Fall of the USSR: Economy

• Soviet economy was essentially a command economy
  • under Stalin, this was successful
  • the 1st 5YP led to Russian industrialisation
  • 1945: Russia's economy was the fastest growing in the world at 7.1% annually

• However, under Krushchev there was economic decline
  • 1958-63, ecnomic growth fell to 5.3%
  • the USSR had been competing in an arms race since 1945 which cam at a great cost

• Brezhnev...
  • 1970's annual growth was down at a 2% average
  • by 1980, it had dropped to 0.6%

• No incentives for work or innovation
  • low labour productivity
  • Russia's top 10% richest were only 3x richer than Russia's poorest
• Waste
  • Gosplan rewarded quantity over quality
  • 1980's Gosplan ordered 400k tractors to be made
    • 20% of them were never used
• No modernisation
  • storage was poor and resulted in grain rotting
  • hard to transport food due to poor transport infrastructure
  • agriculture lacked sophisticated machinery
    • over 25% of Soviets worked on farms vs. 4.6% in the US (who were more productive)
• Centralisation
  • farming was controlled by the government
    • wrong fertilisers often sent at the wrong times etc.
    • farmers could not use their expertise to schedule harvests
  • 1956-80 sugar production increase of only 28%

• Rationalisation 1985-86
  • initial economic reforms
  • led by the communist party
  • designed to stimulate, economic modernisation & higher rates of growth and production
• Reform 1987-90
  • reforms intended to introduce market forces
  • concurrently initiated political reforms designed to build support for greater economic change
• Transformation 1990-91
  • Gorbachev began to abandon the fundamental aspects of the system such as single-party rule and the command economy
  • the party lost control of the process
• Outcome
  • failed to increase economic growth
  • economy actually stopped growing and started to shrink

• May 1985 - Gorbachev reduced state-run factory alcohol production by 50%
  • 55,000 party members assigned to a task force to stop the illegal production of alcohol

• Alcohol consumption 2x 1960 rate in 1987
  • 4.5 million registered alcoholics

• Illegally produced alcohol more popular and so the government made less money
  • government alcohol revenues dropped by 67 billion roubles

• Campaign abandoned in 1988

• An economic initiative designed to end economic stagnation
  • increase in investment to modernise the Soviet economy
  • predicted a 20% increase in industrial output in the next 15 years

• Outcome: a failure
  • a decline in the price of oil
    • $70 for a barrel of oil in 1981 to $20 in 1985
    • soviet revenues dropped by more than 2/3
  • Gorbachev had to finance acceleration by borrowing western money
    • government debt at $27.2 billion in 1988
  • Gorbachev ignore advice and invested in energy production rather than high-tech machinery
  • acceleration created an economic crisis

• Law on Individual Economic Activity, 1986
  • legalised individuals and families making profit from small-scale work

• Law on State Enterprise, 1987
  • intended to devolve power from central government to factory management
  • it failed in two ways
    • devolved very little power as Gosplan found ways to retain control
    • the ability to charge higher prices meant that the government had to pay more for good - government debt increases

• Law on Co-operatives, 1988
  • large scale private companies legalised
  • by 1990 nearly 200,000 co-operatives had been set up
  • incomes of co-operative members higher than state-employed workers

• Gorbachev increased restrictions on Gosplan and it was eventually abolished in 1990

• Gorbachev hoped to combine the best features of the market with the best feature of planning
  • the new market did not function properly and created more issues
  • government subsidised prices allowed consumers to buy products much below market value
  • free market goods were less popular as they were more expensive
  • 'price-capping' made production uneconomic and caused co-operatives problems

• plan to minimise the negative impact of the transition to market economy

• widespread privatisation and marketisation proposed

• government did not adopt a proper plan as Gorbachev was too indecisive 

• Reform resulted in no effective ways of distributing goods and shortages of essentials increased

• enough grain but no system to export it

• Gorbachev's approval ratings fell and strikes increased
  • 1991, 1,755 enterprises affected by strikes

• faith in the government fell and nationalist support increased

• 1991, the Supreme Soviet introduces private property

• in April, citizens could trade stocks and shares

• the economy continued to decline

• oil production down by 9%

• by the summer of 1991, the Soviet government were effectively bankrupt

Khrushchev - decline

Brezhnev - stagnation

Gorbachev - collapse

• The USSR's economic weaknesses were heightened by excessive arms spending

• free markets will almost always outperform command economies in the long run

• the decision to collectivise and to introduce a command economy created an insufficient economic system

• economic collapse = political collapse