Plans , Prices , and Corruption : The Soviet Firm Under Partial Centralization , 1930 to 1990

The level of corruption in an economy is generally thought to influence economic growth adversely. We show that the performance of the Soviet economy was affected not only by the level of corruption but also by its quality, that is, how corrupt incomes were used. In the context of a partially centralized economy, changes in a government control mechanism influenced the quality of corruption and thus economic performance. On the basis of new historical research on the Soviet command system we analyse the choices of a plan-setter and an effort-setter who interact with each other and an external market to determine real output, hidden inflation, and the level and quality of corruption simultaneously. Our results explain rapid Soviet economic growth despite high corruption levels, and why slower economic growth in the 1970s was accompanied by increased privatization of rents. Plans, Prices, and Corruption: The Soviet Firm Under Partial Centralization, 1930 to 1990 Bribery and illegal exchange are as old as government and regulation. Moreover, since some regulation has been economically harmful there is often a plausible case to argue that the bribe that enabled government authority to be set aside left everyone better off. But the case for a little corruption disappears if the regulation that was violated would have promoted the common good, or if the government passed a law that was harmful with the intention of enabling its agent to collect the bribe that the violator was ready to pay. Has corruption in fact helped to lubricate the wheels of the economy, or has it only served to enrich a few at the expense of the many? Corruption has been shown generally to reduce investment and growth (Mauro 1995). It is said to flourish in conditions of authoritarian rule, which hinders accountability and promotes secrecy (Shleifer and Vishny, 1993; Ehrlich and Lui, 1999). However, the variation in growth rates across countries that are similarly corrupt and authoritarian is substantial and exceeds that among democracies (Sah, 1991). This suggests that corruption is unlikely to have the same economic significance everywhere. Economists and historians must evaluate it case by case. In this paper we consider the case of corruption under Soviet socialism. We look at how corruption arose in a centralized command system in connection with decentralized price setting and the ability of agents to extract side payments for output. There are two main findings. First, we show that Soviet economic performance was affected not only by the level of corruption but also by its quality, that is, how corrupt incomes were used. Second, we show how an instrument of policy, the level of plan “tension,” influenced the quality of corruption and thus economic performance. To support these findings we develop a model of a partially centralized economy in which a plan-setter and an effort-setter fix the scale and uses of corrupt side payments simultaneously with effort, output, and inflation. The evidence underlying the model comes from recent investigations in the Russian state archives. We proceed as follows. Part 1 describes the historical limits on centralization of the Soviet command system. Specifically, Soviet managers exercised discretion over the accounting prices used in planning and prices and side payments that arose in decentralized contracting; they used this discretion to improve the ratio of reward to effort directly, and also to reduce effort indirectly by “siphoning” resources from the retail market. In Part 2 we present a model of the Soviet firm in which there is no corruption and producers allocate effort subject to a plan target and a resource constraint. Part 3 looks at the Soviet firm’s use of corruption possibilities to relax its resource constraint through siphoning. In Part 4 we analyse the siphoning process in continuous time and we test an implication using Soviet-era data. At each point we consider the rationale for Soviet managers to engage in corruption and for planners to tolerate or restrain their behaviour. Part 5 concludes.