LIKE MANY OTHER ASPECTS OF RUSSIAN LIFE, the Russian economy underwent a journey through uncharted waters in the early 1990s. First came the disintegration of the centrally planned economy that was a hallmark of the state-controlled economy and then its replacement by an economy operating on the basis of market forces. Some of the former communist states of Central Europe began their process of economic transition two years before Russia and have provided positive models. But Russia lacks experience with market economies and the institutions needed to operate them. Moreover, deeply en-trenched remnants of central planning present challenges in Russia that other countries were able to avoid.
Russia undertakes the transition with advantages and obstacles. Although only half the size of the former Soviet economy, the Russian economy includes formidable assets. Russia possesses ample supplies of many of the world's most valued natural resources, especially those required to support a modern industrialized economy. It also has a well-educated labor force with substantial technical expertise. At the same time, Soviet-era management practices, a decaying infrastructure, and inefficient supply systems hinder efficient utilization of those resources.
For nearly 60 years, the Russian economy and that of the rest of the Soviet Union operated on the basis of central planning--state control over virtually all means of production and over investment, production, and consumption decisions throughout the economy. Economic policy was made according to directives from the communist party, which controlled all aspects of economic activity. The central planning system left a number of legacies with which the Russian economy must deal in its transition to a market economy.
Much of the structure of the Soviet economy that operated until 1987 originated under the leadership of Joseph V. Stalin (in office 1927-53), with only incidental modifications made between 1953 and 1987. Five-year plans (see Glossary) and annual plans were the chief mechanisms the Soviet government used to translate economic policies into programs. According to those policies, the State Planning Committee (Gosudarstvennyy planovyy komitet--Gosplan) formulated countrywide output targets for stipulated planning periods. Regional planning bodies then refined these targets for economic units such as state industrial enterprises and state farms (sovkhozy ; sing., sovkhoz --see Glossary) and collective farms (kolkhozy ; sing., kolkhoz --see Glossary), each of which had its own specific output plan. Central planning operated on the assumption that if each unit met or exceeded its plan, then demand and supply would balance.
The government's role was to ensure that the plans were fulfilled. Responsibility for production flowed from the top down. At the national level, some seventy government ministries and state committees, each responsible for a production sector or subsector, supervised the economic production activities of units within their areas of responsibility. Regional ministerial bodies reported to the national-level ministries and controlled economic units in their respective geographical areas.
The plans incorporated output targets for raw materials and intermediate goods as well as final goods and services. In theory, but not in practice, the central planning system ensured a balance among the sectors throughout the economy. Under central planning, the state performed the allocation functions that prices perform in a market system. In the Soviet economy, prices were an accounting mechanism only. The government established prices for all goods and services based on the role of the product in the plan and on other noneconomic criteria. This pricing system produced anomalies. For example, the price of bread, a traditional staple of the Russian diet, was below the cost of the…