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Marketing in the Iron Curtain Countries REED MOYER What are the implications of a shift in the Iron Curtain countries toward marketing? How will they affect marketing functions and institutions? The author shows the weaknesses in the existing planned systems, and he charts the future of ivhat may develop. ago Karl Marx relegated marketing A toCENTURY the Communist ash-can. He wrote: "The general law is that all expenses of circulation, which arise only from changes of form, do not add any value to the commodities." This means that "the capital invested in (trade) . . . belongs to the dead expenses of capitalist production."^ In recent years the Communist countries, with the exception of Yugoslavia, have produced goods not in response to the market but to commands from planning authorities. This has minimized the need for the "trappings" of capitalistic, market-oriented systems: promotion, personal selling, advertising, new product development, and marketing research. Pricing problems exist in Communist systems, but they differ from capitalistic pricing problems. Retail and wholesale intermediaries also exist in Communist systems, as they do in capitalist economies, despite Marx's disapprobation. But Communist planners establish low priorities for investment in the trade sphere, according these institutions the inattention that Marxist doctrine dictates. In other words, although some marketing activities previously have been performed in Communist societies, their economic systems are production-oriented and not marketing-oriented. But this condition may be changing. Russia is experimenting with a market-directed system on a small scale. In the shoe, leather, garment, and textile industries 400 plants have been transferred out of the planned sector into a modified free-market system in which production responds to consumer demand. Czechoslovakia also has announced a move to grant more decision-making authority to business executives. Managers will be expected to study prices, ' Kai-l Marx, Capital. Vol. 2 (Chicago: Charles H. Kerr & Co., 1907), p. 169. JoHrnal of Marketing, Vol. 30 (October. 1966), pp. 3-9. market conditions, and the relative profitability of producing dilTerent products, as decision-making falls more to them and less to the central planning authorities. Yugoslavia has operated a market-directed, although planned, economy for over a decade. And in recent years Bulgaria has transferred to trade channels greater authority to dictate what consumer goods will be produced. It is too early to tell where this increased emphasis on competition and marketing-orientation will lead. But one thing seems cei'tain: if the trend continues, marketing, heretofore largely ignored, will play a more important role in the Communist economies. Problems of Economics. Tlie Current Digest of the Soviet Press and the Joint Publications Research Service now provide translations of articles and reports from newspapers and periodicals which make available for general use information formerly accessible only to those who understood Russian and other Eastern-European languages. Two ContrastinR Systems In the years just after World War II, all of the Communist countries adopted the Russian model— the so-called command system—under which resources are allocated by commands from a central authority. Several of the Communist countrie.s, Russia included, have now modified the monolithic character of the command system by decentralizing the planning function; but some of these decentralization moves have been temporary. Yugoslavia alone among the Communist powers has broken away permanently from the Russian model, adopting a unique economic system that .stands somewhere between a centrally planned and a free-market economy. Pressures are building within Russia to modify its command system and to move in the direction of the Yugoslav system. These are the two Journal of Marketing, October, 1966 extremes in the Communist economic world—^the Soviet model at one end of the scale, the market-oriented Yugoslav model at the other. The Russian Model The basic planning decisions in Russia's command economy involve the allocation of the country's resources between the production of consumer and investment goods. Production directives issued from above to the individual enterprises carry out the plan's objectives. To maintain order in this complex system, both the production and the distribution of goods must be planned. The distribution of a wide variety of consumer goods is not easy. As the Russian economy has grown more complex, plan fulfillment has become increasingly difficult. Breakdowns have occurred in both the production and distribution of goods. How has the system failed? r c. System's Shortcomings There have been a number of serious problems. First, scarce resources and unfulfilled production goals have created shortages of goods. Meeting agricultural production targets has been a perennial problem. Farmers have not adjusted to a planned economy, preferring to follow individualistic courses. As a result, farm production has lagged behind output goals; and since food accounts for approximately half of retail sales, these production deficiencies have showTi up as .shortages in the distribution system. Bottlenecks in the production of manufactured consumer goods have reflected themselves also in shortages of these commodities. Another problem has stemmed from the setting of production goals in value terms instead of in quantitative terms. Often this practice has led to the production of goods which have failed to satisfy consumer demands. Production managers in Russia also tend to be production-oriented and not marketing-oriented. Being judged by their ability to meet production goals reinforces their production orientation. For example, if they can meet their output targets more readily by producing more high-priced shoes than low-priced ones, the incentive for them is strong to produce the higherpriced articles, even though consumers' demands for cheaper shoes remain unfulfilled. Setting production goals to meet plan objectives, irrespective of the effect of plan fulfillment in satisfying consumer demands, has resulted in the following kinds of situations: • Producing too many woolen dresses and insufficient numbers of children's suits, because producing the former makes it easier to fulfill a firm's production goals. • Narrowing the widths of materials because production quotas were given in terms of linear meters. • Producing too much bandage material and not enough shirt cloth, because the former is more easily produced than the latter.^ A third problem has stemmed from failure to allocate goods properly, once production goals have been met. Shortages and surpluses of the same commodity have existed in different markets. Consider the following examples of maldistribution of existing supplies: • Flashlights going to one location, batteries to another. • One store getting a ten years' supply of women's socks, all the same size. • Failure to account for fewer people from the "hinterland" shopping in Moscow, thus resulting in an excess supply of goods in the capital, deficiencies of goods in the country, and the need to reship the excess from surplus to deficit areas.'' A final problem has arisen from an inability properly to gauge consumer demand. There have been few attempts to determine spending patterns in Russia in relation to income and other economic and demographic variables; and little has been done to calculate demand elasticities. These problems have combined to create excessive inventories. Between 1954 and 1961 retail inventories increased from a 71- to a 94-day supply.* This was partly attributable to retailers who filled inventory needs of goods previously in short supply. In addition, wholesalers increasingly "dumped" goods onto retailers, partly because of shortage of warehouse space at the wholesale level. 2 Abram Bergson, The Economics of Soviet Planning (New Haven: Yale University Press, 1964), p. 291. •'Marshall I. Goldman, Soviet Marketmg (Glencoe: The Free Press, 1963), pp. 69-70. •' V. Berchuk, "On the Relationship Between Demand and Supply of Consumer Goods in the Period of Communist Construction," Problems of Economics, Vol. 7 (July, 1964), pp. 3-13, at p. 6. • ABOUT THE AUTHOR. Reed Moyer is an Associate Professor in the Depar+men+ of Marketing and Transportation Administration, Graduate School of Business, Michigan State University. A graduate of Harvard University, he received his Ph.D. from the University of California at Berkeley. He is the author of COMPETITION IN THE MIDWESTERN COAL INDUSTRY (Harvard University Press, 1964), MARKETING IN ECONOMIC DEVELOPMENT (Institute for International Business Management Studies, Michigan State University, 1965) ana articles in various professional and business journals. In connection with the present article, the helpful advice of Frank H. Mossman is acknowledged. Marketing in the Iron Curtain Countries Finally, inventories piled up because of a divergence between retail prices and clearing prices. Outside of the farm markets most retail prices are administratively determined. The government's determination to maintain stable prices created excess supplies of those products whose prices then did not properly reflect supply-and-demand conditions. The reverse condition held as well in some commodity markets: official retail prices fixed below clearing prices, thus resulting in apparent shortages. The supply of unsold consumer goods is likely to increase. Russia's rapid expansion of output following World War II has enlarged personal incomes, and has put pressure on the government to expand the supply of consumer goods. So long as shortages existed, a strong seller's market ensured the sale of all production. As discretionary income has risen, however, consumers' choices have expanded; and this has increased the problems of planners trying to match output of consumer products with consumer demands. Dissatisfied with existing prices, qualities, and assortments, most buyers have elected to save a larger share of their income—with unsold inventories resulting, and more basically an increasing demand to reform the system. Reform Measures One response to the call for reform has been the reduced central allocation of consumption goods. More of these products now are supplied under direct contracts between retailer and wholesaler intermediaries and factories. This has led to the creation of more trade fairs, which gives wholesalers and retailers an opportunity to purchase goods required to satisfy consumer demands. These changes are insignificant, however, compared with the proposed "Kharkov" system, whose leading advocate is Professor Yevsie G. Liberman of the Institute of Engineering and Economics, Kharkov University. He proposes to "eliminate all existing goals that are centrally planned except for targets of quantitative production, product assortment and destination, and date of delivery."" A number of specific targets which now must be planned would be eliminated. Under this proposal, gone would be planned goals for labor productivity; planned targets, spelling out the number of workers to use, and their wages; investment levels for each firm; production costs; and new technologies. These goals would be assigned to the regional economic councils rather than to each firm. Under the Liberman plan, bonuses at present paid for achieving production and other goals would depend upon ^ Marshall I. Goldman, "Economic Controversy in the Soviet Union," Foreign Affairs, Vol. 41 (April, 1963), pp. 498-512, at p. 501. each firm's achieving a target profitability rate. His proposals have several aims: 1. To stimulate managers to aim for higher goals—the present arrangement encourages low production-targets, in order to increase chances of getting bonuses for plan fulfillment. 2. To encourage the development of new products and new technologies. 3. To improve quality—profits will depend upon the consumption and not the production of a firm's output. 4. To improve efficiency in the use of inputs— the present arrangement wastes inputs by setting output goals in gross-value terms rather than on the basis of quantitative production; and it encourages firms to use unnecessarily expensive raw materials in order to boost the value of output. 5. To rid the system of undue attention to details imposed, by central authorities, which stifles initiative." Any plan as controversial as Liberman's is bound to draw some criticism within Russia, although generally it has been applauded by Western observers. Most of the critics attack the central role assigned to profits; it is charged that this development "smacks" too much of capitalism. In addition, some fear that the plan's introduction would result in fluctuating prices (anathema to Russian planners) ; unemployment; undue emphasis on turning out high-profit products at the expense of those earning low margins; and subordinating the production of capital goods to the production of consumer goods. Some also criticize Liberman's ideas for an inconsistency. The plan imposes on each firm product assortments, production goals, and delivery dates; but fulfillment of these goals may conflict with the firm's achieving its profitability goals. Clearly, if the reform is to stimulate initiative at the level of the firm, this inconsi.stency cannot continue. Yugoslav Model At the other extreme in the scale of Communist economies is Yugoslavia's planned market economy. The system is a mixture of a planned. Socialist economy and one responding to the market. But this is a rather recent development. Just after World War II, Yugoslavia faithfully copied Russia's centralized command-economy model. Between 1947 and 1951 Yugoslavia operated under a 5-year plan, which spelled out in great detail the « Same reference as footnote 5, for elaboration of this point. Journal of Marketing, October, 1966 production targets for 16,000 to 20,000 commodities. The economy was wrapped in a tangle of bureaucratic red tape, with each firm assigned shortterm production targets and raw material consumption goals. The results were dismal. Demands that output goals be reached, plus the absence of cost controls, resulted in firms' producing without regard to cost. Excessive meddling in companies' internal affairs led to shortages, poor product quality, suppressed initiative, and the demoralization of producers and consumers. Output lagged. Yugoslavia felt the sting of Russian criticism, the U.S.S.R. arguing that Yugoslavia was moving too slowly to collectivize its agricultural sector. Citing the loss of producer initiative under collectivization and the stifling effects on production of the resultant regimentation, Yugoslavs refused to conform to the Soviet model. Yugoslavia was "read out of" the Cominform. Under the "reformed" Yugoslav economic system which replaced the command model, ownership of enterprises was transferred from the "state" to "society." Workers' councils were formed to organize output and dispose of the proceeds. The new system abolished most of the state direction. Many state agencies were eliminated; and the General , Social Plan, which replaced the old system of centralized planning, ended planning in physical terms and planned instead in financial terms. Each firm now determines what to produce, whom to hire, the number of workers to hire, from whom it will purchase inputs, to whom it will sell, how much to invest, and what it will export and impoi't. In other words, each firm operates almost as freely as it would under a capitalistic system, although there are investment constraints on which the government can impose indirectly through its credit and financial policies. Guiding its own destiny, each firm is free to earn whatever profits it can (subject to taxation constraints) ; and the workers of each firm are rewarded for efficiency through profit-sharing arrangements. Incentives are strong to maximize productive efficiency and to maintain high product quality. In other words, the firm and its workers must meet the test of the market. Satellite Countries' Economies None of the other Iron Curtain countries has adopted a free-market system in the way that Yugoslavia has. Basically they remain command economies, although there are slight shifts in emphasis away from rigid centralization. What form have these other Communist countries' economic problems taken, and how have they responded to them? Poland Next after Yugoslavia to deviate from the Russian model was Poland. By the mid-1950s Poland's centralized system was working badly. The 195055 plan overemphasized heavy industry. The percentage of production devoted to consumer goods fell from 12% to 8%. Worker morale fell. Some liberalization of the system began in 1953, but the major changes followed the Gomulka reforms of 1956. Antedating the Liberman Plan, Gomulka's "New Economic Model" resembled it in many respects. The new system set goals in value terms rather than in terms of physical units; reduced the central allocation of materials except for those suffering shortages; used profits as a measure of performance; and gave firms free rein on the use of their depreciation funds. Firms received authority to produce a small amount of goods for sale directly to the consumer market at prices that they, and not an administrative agency, determined. However, the reform was short-lived. Poland returned to the use of greater central authority in 1958. Notwithstanding the move to recentralization, Poland demonstrated independence of action in economic matters which must have had an impact on the other Iron Curtain countries. Czechosloyakia Czechoslovakia, too, has abandoned its sole reliance on a planned economy and has adopted economic reform measures in response to deteriorating economic conditions. The economy's gi*owth rate decelerated in 1961 and 1962, and industrial production declined in 1963. The quality of manufactured goods also has left something to be desired. Inventories of unusable goods valued at one quarter of national income had accumulated by 1964." CzechoslovakiaB economists, bent on reform, have prevailed upon the government to remodel the economic system. The reform involves the following: 1. Giving individual firms greater authority to carry out short-term production plans as they see fit, within the broad framework of the government's long-term central plans. 2. Providing that all but major developmental investments be financed by individual firms through internally generated funds, or through borrowing; and providing further for the payment of interest on borrowed funds. 3. Instituting new pricing arrangements under which a firm's prices will depend on both cost and demand factors. For most commodities other than raw materials, energy, and basic Edward Taborsky, "Changes in Czechoslovakia, Current Affairs. Vol. 48 (March, 1965), pp. 168-74, at p. 169. Marketing in the Iron Curtain Countries necessities, free market prices eventually will prevail. 4. Using profits as a measure of a firm's performance, with profits to be based on sales— not output—to discourage the production of shoddy goods. Additionally, where possible. Western-made goods will be looked to as standards of quality. And the threat of import competition will be used to keep the free market prices in line. These moves add up to a sharp break away from Czechoslovakia's rigid, centrally-directed system. One observer feels "that the Czechoslovakian blueprint goes farther than anything hitherto attempted in any country of the Soviet bloc and places Czechoslovakia next to Yugoslavia in the forefront of any Communist economic revisionism."^ Bulgaria In Bulgaria, inferior quality of consumer goods and the inability of producers to match production with consumers' preferences has led to excessive inventories of unsold goods, and demands for reform. Rationing prevailed immediately after World War II. Distribution adjusted to production. But growing incomes and increased output have altered market demand. A 1960 reform has increased the importance of the distribution system in specifying just what consumption goods will be produced. Consumer goods cannot be produced if not ordered by the trade intermediaries. Moreover, firms are forbidden to buy either poor-quality goods or those products not in demand. Still, many problems exist. "The sale of (consumption) goods still lags behind because of organizational and other weaknesses such as the improper distribution of goods funds by regions and stores, poor location of the (trade) network, poor display, exhibit and advertising, aimed at selling a given good."" Hungary The familiar pattern of excessive inventories of consumer goods and shoddy merchandise has also prevailed in Hungary. Anxious to fulfill production goals, producers have succeeded in Hungary as in other command economies by doing one of two things: changing the product assortment, or reducing quality. Changing the output mix has been done to achieve increased productivity through longer production runs, or ** Same reference as footnote 7, at p. 171. "Atanas Lyntov, "The Socialist Transformation and Development of Bulgarian Domestic Trade," Ikonomicheska misul (July, 1964), translated in Joint Publications Research Service 26941, p. 17. simply because the substituted goods have been easier to produce than the neglected ones. Ignoring consumer demands, however, has led to unsold inventories. Quality-deterioration has resulted because of the use of shoddy materials, careless workmanship, and increased prices for so-called "new products," which in fact have undergone insignificant changes. Quality-control departments have been set up in many plants; but too often workers in them have been "pressured by the boss" to overlook imperfections. Rumania Rumania continues to adhere to a rigid, centrallyplanned system. Blessed with rich natural resources, Rumania's economy has continued to grow while other satellite economies have faltered, thus reducing the pressure for reform. With growth has come an increasing supply of consumer goods. The striking change in Rumania is its increasing Western orientation and its concomitant independence from Russian infiuence. Turning its face Westward, Rumania increased the non-Communist share of its total foreign trade from 20.7% in 1959 to jg also encouraging foreign in38% in 1962.1 vestment. One American firm has already announced plans to construct an oil-processing plant there; and firms from other Western industries are seeking out investment opportunities. Future Role of Marketing Stresses and strains in the Iron Curtain countries' economies make apparent the need for some changes in the production-distribution systems. The systems' shortcomings show up most prominently in the consumer-goods industries, where freedom of choice expands with every increase in disposable personal income. The inevitable changes in the economic systems affect most business functions. Trade Channels Although they may view trading as a sterile activity, even command economies requires trade intermediaries. Disdain for the trade sector reflects itself in inadequate allocations of capital to this sector. This condition has resulted in apparent efficiency in the operation of the trade sector—efficiency being measured in terms of retail and wholesale sales per employee. But this is achieved only at a price. Stores are not as conveniently located as they might be, and in-store service is minimized. Inadequate food-storage space often results in spoilage. Increasingly, trade experts in the Iron Curtain 10 Philip Ben "Rumania: Another Split in Communist Ranks," The New Republic. Vol. 149 (October 19, 1963), pp. 10-13, at p. 11. 8 Journal of Marketing, October, 1966 countries have been openly critical of existing conditions and have been calling for reform of the trade sector.^' A Russian trade expert has forecast an increase of over 150% in the number of retail clerks in Russia in the next 20 years.i- The pressure for changes in wholesaling also may result in greater investment in that sector, especially in automated equipment. Pricing In the command economies, most prices are determined administratively rather than by the free play of market forces. Politics dictate that prices, once determined, remain relatively inflexible. This policy creates obvious problems, not the least of which is the high level of unsold goods. These pressures are leading to demands for modest reform. Thus, a Russian economist suggests that retail prices be adjusted every three to five years to "properly reflect changes in technology, in the mechanization of production processes, . . . and changes in population demand."''* This proposal and similar ones ignore the need to change prices in response to short-run supply and demand conditions. Even those least critical of existing Russian pricing policies criticize them for inadequately stimulating production, arguing that the remedy for supply shortages for certain goods is temporarily to raise their prices. Less attention is given to reducing prices to stimulate consumption. This is due to the relatively greater emphasis given to production than consumption of consumer goods. A chink in the Russian armor of rigid prices has already developed. Beginning in 1961, the Russians established a fund, consisting of 0.4% of the value of retail sales to permit retail outlets to cut prices of slow-moving goods.'^ If the Russian experiment to gear output to consumer demands spreads, producers also will gain greater price freedom and flexibility. New Product Development Rigid, restrictive pricing policies new product development in Russia Curtain countries. Prices of new products in planned set at approximately the same level have deterred and the Iron economies are as prices for " See, for example, G. Dikhtiar, "Soviet Trade in the Period of the Full-scale Building of Communism," Problems of Economics, Vol. 5 (August, 1962), pp. 45-52; and Lyntov, same reference as footnote T. '-'Dikhtiar, same reference as footnote 11, at p. 50. '•^ "Price and Price Formation in the U.S.S.R.," Problems of Economics. Vol. 6 (April, 1964), pp. 26-45, at, p. 37, quoting Comrade Odintsova. I'N. Kotelevskii, "The Role of Prices in Regulating Demand and Supply of Consumer Goods," Problems of Economics. Vol. 7 (July, 1964), pp. 16-20, at p. 20. comparable existing products. Enforcing this policy may result in losses for the flrm introducing new products, burdened with unusual startup expenses. So, firms usually follow the line of least resistance and produce existing products whose profit levels are known. Russia has taken modest steps to relieve this problem. The Council of Ministers has authorized the various Republics' Councils to set temporarily higher prices for a limited number of new products, so as to allow for the payment of bonuses to workers who produce the new goods, and so as to compensate for losses incurred when their new products' prices, temporarily inflated, later are reduced. The temporarily higher prices last for periods up to a year, and apply to a limited number of "special fashionable styles and models which . . . are classifled as new goods of better quality and assortment."'-'' Marketing Research A function which probably will increase substantially in importance is marketing research. Heretofore, marketing research has been confined mostly to family-budget studies for the planning of aggregate output; but little has been done to probe the market for individual firms' outputs. Retail and wholesale enterprises do undertake some marketing research, to estimate demand for their goods through "orders and expressed preferences of purchasers; sample studies in separate stores on the course of sales and movement of stocks for difl'erent sorts of goods; exhibit sales, . . . conferences of buyers, . . . and travels of product managers in wholesale bases into the retail trade network in order to take orders.""' In Russia, consumers can express their preferences for proposed new products by "voting" their approval or disapproval of the products- in sample stores exhibiting them. Because of the dominant role of the trade sector in distributing consumer goods, distributors and not producers probably will assume most of the job of analyzing consumer demand. This function will shift to the producers if and when channel control moves to them. Advertising The noncompetitive character of centrally planned systems, persistent shoi'tages of goods, and their strong agricultural-production orientation have shaped the role and scope of advertising in the various economies. However, growing production of consumer goods reference as footnote 14, at p. 19. '"Abram Bergson, The Economics of Soviet Planning (New Haven: Yale University Press, 1964), p. 279, quoting E. Lokshin, Planovae Khozmistvo (January, 1963), pp. 28-29. Marketing in the Iron Curtain Countries to match increasing amounts of disposable personal income, has quickened interest in advertising as a persuasive device. There is some increased use of advertising in all kinds of media in Russia—includ-. ing television, radio, billboards, newspapers, and handbills.'T The government has opened state advertising agencies; and an advertising journal, Informatsionnyi Reklamnyi Builletin. is being published. To date, few expenditures have been incurred for competitive advertising. However, holding firms accountable for the sale as well as the production of their outputs should increase this form of promotion. Implications There is likely to be an increasing use of the marketing functions associated with market-oriented economies. But this will create a dilemma. Increasingly complex economic systems, overburMarshall I. Goldman, "Product Differentiation and Advertising: Some Lessons from Soviet Experience," Journal of Political Economy. Vol. 68 (August, I960), pp. 346-357, at p. 355. 9 dened with administrative details and excessive unsold inventories which reflect unresponsiveness of producers to consumer demands, call for more decentralized decision-making. However, the giving of greater authority to firms reduces the power and authority of the central planners. Responding to the demands of consumers strikes an added blow at planning. The fear of the planners is that centrally planned economies will weaken their ability to allocate resources in what planners consider to be an optimum way. In most of the Communist countries, the optimum leads to an emphasis on production of capital goods more than consumer goods. If the trend toward greater decision-making by the business firm continues, the important unresolved question will be whether Russia will provide an economic model for the Iron Curtain countries to follow, or whether these countries will look elsewhere for guidance. Perhaps they will gravitate to the model which has proved so successful for Yugoslavia. The possible growing independence of these countries from Russian influences would reinforce this possibility. Need Reprints of JOURNAL OF MARKETING Articles? Order them NOW from the . . . American iVIarketing Association 230 North Michigan Ave. Chicago, Illinois 60601 Reprints of every article in this issue are available (as long as the supply lasts) at the following prices: Single reprint $1.00 4 to 99, each of same article. . .$ .50 2 reprints of same article 1.50 First 100 of same article 40.00 8 reprints of same article 1.80 Additional 100s of same article. 20.00 All articles have covers like the front of the JOURNAL OF MARKETING. Special prices for large quantities Duplication, reprinting, or republication of any portion of the JOURNAL OF MARKETING is strictly prohibited unless the written consent of the Editor is first obtained.