TIME: Almanac 1995

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<text id=89TT0954> <link 90TT2502> <title> Apr. 10, 1989: Turning Up The Power </title> <history> TIME--The Weekly Newsmagazine--1989 Apr. 10, 1989 The New USSR </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 74 Turning Up The Power </hdr> <body> To revitalize its moribund industry, Moscow aims to free some plants from meddlesome central planners and encourage enterprise By John Greenwald The giant factory in the heart of Leningrad looks more like a Rust Belt relic than a showplace of new industrial ideas. The Elektrosila power-equipment plant is an aging labyrinth of concrete buildings and connecting tunnels. Nearly half its creaky machine tools and other equipment was built in the 1960s. Yet this factory is the Soviet Union's largest producer of turbine generators for hydroelectric plants and nuclear power stations. Moreover, Elektrosila stands at the forefront of Mikhail Gorbachev's campaign to rejuvenate Soviet industry by freeing factories from the total, stifling control of government bureaucracies. Because the Committee for State Planning controls only 30% of Elektrosila's production, the factory's managers have extraordinary freedom to plan, manufacture and sell the rest of the plant's output as they see fit (total annual production value: 162 million rubles, or $260 million at the official Soviet conversion rate). Elektrosila has boosted its foreign sales from less than 15% of its production a few years ago to about one-fourth of its current output. "We are now the masters of our own castle," says Valentina Murinas, 50, the factory's chief economist. Elektrosila's new spirit of enterprise extends to its rank-and-file workers, who now receive pay raises based on the plant's profitability. Next year they may be able to buy shares in an employee stock-ownership plan. Elektrosila is an exception among Soviet factories, which lag at least a generation behind their Western counterparts in efficiency and quality. The typical Soviet plant's labor productivity is a paltry one-third the average level of factories in non-Communist industrial countries. At the same time, Soviet plants use two to three times as much energy and raw materials as Western factories consume for the same amount of output. Since most Soviet plants answer only to bureaucrats instead of consumers, finished merchandise is often shoddy or simply the wrong type of product to meet demand. Most Western experts, along with rueful Soviets, blame the country's industrial ministries for stifling initiative and innovation. "I used to have to go to the ministry with the smallest change in our work," says Boris Fomin, director of the Elektrosila plant. "They issued hundreds of instructions, which usually contradicted one another. There was no strategic guidance." While Gorbachev's industrial reform required enterprises to wean themselves from government subsidies by January 1989, the majority of Soviet factories still rely on Moscow for merchandise orders, supplies and financial support. The industrial ministries, forced to fulfill their five-year plans, have been slow to relinquish their power. Employees at the giant Uralmash machine works in the town of Sverdlovsk won a victory last year when they successfully protested a state plan on grounds that it called for more heavy machinery than customers needed. But after the workers made their point, Moscow bureaucrats simply sent the orders to a more compliant factory. Said a fed-up manager of another plant at last June's Communist Party Conference: "It's hopeless to fight paperwork. You have to kill off the authors." A primary obstacle for managers trying to balance their books is their inability to set prices. By dictating everything from salaries to the price of finished goods, Moscow planners rob factories of any incentive to hold down costs or make a profit. For example, the prices of labor and raw materials are kept so artificially low that factory managers live in a financial fantasy land. "Right now factory managers don't know when they're doing a good job. They can say they're profitable even though they're selling tractors for $2,000 when they should be selling them for $5,000," says Judy Shelton, a research fellow at the Hoover Institution in California and author of a new book titled The Coming Soviet Crash. But Moscow is cautious about letting plants determine prices for fear that the move would spark a burst of inflation and consumer outrage. For the industrial ministries, the most difficult aspect of restructuring will be to close down unprofitable factories. Although the law now allows bankruptcies, very few have taken place because bureaucrats are loath to reduce their domain and fearful of the unrest that would be caused by throwing employees out of work. Moscow prefers instead to merge unsuccessful enterprises into stronger ones. To become anywhere near competitive in a global market, Soviet factories desperately need high-technology plants and equipment. The government recognizes this, but has gone about fixing the problem in its old-fashioned way of calling all the shots from Moscow. For example, the government has ordered far more computers than factories can produce without sacrificing strict quality standards, instead of allowing the plants to set their own targets. Western economists think Moscow should give individual managers more discretion to experiment with new technologies and independent research. Says Philip Hanson, a Soviet-economics specialist at Britain's University of Birmingham: "The fundamental role of the market in weeding out unsuccessful technological processes and forcing firms to innovate is something that a lot of Soviet officials don't really grasp." Most Western economists think the Soviet restructuring will take as much as a decade to start showing results, since the shift in approach really amounts to a second industrial revolution. The old ways of doing business will be just as hard to replace as the rusting machinery. "It is not that they aren't going to make some progress, but it's much more difficult than starting out with a clean slate," says John Hardt, a Soviet specialist at the Congressional Research Service. Such worries have not slowed the managers at the Elektrosila plant. They have teamed up with ten other factories and six research centers in Leningrad to form a consortium to explore new manufacturing methods. They plan to sell their equipment in package deals so that customers can sign up for an entire power plant with a single stroke of the pen. Elektrosila hopes for a substantial boost in exports to raise the foreign currency the plant needs to buy up-to-date Western machinery. At the moment the factory has only 7 million rubles ($11.2 million) in hard currency, and "one good machine tool costs about 2 million rubles," says economist Murinas. Elektrosila's newfound independence has brought some unexpected problems. "There's more risk now," says Fomin, the plant director. "Before, all my mistakes were leveled out by the ministry. They were covered up. Now we must rely on our own skills and resources." Simply arranging financing or figuring out whom to call for operating permits can become a major headache. "We have great difficulty getting supplies," says Alexander Kozlov, 42, the factory's chief planner. "Everyone is in the process of change. Some old connections are broken, and new ones have not yet been established." Yet if the men and women of Elektrosila are a bit awed by their new freedom, they are too enthusiastic to be daunted. Fomin, a stocky man whose black wavy hair makes him look a decade younger than his 62 years, has turned down repeated offers of ministry jobs in Moscow. "I'm in love with what I'm doing now. Besides, I do more good here. So far, I have had no bad flukes, so I sleep pretty well. But there are a lot of general managers in the Soviet Union who don't sleep well at all these days." As any capitalist would tell them, a little restlessness is good for business. </body> </article> </text>