless a great boon to underground economic activity, corruption, and various related phenomena and their consequences.

The Favorable Climate

Returning to the opening sentence of this article, we proceed to take a brief look at the extremely favorable conditions for underground economic activity and other types of illegal personal gain in the USSR as of, say, the eve of Mr. Gorbachev's accession to the general secretaryship of the Communist Party of the Soviet Union in March 1985. The developments since this event will be discussed later. The narrative in the next several paragraphs proceeds in the present tense inasmuch as the situation has changed little to date except in the direction of greater propitiousness.

The favorable circumstances include various systemic features: for example, money is in excess supply while nearly all prices and wages are administratively fixed or controlled; markets are more the exception than the rule; nearly all productive assets including inventories, of courses are officially owned; decision making is highly centralized and bureaucratically executed; shortages abound; quality and service in the official sector are miserable; nearly all producer goods and resources and some important consumer goods and services are bureaucratically allocated or rationed; and virtually all independent private gainful activity is forbidden, except in agriculture. Confronting this situation is a cynical population starved even for material necessities, educated above its economic reach, and with a modern existence mostly beyond its grasp. Confronting the population is an inert and heavily corrupted apparatus of rule and enforcement.

In the very few areas where individual private activity has been traditionally permitted, it has been hemmed in and discouraged by administrative and ideological hostility, high taxes, extortion by sundry officials, supply shortages, a bar on hiring labor, and so forth. It is small wonder that on the eve of the Gorbachev era only some 70,000 persons about 1 per 4,000 population were legally pursuing, as individuals, the permitted trades and professions and paying direct taxes and that only about 150,000 were legally renting out private space in a country with a fearsome housing shortage. But, per contra, millions were so engaged illegally, though often on sufferance and with palm greasing, paying no income taxes, and depending heavily on materials stolen and equipment borrowed from the socialist sector.

Overlooking the damage to the state and to the fisc and taking the overall system as is, much of this sub-rosa activity is, of course, most useful in that it supplies goods and services of great variety and often relatively superior quality, which the official sector cannot provide properly, if it provides them at all, or cannot provide as cheaply, because the goods are massively stolen from that same official sector, as happens with gasoline, or because taxes on them are avoided, as in the case of home brew. Incidentally, the underground economy supplies goods and service not only to households and to the private sub-rosa production sector but to the official production sector as well.

Furthermore, millions of individuals buy scarce and cheap and sell dear, a practice called "speculation," which is a criminal offense; millions steal and embezzle from the state or defraud it by overstating their production accomplishments; millions defraud the buying or selling public; millions abuse their official positions, take graft, tribute, bribes, kickbacks, outsize tips and gifts all of which opportunities abound at every step. Much of this criminal or at least gray activity is taken for granted by the public, whether it approves of it on moral grounds or not.(3)

Some Technicalities

The crucial importance of theft from the state for the Soviet underground economy cannot be overstated. We note again that in the Soviet Union and, with some exceptions and modifications, in all other Soviet type economies as well nearly all of the natural resources, capital equipment, and nonconsumer inventories have been owned by the state or at least by entities under its closest control and that of the state's boss, the Communist Party. The formal custodians of these assets have too often been incompetent and/or negligent, venal, crooked, or, at any rate, ineffectual, while public respect for socialist property has been very low. Consequently, a considerable portion of socialist mostly state-owned assets has been routinely and widely misappropriated or misapplied for private benefit, often on a large scale and not least by the ostensible custodians themselves. If not turned directly to personal use, the goods and services pilfered from the socialist sector, as well as labor and equipment time stolen from the socialist employer, feed massively into underground production and black markets.

Indeed, a considerable, though unascertainable, part of black production on private account takes place within the very walls of socialist firms. In turn, a considerable proportion of that is what we call crypto-private, that is, private production concealed behind the socialist firm's facade and masked to the point that it is identical in physical appearance and price with the officially produced goods in the same facility at the same time. The privately produced portion is, of course, not reported to the competent authorities. The profit to the underground operators derives from the fact that all inputs, labor included, used in the production of the private portion as well as of the officially reported portion of the output belong to or are paid for by the state. In other words, the secret of success of this ingenious stratagem is that crypto-privately produced goods are absolutely indistinguishable from those produced for the plan, either to customers or to authorities except the authorities who are in on the deal and abet it by channeling extra supplies and other inputs to the operation.

Several aspects of the crypto-private mode of illegal activity should be mentioned. First, because it can potentially draw on the very large resources of the state for private gain, it is able to generate very large underground profits, though it is not the only underground operation capable of doing so. Second, it does so not without a great deal of large-scale bribery in a variety of planning, administrative, supervisory, and other offices, thus strongly contributing to the overall corruption of the system, though in this regard the crypto-private technique is certainly not alone. Finally, the crypto-private segment of the underground economy is not a candidate for privatization through legalization precisely because it is nominally part of the official sector, that is, it is ostensibly already legal. It may be, however, under certain conditions, be a rather logical area for limited privatization through private leasing from the state. Nor is there much private underground capital sunk into production capital in crypto-private ventures; rather, it is sunk primarily, and often in large amounts, into the form of bribes and protection money, so that there is very little by way of tangible assets for which one's property rights can be formally legalized.

Effects and Consequences

A questionnaire survey conducted by the Berkeley-Duke study among emigrants from the USSR suggests that in the late 1970s the urban population alone, which constitutes 62 percent of the total population, derived on the average about half again as much income from all nonofficial sources, including some legal ones, as it did from official sources, such as wages, salaries, pensions, and stipends. Even more important is the contribution of informal sources to personal wealth. In interpreting ratios such as the just-cited 0.5:1.0, however, it should be borne in mind that the levels and distribution of legitimate income from official sources would be considerably different in the unlikely absence of substantial informal income. For instance, many jobs are officially paid very little precisely because they provide good opportunities for illicit supplementary earnings for example, jobs in retail trade. Lucrative positions are not infrequently sold and purchased for money up front plus a periodic tribute. A Soviet specialist has estimated the annual value of illicit consumer goods and services for the mid-1980s at 80-90 billion rubles, which would add about a fourth to the value of the goods and services sold to the public by the state.

Except in the very common case of illegal activities that involve only one person and that are not very visible, the gain from underground operation does not generally stay with the direct, or initial, receiver, say, the retail sales clerk who short-weights his customers or collects under the counter or both. Rather, a large part of it is often passed upward through an elaborately organized money pyramid. The direct payees' take is shared with their superiors, and likewise all the way up, which may be a very high level indeed, judging by stories in the media and by private information. Simultaneously, at each level of the pyramid, part of the money flow is diverted toward various power holders "necessary people," in Russian parlance officials of the Party and the government, police, inspectors and auditors, crucial suppliers, and, these days, also increasingly to professional extortionists and blackmailers illegally acquired wealth is a relatively safe target for the criminal. Many people, including many at the pyramid's base, are trapped in the system in fact doubly trapped: they need their illegal take to make ends meet, and they dare not drop out of the system for fear of reprisal.

Spending and earning, surviving and succeeding in an underground economy that ranges through various shades of gray to black is a way of life for the Soviet people, as it is for the people of many other countries as well. But the underground economy is and does more than that. It incriminates and thus renders vulnerable a large part of the population. It is a crucible of moral values. It shapes the public perception of reality against which official versions are judged. It tests the regime's mettle and ultimately its legitimacy. It provides visions of social alternatives. Finally, and more concretely, it furnishes the material foundation for existing alternative social structures.

Indeed, at least two alternative social structures rest on the second economy. The first, better known abroad but much the smaller in size, is the world of political dissidents, ethnic and religious activists, refuseniks, opters-out, nonconformist writers and artists, and samizdat(4) publishers. To this counter-society and counterculture, the second economy in itself a counterphenomenon, an implicit indictment and rejection of the official system has furnished much material support, especially in the pre-Gorbachev years.

The second, and very different, edifice is the all-permeating but shadowy structure of formal-informal alternative power, the world of political and social realities, of corruption, unofficial networks, patronage and clientelism, extortion, intimidation, large payoffs, organized crime, and purposive violence. It is a world of surviving or newly fostered "neotraditionalism" as it were, satrapies in which near absolute power derives at once from formal hierarchical status and tacit official sanction from above, and from the informal realities often mingled with ethnicity, territorial considerations, even religion. In this world of the "Mafia" as the Soviets now call it, there is no demarcation between underground and aboveground.(5)

The Underground and Perestroika

With its own sub-rosa private enterprise and free markets, the underground economy has probably been both a boon and a bane for Gorbachev's attempts to move the legal, aboveground Soviet economy along its rocky road of privatization and marketization. First let us examine the boon, where the most important effects have probably been intangible, perceptual, and even ideological, accumulating over decades. By its vigor and vitality, its flexibility and resourcefulness, the second economy has vividly underscored the negative lesson of the ineffectualness and wastefulness of the traditional, Stalinist "command economy," as it is now called in the USSR, too. The positive lesson the potential superiority of a significantly privatized and marketized economy over the traditional version may not have been learned as widely. The idea of market socialism with substantial privatization, not to say out-and-out capitalism, and of corresponding economic insecurities and inequalities holding sway in the USSR does not seem to have had in 1985, or four Gorbachevian years later, anything like overwhelming popular acceptance.

The underground economy has doubtless been a school of enterprise, initiative, better work habits, pecuniary calculus, risk taking, and other attributes of a market oriented economy. But the students in this school have been predominantly small, individual tradesmen and less so professionals. Its curriculum may not have been well suited to produce market-oriented managers for considerably larger business undertakings, sophisticated bankers, or effective vice-presidents for marketing. Moreover, much of the underground economy has been a zero-sum game: the state or the buyer loses, the individual wins not a healthy outlook for marketization.

Yet, according to our informants who came out of that milieu, there is also a remarkable amount of integrity among and mutual trust between underground operators indispensable qualities where business understandings cannot be committed to paper for security reasons. Our expressions of surprise were met by surprise: "After all, we were businessmen, not Party crooks!" More generally, we do not subscribe to the assumption that potential entrepreneurial and managerial abilities hardly exist in the Soviet population. We suspect they are there all right, albeit unschooled and underskilled, and if they do exist, the credit belongs to the second economy.

If the underground is a drag on the economic reform, this is largely for two reasons. First, it fosters a great deal of politico-economic conservatism in the anti-perestroika sense. Millions of people have cultivated their little illegal or gray niches and would rather keep the known risks than face the unknown brave new world. More significant, as we have seen, the big-time underground and the organized underworld that it has spawned have melded with a part of the official political administrative and police pyramid of power. Here the stakes are enormous not just vast wealth and great power

but also personal security and even one's head. The last several years' purges, prosecutions, convictions, executions, and suicides of the once mighty drive the lesson home. True, every economic system creates its countereconomy; so will perestroika if it succeeds. But the grandfathers will be new, as will their political partners. Hence a good part of the old establishment's resistance to economic reform, to the legitimization of privatization and marketization.

In any event, during the four-plus years since Gorbachev's coming to power, the underground seems to have prospered and swelled further, despite a major renewed campaign against it and the newly enacted opportunities to turn legitimate. Major reasons are to be found in the evolution or lack of it of the official economy, namely, the rapid expansion in the money supply with prices still largely, but not firmly, fixed, and therefore a rapid increase of excess demand by both consumers and producers, aggravated shortages, and other windfalls to black production and markets. The continuous confusion engendered by perestroika probably helped, too. The drastic anti-alcohol measures promulgated in May 1985 were followed by sharp increases in official prices of liquor and wine and inevitably by an explosion of bootlegging and home brewing and by a serious drop in tax revenue. The campaign against economic crime "nonlabor income" was announced in May 1986, in prophylactic anticipation of the widening of the scope of legitimate private activity, which was promulgated in November 1986, but the campaign quickly caused so much disruption in the economy, especially in informal food supply, that its enforcement was relaxed and has been tapering off since.

We cannot dwell here on the limited and ambivalent legitimation of private activity by individuals and producer cooperatives, legitimation that had embraced over 2 million people, including part-timers, by mid-1989. To some extent this new private sector must have brought underground producers and traders into the open, but many of the now lawful operations doubtless combine illegal activities behind the new facades and, in fact, seem to have stimulated additional underground activity around themselves. Any rumors of the economic underground's early indisposition, let alone demise, or of the wasting away of corruption and organized crime are definitely premature.

1. -

2. -

3. 2 It should come as no surprise that defrauding the state can be particularly lucrative. The largest such scheme yet to surface is the cotton affair, in which, during the late 1970s and early 1980s, enormous quantities of nonexistent cotton were sold from Central Asiamainly Uzbekistanfor a take of billions of rublesthe exact amount is still unclearwith the help of massive bribery extending up to Brezhnev's son-in-law Yurii Churbanov, deputy minister of internal affairs, that is, of the police. Nearly all the Party and government leadership of Uzbekistan was implicated.