Introduction
This post will discuss the collapse of the Soviet Union and its transition from a planned economy to a market economy.
Planned Economy
A planned or centrally controlled economy is often stereotyped by long lines of people waiting for consumer goods and daily commodities. Based on feedback from two of my colleagues (and good friends) this seems to be fairly accurate. LK, formerly from Russia, made the following comment regarding the scarcity of goods.
When you saw your friend wearing new jeans or reading a new book, the first question was not "where did you buy it?", but instead of "buy" we used another Russian verb "dostat'", literally "to obtain, to fetch, to reach for", because almost anything good or interesting wasn't easily available.
(LK 2008)
Unlike a market economy, a planned economy is less flexible and is slower to respond to changes in consumer needs. WF made this observation about some state run clothing stores in Poland.
…frequently there were surpluses of all kind of clothing that would be easily sold if produced 5 years earlier. Even in the communist system (at least in the 60-ties and 70-ties that I remember) most people didn’t want to wear stuff that was out of fashion. Yet the clothing factories were producing a plenty of out of style jackets, shoes, coats, etc. The stores were full of such obsolete stuff. The store staff was not allowed to reduce their prices until it was well too late.
(WF 2008)
WF also elaborate on how the supply system was deeply flawed. WF described how produce from a bountiful harvest was often discarded due to strict government quotas and farmers were unable to store surplus produce. Additionally during poor harvests, Poland was forced to purchase expensive foreign grain from the international market.
Gorbachev
During the 1980’s there was a growing feeling of dissatisfaction in the government of the Soviet Union. The Soviet-Afghanistan war that commenced in 1979 was far from over with mounting casualties. Oil prices in the mid 1980’s dropped considerably, depleting the Soviet Union’s access to foreign currency which was needed to purchase imported grain. In addition to this, the cold war had a significant social and economic effect on the Soviet people as funds were diverted from social programs to the military.
In March 1985, public desire for change forced the politburo to elect Mikhail Gorbachev to the office of General Secretary of the Soviet Union. Gorbachev introduced changes to the soviet administrative command economy with his programs of glasnost (political openness) and perestroika (economic restructuring).
The policy of glasnost permitted significantly greater freedom of speech, including the media. The intention of glasnost was to encourage debate and participation by the public on all aspects of the economy and government. Glasnost also gave pardons to political prisoners and allowed government records to be released to researchers, scholars and the media.
The most radical of changes occurred in May 1988 with the introduction of the Law of Cooperatives which permitted private ownership of businesses.
But the most surprising development came in 1987 when Gorbachev publicly announced his intention to pursue the democratization of the Soviet Union. To gain independence from the Communist Party of the Soviet Union (or CPSU), Gorbachev created a new political position, President of the USSR. Gorbachev became the USSR’s first and only president in March 1990 which effectively reduced the influence (and power) of the CPSU.
The unintentional consequences of Glasnost
Whilst the original intension of the relaxed media was to foster healthy debate on political reform, the unintentional consequence was the exposure of current social and economic problems. The media reported on the poor housing, corruption, alcoholism and even the historic crimes of Stalin. LK had this to say about the bleak media reports.
When Gorby relaxed the media, there were so many movies and books with negative contents, that a new word was coined to describe them "chernukha", derived from "cherny" (black). It was all doom and gloom and no light at the end of the tunnel. Very depressing stuff, without any redeeming values.
(LK 2008)
The “cherny” reports revealed a darker side of soviet life that was not previously known. This caused a significant weakening of the communist party’s popular support.
The Collapse of the Warsaw Pact
The declining support for the CPSU in Russia quickly spread to the Warsaw Pact countries. The Warsaw Pact was an alliance of eight European communist countries formed in 1955 to counter the North Atlantic Treaty Organization (or NATO).
The communist governments in the Warsaw Pact were removed by popular vote, or in the case of Romania, a violent uprising. After East Germany withdrew from the pact in October 1990 to unify with West Germany, the alliance mutually agreed to dissolve in March, 1991.
The Failure of Perestroika
Perestroika introduced unprecedented changes into the Soviet economic system but this was insufficient to kick start the economy after the depression in the mid 1980’s. Whilst revolutionary in some respects, Perestroika in the minds of many did not go far enough; for example, the state still controlled prices and individuals were still unable to own property.
What followed was systematic economic breakdown. The Soviet government continued to subsidize industries as tax revenues declined. This decline was partially due to a successful campaign to teach alcohol moderation that severely affected revenues from liquor tax. The economy was further exacerbated by dismantling of the traditional supply chain, a result of Gorbachev’s decentralization, but unfortunately there was no system to replace it.
The Dissolution of USSR
In February 1990, the CPSU agreed to relinquish control over the fifteen USSR republics. Republics subsequently held elections to select national representatives and then proceeded to enact laws to assert their own sovereignty. This included laws to withhold tax revenues from the USSR and pass laws contradictory to those in the USSR.
YELTSIN
Boris Yeltsin won 57% of the popular vote in June 1991 to become Russia’s first president. Interestingly, Yeltsin did not advocate (or mandate) a move to a market economy prior to coming to office. His only mandate was to ease prices increases.
The August Coup
On the 20th of August 1991 Gorbachev was scheduled to sign the New Union Treaty that would effectively convert the USSR into a federation of independent republics. The treaty was supported by the Baltic States but not by some in the communist party who believed that the reforms had gone too far. On the eve of the treaty, a group of conspirators barricaded themselves in the Russian parliament in an attempted coup. The goal was to try to persuade Gorbachev to declare a state of emergency to restore order.
Three days later, the coup leaders surrendered, this result is largely due to the Yeltsin’s popularity and support from the Russian people.
End of the Communist Party
In November 1991, following the failed coup, Yeltsin banned the communist party (in Russia) and disbanded the Soviet Union. This effectively terminated the Soviet government and left Gorbachev without a job.
Commonwealth of Independent States
On the 12th December 1991, Russia, Ukraine and Belarus signed the Belavezha Accords that formalized the end of the USSR and the formation of a new union called the Commonwealth of Independent States (or CIS). A week later all remaining former soviet republics joined the commonwealth with the exception of the three Baltic states of Estonia, Latvia and Lithuania.
On Christmas day 1991, Gorbachev formally resigned as President of the USSR and signed over all remaining power to Boris Yeltsin, President of Russia.
Restructuring
Starting almost immediately after the collapse of the Soviet Union, Yeltsin implemented drastic economic reforms including the abolition of price controls and subsidies. Yeltsin’s government also implemented new taxes and reduced government spending.
It must be noted that many entrepreneurs profited heavily from the restructuring process. This new class of Russians is sometimes referred to as the Oligarchs, many of whom had links to Yeltsin and his administration.
Restructuring problems
After 4½ years, the restructuring results were mixed. The Russian GDP declined by more than 50%, this is larger than the decline experienced by the United States during the Great Depression. Heaviest hit was the defense industry that experienced an enormous reduction in government spending. There had also been a proliferation of crime due to high unemployment and the ineffective police force.
The privatization of state assets was supposed to revitalize the economy. This did not happen immediately due to the immature banking industry that was not prepared to finance individuals and organizations.
High inflation led to high lending rates of up to 250% in the early 1990’s. The hyper-inflation caused by the “shock therapy” policy had effectively wiped out the savings for most Russians. This made capital investment by Russians almost impossible.
Shortages of capital and finance forced many industries to resort to bartering. This practice, whilst illegal (and untaxed), was tolerated by the government as it allowed key customers such as the military to be supplied with goods.
Many professionals in Russia experienced significant salary cuts, delayed payments and job losses. With relaxed travel, many Russians emigrated to the security and well paid jobs in the West.
PRIVATIZATION
As part of Russia’s economic reform and a condition of foreign investment, some 200,000 industrial enterprises needed to be privatized. Three quarters these enterprises employed more than 1,000 people. The Russian authorities had three methods to privatize state assets. The first was an employee buyout (or lease with right of buyout). A second method was through competitive bidding. The last method involved converting the enterprise into a corporation and selling at a later date.
Despite allegations of corruption and favoritism, international experts (in 1996) have deemed the transition of state assets to private individuals and organizations to be a success.
The employee (or “inside”) buyout scheme has been criticized by economists like Marshall Goldman and Joseph Stiglitz as it unfairly favored industrial management. It is argued that employee owned enterprises are less competitive because employees would improve their own working conditions without necessarily increasing their output or becoming more efficient. But employee-owned enterprises have been credited with keeping unemployment low.
Shock Therapy
Shock therapy refers to the rapid transition from a planned economy to a market economy. Jeffrey Sachs, a prominent economist recommended this approach to former communist countries. Shock therapy was first used to liberalize post-war Germany (specifically West Germany). The 1947-1948 reform eliminated price controls and other government support programs. These reforms were successful in kick-starting the war-torn economy. Critics are mixed as to the success (or otherwise) of Shock Therapy. Naomi Klein in her book “The Shock Doctrine” is probably the most critical; she asserts that shock therapy causes mass unemployment, increased crime and introduced a class struggle. A noteworthy nation that embraced shock therapy is Poland. Of all the former Warsaw Pact countries, Poland was the first to exceed pre-1989 GDP. This could partially be explained by Poland’s culture of private enterprise that quickly adjusted to post-communism economy.
…almost 80% of Polish arable land remained in private hands of farmers. In towns there were small businesses, which were sometimes doing very well economically. There were small private stores. There were private car mechanic shops and private carpenter, blacksmith, plumber, etc. shops in every town. Except of Yugoslavia, which technically did not belong to the soviet controlled states, this was totally unique. Legally, as a private company owner, in Poland prior to 1989, you were not allowed to employ more than 10 people. In comparison, in the SU, Romania, Bulgaria, etc. people were not even allowed to sell what they grew in their backyards. Yet, there were thousands of those little private shops in Poland that survived many years. With that kind of training that Poles were practicing during all these years under the communist rule, they had an advantage in the “know-how” of how to run a private company and how to be a productive individual farmer. After 1989 many small businesses (with less than 10 personnel) were able to grow without any red tape barriers. That was what most of this small businessman wanted for years! Consequently, these little businesses exploded in number and started growing like crazy.
(WF 2008)
Globalization
This section will analyze three aspects of globalization, specifically security, the European Union and trade.
Security
Following the collapse of the Warsaw Pact, the Czech Republic, Hungary and Poland joined NATO during the Fourth Enlargement. Later in 2004, during the Fifth Enlargement, the former Soviet Republics of Estonia, Latvia and Lithuania (also known as the Baltic States) joined NATO. Naturally, Russia opposed the expansion of NATO into Eastern Europe.
The European Union
All former communist countries that are now part of NATO are also members of the European Union. These countries joined the union in 2004 with the exception of Bulgaria which joined in 2007. The apparent delay joining the European Union compared to NATO can be explained by certain economic and political pre-conditions commonly known as the Copenhagen Criteria. The criteria includes a democratic government with associated freedoms. Accession to the Union is also conditional on acceptance from all existing members and the European parliament.
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Trade
The Soviet Union was largely self sufficient in fuel, metal and timber but it did import machinery, consumer goods and occasionally grain. More than half of the Soviet Unions’ trade was with the Council for Mutual Economic Assistance (or COMECON) which was basically the Warsaw Pact countries with the addition of Cuba and Vietnam. The liberalization promoted in the perestroika reforms allowed the Warsaw Pact countries the freedom to trade with non-COMECON nations (namely the West). This naturally, was economically advantageous as these countries could acquire hard currency and have access to a larger and more affluent market.
Conclusion
Few in the early 1980’s predicted the collapse of the Soviet Union and/or the demise of communism. Unquestionably this was not the intention of Gorbachev but he was definitely the catalyst of change. The policies introduced by Gorbachev and continued under Yeltsin were aggressive. Many argue that the changes were too rapid however the “shock therapy” ultimately proved effective even though it had a heavy social cost.
It is interesting to compare the changes occurring in China with those in the former Soviet Union. The Chinese consciously avoided the Soviet-style “shock therapy” and decided to progress cautiously to evolve their economy without the complication of political changes. Clearly the Chinese method has been effective as they emerge in the 21st century as a potential economic superpower.
It is evident that communism created a lethargic economy that was slow to evolve and slow to adjust to change to market and consumer needs. Adam Smith’s assertion that the market requires competition to balance the selfishness of sellers with the needs of society is true today as it was three hundred years ago.
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