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Economy of the Soviet Union

The Soviet Union was the first country to base its economy on communist principles, where the state owned all the means of production and farming was collectivized.

Table of contents
1 War Communism and the New Economic Policy (NEP)
2 Stalin's Consolidation of Power and the Administrative Command Economy (ACS)
3 Destalinization and the Rise of Nikita Khrushchev
4 The Post-Stalin Years: Cold War and Economic Planning
5 Conclusions: The Post-Communist Transition

War Communism and the New Economic Policy (NEP)

See History of the Soviet Union: Part I.

Stalin's Consolidation of Power and the Administrative Command Economy (ACS)

See History of the Soviet Union: Part I.

Destalinization and the Rise of Nikita Khrushchev

After Stalin's death, Khrushchev shocked delegates to the 20th Party Congress on February 23, 1956 by publicly denouncing the "cult of personality" that surrounded Stalin, and accusing Stalin of mass murder during the Great Purges. This effectively alienated Khrushchev from the more conservative elements of the Party. He became Premier on March 27, 1958 after a long and complex series of maneuvers, notably the crucial removal of Stalin's obvious successor, Beria, head of the KGB. Even before this watershed speech, however, the new leadership declared an amnesty for some serving prison sentences for crimial offences, announced price cuts, and relaxed the restrictions on private plots. The ten-year period that followed Stain's death also witnessed the reassertion of political power over the means of coercion. The party became the dominant institution over the secret police and army. Effectively overnight, Stalin's death freeded the Soviet people from his apparatus of state terror, thus reducing the role of prison labor in the economy.

The Post-Stalin Years: Cold War and Economic Planning

The ACS: From Rapid Growth to Stagnation

When the First Five-Year Plan drafted by GOSPLAN established centralized planning as the basis of economic desision-making, the Soviet Union was still largely an agrarian nation lacking the complexities of a highly industrialized one. Thus, its goals, namely augmenting the country's industrial base, were those of extensive growth or the mobilization of resources. At a high human cost, due in large party to prison labor, and the effective militarization of factories, the Soviet Union forged a modern, highly industrialized economy more rapidly than any other nation beforehand. By the 1970s, the Soviet Union was a complex industrialized society with an intricate division of labor and with complex interconnection of industries over a huge geographical expanse that had reached military parity with the Western powers.

During the early Brezhnev years following 1964, the ACS economy still had not yet exhasted its capacity for growth. The Soviet Union improved living standards by doubling urban wages and raising rural wages by around 75%, building millions of one-family apartments, and manufacturing large quantities of consumer goods and home appliances. Under his tutelage, industrial output also increased by 75%, and the Soviet Union became the world's largest producer of oil and steel. The twenty years following Stalin's death in 1953 were the best period in the history of Russia for the ordinary citizen in terms of rising living standards, stability, and peace. Terror, famines, and world war were only horrific memories while the tide of history appeared to be turning in favor of the Soviet Union. The United States was mired in economic recession resulting from the OPEC oil embargo, inflation caused by excessive government expenditures for the Vietnam War, and not to mention the wartime quagmire. Meanwhile, pro-Soviet regimes were making great strives abroad, especially in the Third World. Vietnam had defeated the United States, becoming a united, independent state under a Communist government while other Communist governements and pro-Soviet insurgencies were spreading rapidly across Africa, Southeast Asia, and Latin America.

But during late Brezhnev years the economy began to stagnate and the population increasingly began demanding greater quantities of quality goods than the economy could produce. Plan quotas (control figures) for enterprises, of course, were fulfilled on the basis of output, not quality. In the past, shoddy goods were more acceptable when access to consumer goods was so limited. But with ever-improving living standards and with the growth of a new middle class since de-Stalinization, shortages of shoddy goods grew increasingly unacceptable. Supply shortages were not helped by the insistence on raising wages while keeping prices down at artificially-low administratively-set levels either.

Intensive growth (growth to improvements in productivity), in contrast to the extensive growth (mobilization of capital and labor) achieved under Stalinist industrialization, would prove to be the disadvantage to centrally directed economic decision-making. As the Soviet economy grew more complex, as it required more and more complex disaggregation of control figures (plan targets) and factory inputs, and as it required more communication between the enterprises and the planning ministries, and as the number of enterprises, trusts, and ministries multiplied, it increasingly suffered from a systemic inability to respond to change, adapt new technologies, and provide incentives at all levels to improve growth, productivity and efficiency.

At the enterprise level, managers not only lacked the incentives to improve productivity found in market economies, but often had incentives not to over-fulfill plan targets by as much as possible. For one, there was a tendency to overstate capacity in order to bargain for more advantageous plan targets or control figures with the ministries (targets that, of course, would be easier to implement). Faulty communication, more of a problem as the economy grew larger and more complex, would reverberate throughout the economy, distorting supply and demand figures for inputs in interconnected industries. Moreover, managers were often more preoccupied by institutional careerism than improving productivity. They received fixed wages and only received incentives for plan fulfillment on the basis of job security, bonuses, and benefits like special clinics and private dachas. Managers received such benefits when targets were over-fulfilled, but when, for instance, they were greatly over-fulfilled, they only saw their control figures increased. Hence, there was an incentive to exceed targets, but not by much. This effect was known as the "rachet effect." Prominent American specialists on the Soviet economy Paul Gregory and Robert Stuart emphasize these points.

Planning was also very rigid; plant managers were not able to deviate from the plan and were allocated certain funds for certain capital and labor inputs. As a result, plant managers could not improve productivity by laying-off unnecessary workers due to such labor controls. There was substantial underemployment due to such rigidities by the plans devised during collective bargaining between enterprises and ministries.

And there was a systemic lack of incentives to improve productivity through technological innovation. If the production process were more efficient because of the introduction of new technology, enabling the same process to require less inputs or less labor, it would just result in lower administratively-set prices rather than prices set by a profit-maximizing equilibrium of supply and demand. In other words, improved productivity through technological innovation would do little to make the industry more profitable for those who had a stake in it.

Meanwhile, due to the realities of the Cold War, the Soviet Union, with its historically much smaller productive capabilities than those of the West, faced a disproportionate burden in the arms race, having to devote a much relatively higher segment of its economy to military expenditures to reciprocate those of the West. Before the Cold War, long-standing disparities in the productive capacities, developmental levels, and geopolitical strength existed between East and West. The "East", in many respects, had been behind the "West" for centuries. As a result, reciprocating Western military build-ups during the Cold War placed an uneven burden on the Soviet economy, forcing them allocate a disproportionately large share of their resources to the defense sector. The burden of the Cold War, in conjunction with the growing impracticality of centrally-administered economic decision-making as the economy grew larger and more complex, would lead to a huge imbalance between supply and demand for consumer goods in the Soviet Union's late years.

As mentioned, the Khrushchev and Brezhnev years saw great concessions to consumers, enabling the Soviet people to reap the benefits of the Soviet Union's industrialization during the Stalin years. But as the purchasing power of Soviet workers increased, the products that they demanded were in an ever-shorter supply. Although wages for workers were relatively high, workers were often unable to purchase the products that they demanded because of systemic supply shortages caused by the stagnation of the Soviet economy once it had industrialized and reached a high level of complexity. Many workers thus began accumulating large surpluses at Gosbank, which operated as what would be a state bank and a commercial bank in a market economy. These surpluses would be wiped out after the dismantling of the Soviet economy when price and currency controls were abruptly lifted in 1992.

Calls for Reform

Although economic stagnation was pronounced by the time Gorbachev became party chief in 1985, the sluggishness of the Soviet Union's command economy was evident two decades earlier amid calls for reform. Following Khrushchev's ouster in 1964, however, the reform movement high up party ranks was perhaps weakened by the growing power of the ministries and collective leadership. As the political atmosphere gradually moved toward becoming more relaxed since de-Stalinization, a pattern of collective leadership emerged that reconciled the interests of many different bureaucracies and interest groups. In contrast to the system of delegated power in the post-Communist years, Soviet politics under Brezhnev was generally based on informal personal influence that a cadre accumulated over some particular institutions and compromise between committee members.

Known as "bureaucratic pluralism" by Western Sovietologists, this dyanamic of politics has been used to explain the aborted Kosygin Reforms of 1965, which called for giving industrial enterprises more control over their own production-mix, some flexibility over wages, and allowed them to put a proportion of profit into their own funds. Since these reforms suggested a move away from detailed central planning and control from above, the planning ministries, whose numbers were proliferating rapidly, fought back and protected their old powers. This was not a difficult task since the Brezhnev/Kosygin collective leadership lacked the strength to counter their influence (the ministries, after all, controlled supplies and rewarded performance) in order to implement the reforms. The ministries curtailed them by just issuing more detailed instructions that retarded the reforms, impeding the freedom of action of the enterprises. Nor did these economic reforms, aimed at increasing productivity by pushing aside surplus labor, necessarily appeal to workers. The constituency that stood to gain the most from the reforms was the enterprise management, but they weren't enthusiastic either since they weren't convinced that these reforms might last. Finally, by 1968 there was the unfortunate example of the Prague Spring in Czechoslovakia, which put the brakes on the momentum for economic and political reform. In contrast, the military sector continued to be the success story.

Due to continued growth rates, some Sovietologists have argued that the ACS system had not yet exhausted its capacity for growth by the late 1960s since it was still sustaining higher rates of growth than the Western powers. In light of this, it has been argued that the Kosygin Reforms of 1965 could have been implemented at just the right time to save the Soviet Union and spare the population of the hardships of the past twenty years. By the Gorbachev era (1985-1991), in contrast, a decade of stagnation, declining productivity, and systemic problems down to the factory level might have been insurmountable. Perhaps the problem with the Kosygin/Brezhnev collective leadership was not too much power concentrated in their hands, but not enough. Forces like the ministries and the military won out, pushing the Soviet Union in a less prudent direction.

However, following the dissolution of the Soviet Union in 1991, Yeltsin was a strong executive with strong formal delegated powers able to implement radical (and unpopular) economic reforms under his leadership by executive decree and unconstitutional actions like his dissolution of the Duma in 1993. Kosygin, then the Soviet Premier, however, could not get the Byzantine labyrinth of the Soviet Administrative Command System to carry out the reforms that he attempted to institute. Unlike Stalin, they simply did not have his apparatus of state terror in place, which enabled Stalin to subvert the party's authority with the secret police.

Perestroika and Glasnost Introduced

Although reform stalled between 1964-1982, the generational shift gave new momentum for reform. Changing relations with the United States might also have been an impetus for reform. By the Reagan years in the United States, the abandonment of Détente would force the Soviets to greatly improve their productive capabilities in order to reciprocate the new arms build-up, especially amid talks of "star wars" missile defense. By the time Gorbachev would usher in the process that would lead to the political collapse of the Soviet Union and the resultant dismantling of the Soviet Administrative Command System with Glasnost (political openness) and Perestroika (economic restructuring), the Soviet economy suffered from both hidden inflation and pervasive supply shortages.

Conclusions: The Post-Communist Transition

To eliminate the distortions of the ACS system and in favor of democratization and capitalism, Yeltsin's shock program, employed days following the dissolution of the Soviet Union, cut subsidies to money-losing farms and industries, decontrolled prices, moved toward convertibility of the ruble, and moved toward restructuring the largely state-owned economy. Existing institutions, however, were abandoned before the legal structures of a market economy that govern private property, oversee the financial market, and enforce taxation were functional, despite the fact that the two major components of a macroeconomy are banking system and the state budgetary system.

According to market economists, the dismantling of the administrative command system in Russia was supposed to raise GDP and living standards by allocating resources more efficiently. It was supposed to create a movement outward towards production possibilities by eliminating of central planning, substituted by decentralized market system, eliminating huge distortions through liberalization, providing incentives through privatization. Instead, over half the population is now impoverished in a country where poverty had been largely non-existent, life expectancy has dropped, and GDP has halved.

Mainland China, sustaining one of the world's highest rates of per capita GDP growth over the past two decades, in contrast, has maintained public ownership while avoiding the rigidities of planned economic decision-making since the ascendancy of Deng Xiaoping. Peasants are largely in charge of economic decision-making at the countryside (still home to the majority of mainland China's population), not planners. In turn, they are able to spend their surplus capital on consumer goods. Socialist enterprises at the local level, known as Township and Village Enterprises (TVEs), and state-owned enterprises are also profit-maximizing and thus capable of deciding for themselves the source of inputs, the destination of outputs, the amount of funds geared toward labor allocation, and what to produce. Subsides, however, still prop up many money-losing state-owned enterprises (SOEs) which are often still overseen by planning ministries. While the PRC has not reached the high level of industrialization and urbanization as rapidly as seen in the Soviet Union under Stalin, it seems to be avoiding the Soviet economy's record of poor productivity and rigidity seen since the late 1970s.

Thus, socialism is not necessarily the economic system that failed in the Soviet Union, but rather a system of administrative command or planned economic decision-making. The more complex the Soviet economy grew under the auspices of the planners, the more unfeasible it simply grew to plan every economic decision in the highly industrialized nation covering such a huge geographical expanse. Planning might have transformed a nation of peasants into an industrial superpower, but it failed to supply all the goods demanded by a population growing accustomed to increasingly better living standards once the economy had achieved a high level of industrial development.

See also: Economy of Russia