Effort at Capitalism : Co-Ops Earn Soviet Pluses and Minuses

MOSCOW — At the Riga Market here, the Soyuz cooperative offers attractive women’s blouses for $85 along with the cheery slogan: “We’re one step ahead of the fashion.” The garments have been patched together from home-dyed T-shirts and have sleeves made from lace window curtains.

A huge crowd presses around an outdoor stall, where youths in vinyl jackets sell homemade “stone-washed jeans” with counterfeit designer labels. Gray-haired grandmothers work the crowd peddling home-knitted sweaters from hangars and hats made from unraveled men’s underwear.

Nearby, a cooperative butcher offers a good selection of otherwise impossible to find salami and sausages. But at the price of roughly $8 a pound, the butcher is obliged to list his prices in slices of 100 grams--little more than 3 ounces.

Triumphs and Problems

With a bustling pushcart atmosphere that evokes images of New York’s Bowery at the turn of the century, the Riga Market reflects both the triumphs and problems surrounding the Soviet Union’s efforts to encourage free enterprise in a closely controlled economy.

Originally conceived as Soviet founder V. I. Lenin’s compromise between socialism and capitalism, the cooperative system was revived under Soviet leader Mikhail S. Gorbachev to help restructure the country’s faltering economy. Now in its second year, the system of cooperative enterprises is encountering severe teething pains.

Cooperatives are regularly accused of price gouging on commodities in short supply, while state employees are becoming increasingly jealous of the sudden wealth being harvested by the co-ops. Supporters of the system complain that bureaucrats have been slow to let entrepreneurs take advantage of the new freedom.

Anguish Over Income Tax

The businessmen themselves have begun howling over the imposition last month of a graduated income tax system especially for cooperative workers, which in the upper income category imposes a confiscatory 90% levy.

“The government is really squeezing us,” said Sasha, a clothing merchant at Riga Market who claimed that each member of his seven-man cooperative has been earning 5,000 rubles a month, (roughly $100,000 a year), about 10 times the wages of the highest paid civil servant.

Private labor in the Soviet Union has been around for years, but in the past, most work for profit has been done by individuals na levo or “on the side” without government sanction. A “cooperative” in the latest Soviet use of the word is similar to a small private company, working for profit but entirely owned by its employees.

In March, the ruling Politburo of the Soviet Communist Party praised the results of the year-old cooperative experiment and adopted a new law, which, it said, was designed to “tap cooperatives’ enormous potential and will enhance their role in accelerating the country’s social and economic development.”

The Politburo directive said that any group of people can now form a cooperative as long as no laws are violated. In an effort to deal with the criticism of gouging, it also banned prices that are “economically unfounded.” But, in both cases, the wording was left vague enough to allow officials wide discretion in choosing what practices to permit.

According to published statistics, by the beginning of this year, 23,000 cooperatives had received official permission to begin working, but only 14,000 had actually started functioning. They employed about 150,000 people.

So far, the cooperatives seem a qualified success with the public, as the huge crowds at the Riga Market attest. One opinion poll in Latvia reported that 85% of those questioned approved of the new system.

The cooperatives have initially attempted to provide a wide range of consumer goods and services that were previously either non-existent or hard to find: butcher shops, restaurants and cafes, shoe repair, real estate exchanges and household alterations.

The inventiveness of the entrepreneurs is dazzling: some have even introduced “cooperative” public restrooms, offering scrupulously clean facilities and copious toilet paper--the latter being no small feat in a system in which toilet paper is one of many chronic shortages. And there is pleasant background music, all for a 60-cent entrance fee.

Even Soviet lawyers, up until now salaried state employees, have suggested forming cooperative law firms, but so far without success.

Original Intent

The cooperatives were originally intended to utilize untapped sources of labor, such as students, housewives and pensioners, to produce added commodities in a market of abundant shortages. But the experience so far is that 65% of cooperative workers hold down a state job as well, suggesting that the state gets little of the worker’s attention.

The Soviet press has been filled with complaints recently that local governments have been slow to implement the government’s stated desire to encourage the cooperative market.

“Because of sluggishness, indifference and poor organization, many cooperatives exist only on paper,” an article in Soviet Russia complained. “In some cities, as many as half the registered cooperatives are not actually operating. . . . Some cooperatives fall apart because they cannot find the proper facilities, and local government and economic bodies refuse to help them.”

The start-up problems prompted the Communist Party’s Central Committee to note in a recent report that “cooperatives’ contribution to providing the population with goods and services is still negligible.”

One major complaint about the cooperatives is that rather than provide a new service, many of them have simply replaced services previously offered by the government but at a higher price.

A report in the newspaper Pravda on restaurants and cafes said that 80% of the cooperative establishments in the Russian Republic, the largest in the country, were created on the foundation of a state institution.

“What is taking place is not an expansion of the existing network, but a change of signboards, which often infringes on the interests of the population,” Pravda said.

If there is a single theme running through most criticism of the cooperatives, it is the shock of the consumer encountering free market prices for the first time.

Like the butcher in the Riga Market, the cooperatives now have plenty of the goods formerly “in deficit supply”--the official euphemism for shortages--but at such high prices that they are out of reach for many consumers, who eke out a living on an average salary of $400 a month.

So far, cooperatives have not been around long enough or on sufficient scale to allow the laws of supply and demand to bring prices into line.

2 Ruble Shish Kebabs

One newspaper review of cooperative railroad station cafes commented trenchantly that “the 2 ruble ($3.36) shish kebabs and the 30-kopeck (50 cents) juice are not enough to fill the stomach, but they can sure make a considerable dent in the pocketbook.”

One Ministry of Finance official, Viktor Tur, told Moscow Radio recently that some cooperatives are earning money “clearly out of proportion” to the work they put in.

“This happens because these cooperatives either take advantage of some temporary situation or resell goods to the public at a higher price than at which they were previously bought from the state, or they simply inflate prices by taking advantage of the fact that some goods are in short supply.”

A frequent criticism of the proposed new law on cooperatives is that the language dealing with prices does not spell out what is considered excessive.

One cooperative cafe was publicly criticized for selling American-brand orange soda for 2 rubles ($3.36) a bottle. When it was argued that consumers do not have to drink at the particular cafe, a city official expressed concern that cooperative cafes are in a position, in effect, to corner the market in orange soda, giving consumers little choice.

Rising to the defense of the small entrepreneur, a popular economist, Nikolai Shmelev, wrote recently in the journal Novy Mir that the cooperatives are often forced to buy their raw materials at retail prices, forcing them to pass along high prices.

“What do we want, the prosperity of the private sector or its death?” Shmelev wrote. “We should pay attention not so much to its income, but to (the benefits) it gives us all.”

Not surprisingly, the relatively large sums being earned by cooperatives have aroused a considerable amount of jealousy, both from state institutions that work far less efficiently and private workers who grumble about the disparity in their take-home pay.

A taxi garage in Vilnius, capital of the Baltic republic of Lithuania, was recently forced into bankruptcy by drivers working for a private company. The government firm has appealed for higher subsidies to fight back, but 200 drivers have already gone over to the private sector.

“Is this socialist justice?” asked a tractor driver, who complained that in the winter months he earned only 3 rubles a day fixing machinery, while he had read about cooperative workers making clips for women’s lingerie earning 100 rubles a day.

The latest controversy to hit the cooperatives appeared with only a few days’ warning at the end of March. Concerned about the “exorbitant” wages being earned, the Ministry of Finance announced that, starting April 1, cooperative workers would have to pay taxes on a sliding scale that increases with income.

Thus, workers earning 500 rubles a month, about $840, will continue to pay the current 13% tax, while those earning more will rise accordingly: up to 700 rubles will be taxed at 30%, up to 1,000 rubles will be taxed at 50%, 1,500 rubles at 70%, and above 1,500 at the rate of 90%.

In addition, the profits of a cooperative will be taxed, and a wholesale tax is applied to raw materials.

The response from cooperative workers has been one of unrestrained anguish that the new measures will defeat the cooperative idea before it can take root.

“We will probably have to disband,” predicted a worker at a cooperative that builds roads in the northwestern Republic of Karelia. “Those wages which will be left to us by the Ministry of Finance will not compensate for the 12 hours per day of highly productive labor that we have been working.”

An article in Socialist Industry predicted that because of the new tax law, cooperatives will work just enough to avoid paying the higher tax rates, or pass along the taxes in the form of increased prices.

One newspaper asked a tax official if he didn’t think the new taxes would result in a decline in productivity as well as an increase in tax evasion. His response was worthy of his brethren at the Internal Revenue Service.

“The discovery of a tax evasion will lead to the confiscation of the undeclared sum plus a 10% fine,” said the official, head of the Ministry of Finance’s tax department. “A repeat violation could lead to the closing down of the cooperative.”