What was peculiar about the phenomenon was that it involved the circulation of legal goods and services on illegal markets. The sources and character of the ‘deals’ were semi-legal or illegal. Such semi-legal markets provided services that were not declared for purposes of taxation (privately rented housing, medical care, private lessons, repairs), as well as barter deals between enterprises seeking ways to make up for their failure to achieve the targets laid down by the plan.
The unambiguously illegal sphere included the sale of all kinds of scarce goods (like spare parts and consumer goods), and illegally produced or stolen merchandise. A separate category contains such criminal activities as embezzlement, smuggling, drug-trafficking and so on, which are prohibited the world over. But the criminal economy proper accounted for only part of the shadow economy, even if it was the most dangerous, and as such deemed unacceptable by many who were themselves engaged in parallel economic activities.
The US scholar Louise Shelley has offered an illuminating alternative definition. Within the ‘second economy’, she distinguishes between legal and illegal activities, but excludes anything that is obviously criminal. The legal private sector essentially corresponded to markets where peasants, but others too, sold what they had grown on private plots. The illegal economy was much larger and had two components – one of them operating within the official economy, while the other functioned in parallel to it. The principal illegal activities in the official economy consisted in speculation on scarce goods, bribes to influential people, corrupt practices in the education system, the formation of work-teams for hire in construction, the manipulation of accounts and false data in response to investigations (e.g. adding ‘dead souls’ to payrolls), and, finally, the construction of illegal factories concealed within official ones and using their raw materials.
THE EXTENT OF THE SHADOW ECONOMY
In addition to the problem of defining the shadow economy, we face the difficulty of estimating its extent. Researchers are agreed that it was sizeable, supplying large quantities of goods and services. Gosplan’s research institute estimated that at the beginning of the 1960s it involved less than 10 per cent of the annual average number of workers, employees and kolkhoz members, whereas by the end of the 1980s more than a fifth of the working population was engaged in it (some 30 million people). In some branches of the service sector (house building and repairs, car repairs), it was responsible for between 30 and 50 per cent of all the work undertaken – and often much more than an equivalent state service performed (Menshikov’s estimate). For example, the quantity of vodka distilled at home – an important branch of the ‘private sector’ – was difficult to assess, because official and unofficial production of alcohol were interconnected.
Researchers point out that the parallel economy also exists in the West, where its development reflects the growth in state regulation. In the Soviet case, the shadow economy may be considered an adaptation and reaction on the part of the population to state controls and the deficiencies of the state-run economy.
At the beginning of the 1980s, Gosplan’s research institute proposed the following classification, which was probably the optimal one in the Soviet case:
(1) The ‘unofficial’ economy, involving mostly legal activities that included the production of goods and services which, although subject to taxation, were not declared. These were tolerated.
(2) The ‘fictitious’ economy: false accounting, embezzlement, speculation, bribes.
(3) The underground economy, comprising actions forbidden by law.
This picture must be rounded off by what we had to say about the snaby-sbyty. Therewith we obtain a more realistic image of Soviet economic activity, the interaction between different economic agencies, and the innumerable varieties of private or semi-private initiative. We shall shortly address the political implications of this complex economic scene.
The whole set of shortcomings and malfunctions afflicting the bureaucratic system – phenomenal shortages of goods and services had become systemic – prompted or forced different institutions to seek solutions in private arrangements, bartering of merchandise or raw materials, and falsifying results. Even if personal gain was not necessarily the principal objective, it increasingly became a powerful motive force, especially at the beginning of the 1980s, when it was clear to everyone that the leadership was displaying little zeal when it came to the prosecution of highly placed offenders. Louise Shelley notes that in the 1970s, 90 per cent of cadres accused of breaking the law got off with a simple reprimand from the party. A double standard could be discerned in the attitude of party and state leaders to the unofficial economy, which certainly complicated the task of streamlining and improving leadership at the centre.
For its part, the population quite naturally strove to maintain or improve its standard of living by obtaining additional income, at a time when the consumer market was defective and open or hidden inflation high. The discrepancy between widespread corruption in the state administration and the official ideological rejection of any private enterprise helped to fuel the economic and psychological factors pushing people into the shadow economy, or even directly into the black market.
Some researchers believe that the shadow economy actually enabled the system to survive, by supplying a partial corrective to its malfunctioning; that it helped most citizens to make ends meet; and that it thereby preserved the regime. In my view, the positive function of informal economies should not be exaggerated. The same authors reckon that such practices inculcated new motivations among economic managers, which supplemented the official ones attaching to their duties. On the other hand, the existence of a whole range of parallel networks led some sections of the Soviet elite to separate themselves from the official system and forge closer links with ‘unofficial’ elites. The two elites had much in common. Leaders of the unofficial elite (who were implicated in the black market, if not directly connected with criminal mafias) themselves retained official positions, or maintained close ties with the official elite, enabling them to play a background role as pressure groups for dubious causes or undesirable elements. Such activities might be characterized as pertaining to a ‘shadow polity’.
The Soviet system guaranteed all its citizens social security, public health services, education, and pension entitlements, whereas employment in the shadow economy was mostly part-time and unregulated. Thus the official sector provided social services to the unofficial one, thereby contributing to the reproduction of the labour force in the shadow economy.[2] R. Ryfkina and L. Kosals have aptly summarized the situation: it was no longer possible to distinguish between legal and illegal activities in many enterprises. A ‘black-and-white’ market had emerged.[3]
Others believe that although the shadow economy made it much more difficult to create a healthy contemporary economy, it was still better than the savage, mafia-style capitalism that descended on Russia after the fall of the Soviet system. At all events, the phenomenon is an additional aspect of the trends that emerged in the Soviet system, conditioning, maintaining or undermining it. The resources the population found, and which it could rely on in coping with the system’s vagaries, formed one of them. The low intensity and low productivity of the working day, which were at the heart of the ‘social contract’ between workers and the state, facilitated ‘work on the side’ (cultivation of private plots, etc.). Such resources, officially unacknowledged, became increasingly sizeable with the growth of the shadow economy, which not only supplied supplementary foodstuffs, but also provided additional income through part-time employment that became available to ever more people. Criminal activities are excluded from these resources: they could lead to prison.