User:Trust Is All You Need/Soviet Union

Economy of the Soviet Union

DneproGES hydro-electric power plant, one of the symbols of Soviet economic power, was completed in 1932.
Currency	Soviet ruble (SUR)
Trade organisations	Comecon, ESCAP, WTO and others
Statistics
GDP	$2.659 trillion (1990)
GDP growth	1.4% (1990)
GDP per capita	$9,211
GDP by sector	agriculture: (20%), industry: (21.9%), services: (0.82%) (1989 est.)
Inflation (CPI)	6% (1989)
Gini coefficient	Low
Labour force	152.3 million (1989 est.)
Unemployment	Officially, no unemployment
Main industries	petroleum, steel, motor vehicles, aerospace, telecommunications, chemicals, heavy industries, electronics, food processing, lumber, mining, defense
External
Exports	$110.7 billion (1988 est.)
Export goods	petroleum and petroleum products, natural gas, metals, wood, agricultural products, and a wide variety of manufactured goods (1989 est.)
Main export partners	Eastern Bloc 49%, European Community 14%, Cuba 5%, US, Afghanistan (1988)
Imports	$107.3 billion (1988)
Import goods	grain and other agricultural products, machinery and equipment, steel products (including large-diameter pipe), consumer manufactures
Main import partners	Eastern Bloc 54%, European Community 11%, Cuba, China, US
Public finances
Government debt	$27.3 billion (1988)
Revenues	$622 billion (1989 est.)
Expenses	$781 billion (1989 est.)
Economic aid	$147.6 billion (1954-88)
All values, unless otherwise stated, are in US dollars.

The economy of the Union of Soviet Socialist Republics (USSR) was based on a system of state ownership, collective farming, industrial manufacturing and administrative planning. The economy was characterised by full state control, autarky, public ownership, pervasive corruption and socio- and economic stagnation in its last 20 years of excistence. Since Mikhail Gorbachev came to power, continuing economic liberalisation moved the economy towards a market like-system. The led to the final collapse of the Soviet economy and led to a depression which led to the dissolution of the Soviet Union in 1991. The stagnation which would consume the last years of the Soviet Union was caused by poor governance under Leonid Brezhnev and inefficiencies within the planned economy. When the stagnation is a matter of debate, but is normally placed either in the 1960s or early 1970s. In 1991, the USSR had established itself as the second-largest economy in the world, only behind that of the United States.

From 1928 to 1991 the entire course of the economy was guided by a series of Five-Year Plans. Within about 50 years, the nation evolved from a mainly agrarian society and became one of the world's three top manufacturers of a large number of capital goods, heavy industrial products and weaponry. However, the USSR lagged far behind in the output of light industrial production and consumer durables, mostly because of inability of Gosplan to predict the demand for such products. The complex demands of the modern economy and inflexible administration overwhelmed and constrained the central planners. Corruption and data fiddling became common practice among bureaucracy to report fulfilled targets and quotas thus entrenching the crisis. At its peak, from Stalin to early Brezhnev, the Soviet economy grew at the same phase as the economies of the United States, Japan and that of the Russian Empire, its predecessor state.

The USSR's small service industry accounts for 0.82% of the country's GDP while the industrial and agricultural sector contribute 21.9% and 20% respectively. Agriculture was the predominant occupation in the USSR before the massive industrialization under Joseph Stalin. The service sector was of low importance in the USSR, with the majority of the labor force employed in the industrial sector. The labor force totaled 152.3 million people. Major indutrial products include petroleum, steel, motor vehicles, aerospace, telecommunications, chemicals, electronics, food processing, lumber, mining, defense industry.

History

Early development

The Russian Soviet Federative Socialist Republic and later the Soviet Union were two industrializing countries, but they both shared a thing in common, they were industrializing slowly, and from an already low base. With World War I, the Russian Revolution and the ensuing Russian Civil War proving to be major strains for the Russian economy; the aggregate industrial production of the USSR in 1926 was only marginally bigger than what it had been in 1913, before the start of World War I. Meaning that Soviet coal output was a little below that of Socialist Bulgaria in 1982. In 1926, about 26.3 million out of the 147 million people of the USSR lived in towns, with only 11 million them being employed in the non-agriculture sector of the economy. An existing problem was that of overpopulation of rural areas, and while the numbers are not clear, it is normally assumed that the marginal product of agriculture labour was low.

The repudiation of the debt of the Tsar regime along with the dire situation in world economics, ensured to any increase in growth of accumulation was to be internally financed. At the meantime, natural conditions were not encouraging to high-level of agricultural productivity, with long cold winters nationwide, drought problems in the south and acid soils in the north. Enrichenment in the sector of indutrial raw materials, was in contrast, "extremely good" according to historian, David A. Dyker. The USSR was a country with large natural deposits, an example being the large oil fields in Transcaucasia. In some ways, it should be noted that the Soviet Union in the 1930s was a typical developing country, with a relatively low accumulation and substantial large rural population. But due the economic crisis abroad, the Soviet Union could not count on large-scale capital transfer from abroad. Unmistakeable, the country had at that time a small, but steady growing industrial base. The raw material endowment in the USSR which ensured that the industrialization drives did not lead up to such problems as, for example, balance of payments.

The New Economic Policy

Main article: New Economic Policy

See also: Planned Economy

The two major economic policy makers of the USSR, Lenin (left) created the NEP while Stalin (right) created the planned economy

Early in February 1921 the Politburo unanimously voted for Vladimir Lenin's proposal of ending the forced requisitioning of grain. By 1921, it had become clear that this move did not only lead to popular hostility, but also the retardation of agriculture. At the 10th Congress of the Russian Communist Party (Bolsheviks), the economic policy known as the New Economic Policy, often abbreviated to NEP, was approved. Everything except "the commanding heights", as Lenin put it, of the economy would be privatized. "The commanding heights" included foreign trade, heavy industry, communication and transport among others. The limited toleration of bourgeoisie activities led to a split within the party, with the opposing side claiming that NEP stood for "New Exploitation of the Proleteriat". Lenin was opposed to this, and believed the road to communism could only be reached through state capitalism. While trying to persuade fellow communists of the wisdom of NEP, Lenin himself remained wary of NEPmen (private businessmen) and sometimes feared that they were using the government more than the government were using them.

As novelist Andrei Platonov, the improvements were immediatley noted and rationing cards and queuies which had become hallmarks of war communism had dissapeared. It should however be noted that while some trade improved, the economy was still in deep crisis. Years of war and natural disaster had destroyed the once steady growing agriculture of Russia. The result of all this was famine on a scale in which the government's weaknesses were shown. What followed was the establishment of an international relief committee chaired by prominent communist and non-communist alike. But in despite of the governments effort, an estimate of 5 million people died under the famine. While it is true that agriculture rapidly recovered from the famines of 1920-21, but Soviet agriculture under Lenin and Stalin proved to be unable to recover to the output found in pre-war years. Compared to the 81.6 million tons gathered in 1913, it should be noted that this was a "really" good year for harvesting, the communists were never able to exceed over the 76.8 million tons in 1926, and the output fell of thereafter. Livestock did however preceed pre-war levels in 1926, but as with agriculture, it subsequently declined. Lenin's goal was to collective agriculture in Russia, but instead of force, persuasion was to be used.

It was however not only agriculture which felt the full force of the crisis, the industry too worsened. In the major branches of manufacturing, the total output of 1921 was a fifth or less of that found in 1913, before the start of World War I. The numbers of workers employed in this sector to generate output did not fall below 40% of the pre-war level. This problem was to be one of the largest problems in the "new era" of communist rule; because the underemployed were soon joined by new job-seekers, coming primarily from the country side and the demobilized Red Army.

After Lenin's death in 1924, a power struggle between the pro-NEP and anti-NEP escalated eventually into the creation of the first planned economy under Stalin. However, before this Nikolai Bukharin, Alexei Rykov and Mikhail Tomsky stood as the right-wing faction of the Communist Party, however, they were still far-right by western standards. While Leon Trotsky headed the Left Opposition while Joseph Stalin still stood on the sidelines. After crushing the Left Opposition in 1927, Stalni began to borrow some of their economic policies and began to attack the right-wing of the party led by Bukharin. Stalin, after consolidating power, ended NEP in 1928.

The reasons for industrialization

See also: First Five-Year Plan

With the industrialization and economic growth of the Russian Empire lagging behind that of its western counterparts in Europe and the United States. By the late 1920s, the enormous losses in World War I and the subsequent Civil War, and in part because of increasing hysteria, the goal of catching up with the west became the dominant influence on the economic policy. The relatively liberal NEP under Lenin and later Joseph Stalin, had mixed success and was seen by some to be inadequate in achieving the desired "dash for growth" to catch up with the west. With some seeing the faults of the NEP of being to large, in 1928 NEP-era ended and was replaced by the planned economy. This strategy for growth in the USSR was established in the First Five-Year Plan and remained fundamentally unchanged throughout the next 50 years of Soviet existence. The new approach of the planned economy, centered on the acceleration of industrialization, required rapid mobilization of capital, labour and material inputs, with lesser time being used on so-called intensive growth and more time focusing on extensive development. This policy ment to raise the share of investment in national income, to increase the participation rates of the labour force and to redeploy most of the labour force from the agricultural sector to the industrial sector. The introduction of the command economy; including the nationalization of nearly all entities and the collectivization of agriculture was seen by the communist leadership as the only way to secure the shift of resources at the required pace to catch up with the west.

File:Pjatiletnu prevratii ve chetuirekhletnu.jpg

"Let's Turn the Five-Year-Plan into a Four-Year One" (Gustav Klutsis, 1930)

By the 1920s, debates raged within the Communist Party of the Soviet Union (CPSU) on the matter of targeting industrial growth. The general objectives of industrial growth in the USSR that was finally established by the ruling party elite, can be summarised in these four key points (see below):

1. The USSR must overtake the advanced capitalist countries in terms of industrial output per head of the population;
2. The Soviet economy must overtake the West technically;
3. The output of capital goods, must increase more rapidly than that of consumer goods;
4. The chosen location of industry should be based on their long-term and defence needs rather than short-term factors like cost.

The general conclusion was that the survival of the Soviet Union in a capitalist ruled world was of upmost importance to keep the revolution alive. In 1931 Joseph Stalin held is best known speech, in it, he boldly claimed; "To reduce the tempo means to fall behind. Those who fall behind get beaten. [...] We are fifty years behind to a hundred years behind the advance countries. We must make up this distance in ten years. Either we do it, or we shall go under." It should be noted that the preperation of war was one of the main driving forces behind industrialization, mostly due to communist distrust of the outside capitalistic world. This mistrust, in turn, had roots in Russian tradition and the only difference from the communist and other Russian rulers was that the Soviet Union came with a state ideology.

Just like military needs, ideology was also important to the industrialization program of the late 1920s and 1930s. In addition to the conflict with capitalism, Vladimir Lenin and fellow supporters believed that the stage of communism could only be reached through an industrialized nation. This stance was already conceived in 1917, before the revolution, when Lenin coined the slogan; "catch up and overtake". It should also be noted that the CPSU was the party for the industrial proletariat, even if the proletariat made up a minority of total party members.

A related cause to the rapid industrialization in the Soviet Union, was that it was not just Stalin, or a group around him, who sought industrialization, but the majority of the communist leadership backed the plan. This was to be the case after two generations of the leadership. The term New Bolsheviks has been coined to describe the overlly enthusiastic members of the Soviet leadership who pushed for the rapid industrialization seen under Stalin. The term may however be misleading, seeing that the majority of the New Bolsheviks were Old Bolsheviks, so the term, Stalinist may be better to describe them. The new Soviet generation who had experienced the Russian Civil War helped to polarise Soviet politics, which in turn helped the Soviet government in gaining support from the populace. It did not matter that much to the Soviet leadership that most of the communist industrialisers were killed during the purges of 1937-1938, the successor generation, often simply called stalinist, but also the "upwardly-mobile people", the "men of 38" or the "Brezhnev generation", were even more committed to the continuing rapid industrialization. The generation had been educated by the First Five-Year Plan and their values had been reinforced by their experience of World War II. It was not, however, as some Cold War historians argued, that the communist leadership needed an economic race with the west to justify government repression, but instead, simply that the generation believed in the cause of economic modernization.

The 1930s

In an official party statement, the goal of the second Five-Year Plan (1933-1937) was the reconstruction of the entire Soviet economy and the creation of a new technical base for all the branches of it. The goal of the Five-Year Plan was to increase machine production from 3 to 3.5 times in 1937, the mining of coal was increase from 90 millions tons to 250 million in 1937, the construction of a 25-30000 kilometres new railway lines and 22 million ton of cast iron would be smelted in 1937. However, the optimistic targets of the second Five-Year Plan was quickly reduced and in 1934, and total production for all industry was set 92.7 billion rubles, in comparence to the original 43 billion at the start of the plan. This was a rather more modest targeting, with the yearly rate of growth being 16.5 percent. Social objectives was also part of the plan, with two of them containing improvments in living standards for both urban and rural dwellers and the "elimination" of all class. They also projected that the salary for the common worker would increase from 1427 rubles in 1932 to 1755 rubles in 1937, a modest increase of only 23 percent. The plan also projected an increase for consumer goods from 22.2 billion rubles in 1932 to 47.2 billion in 1937, however the plan was only able to fulfill 85.4 percent of this target.

It was also during this plan that the Stakhanovite movement grew; the movement follows the example of Aleksei Grigorievich Stakhanov, employing hard work or Taylorist efficiencies to over-achieve on the job. However, while some impressive new targets were achieved, it also led to deterioration of the work place and the equipment due to lack of repairs. The Third Five-Year Plan was not as successful, due to the purging of leading Gosplan members and the outbreak of World War II.

File:Поезд идет от ст. Социализм до ст. Коммунизм.jpg

Translation of the text: "The train goes from the station of socialism to the station of communism", to the left you see Stalin driving the train

While figures vary from time and geographical location (e.g. Western or Eastern Europe), Soviet statistics estimated a growth of 21.7 percent in the period from 1929-1940, however, Western sources puts it at 7.1 percent. While lower, seeing that most of the developed world was in an economic depression in the aftermath of World War I, this was an impressively high growth rate at that time in comparence to that of Western Europe and the United States at that time. New industries were created from scratch, as for example, in the sectors of armament and agriculture, and the increase in industrial manufactured raw material such as iron and steel, the improvements in the manufacturing of consumer goods were less impressive however. The fact that capital goods took precedence over consumer goods led some technical improvements, with historian Vincent Barnett calling them "impressive". At the same time, the precedence of capital goods was one of the key factors which contributed to the famines of 1932-33. It should also be noted that in 1939, the USSR still was an agrarian society, with agriculture employing 52 percent of the labour force compared to the 18 percent of the industrial sector.

The Great Patriotic War and its aftermath

See also: Eastern Front (World War II)

During the Great Patriotic War, the Soviet Union proved that it was able to out-produce the economy of that of Nazi Germany. Some of the causes are relative and can be attributed to the shortcomings of German economic planning before the war. Another reason was that defence industry, as already noted, had been of up most importance in the USSR since the late 1920s. The industrialization in the 1930s which localised many key factories during the war in the Urals, western Siberia and Soviet Central Asia would prove invaluable after the loss of the Ukrainian SSR and other losses of Western USSR between 1941-42. The exaggeration of Stalinist forethought in Eastern development had more to do with luck than anything else, noting that only most pessimistic planners would have dreamt of losing so much territory to the Germans. Many major industrial plants were located west of the Urals, places were the Germans never reached.

The Soviet economic system proved itself to be well suited for war, better suited than its capitalistic counterparts in the west. According to historian Evan Mawdsley, the Soviet economy was a "war economy" in peace times, and due to the Soviets victory over Nazi Germany, World War II was seen by some as proof of the superiority of the communist system, both economically and politically.

By the early 1940s, the Soviet economy had become relatively autarkic; for most of the period up until the creation of Comecon, only a very small share of domestic products were traded internationally. After the creation of the Eastern Bloc, external trade rose rapidly. However, despite a growth in trade, the authorities tried to limit the external influence on the Soviet economy; first, by conducting virtually all trade through a state monopoly composed of non-competing foreign trade organizations, whose main goal was to export only enough to fulfill the requirements of the Five-Year Plan; and, second, by ensuring that changes in the world prices were fully offset by implicit variable taxes and subsidies, called "prize equalization" by the Soviet government, with domestic prices remaining fixed. Thus, meaning that both enterprises and households were protected from the world economy.

By Stalin's death in 1953, the USSR's economy was growing rapidly, with the Fourth Five-Year Plan drastically improving the standard of living for the common Soviet from a very low level. At the same time, his last years were markt by the improvements in consumer goods, while still much lower than what it should have been. The USSR during Stalin's final years, was aided by industrial booty gained from the former Nazi Germany as war reparations and the USSR's economic exploitation of its communist satelite states in Eastern Europe.

Golden Age of Communism and the early 1960s

USSR postage stamp depicting Sputnik 1. The caption reads: "The world's first Soviet artificial satellite of the Earth"

At the same time the low level of efficiency and the comparatively low level of improvements was uncovered, the Soviet economy under Nikita Khrushchev was improving at a healthy pace. The CIA estimated average growth from 1956-1960 to be 5.8 percent, while Soviet economist Grigorii Khanin reported growth averaging 7.2 percent yearly during the 1950s. Though modest when compared to capitalistic economies at the same level of development, these growth rates were higher than those found in the richest economies during that period. In other words, the Soviet economy was catching up with the west. The 1950s has been labeled by the majority of scholars, as the "Golden Age of Communism" in Soviet society.

By the 1950s, the majority of measurements agreed, the Soviet heavy industry increased by 7% more rapidly than the United States. An ongoing strain to the Soviet economy was its military budget due to the country's backwardsness in regards to technological breakthrough. This led to the USSR using a higher proportion of its GNP than the United States. However, the rising defence expenditure was not the only major weakness of the Soviet economy. As noted, in 1958 the growth of agriculture was far-less rapid, decline from a rate of 44 percent from 1952-1957 to 22 percent from 1957-1959 and 1964-1966. The slowdown in agriculture happen simontanously with marginalisation of the peasants wages and the rising defense expenditure and the precedence of capital goods over consumer goods.

The economy was also beginning to face other economic difficulties, this can be seen by the great expansion of foreign trade with communist- and non-communist nations alike. According to official figures there was a fivefold increase in international trade. between 1950 and 1965, with two third of this trade being with the USSR's satelite states in the Eastern Bloc. Machinery and plant constituted nearly one third of all Soviet import, and played a significant part of the restoration and modernization process after World War II. While trade was increasing, it was still, however, much smaller in relations to national income than in others more developed market economies. However, the Soviet leadership began to realise that it was becoming harder to import technology from abroad, therefor the Soviet economy needed to become more technologically advanced than the west, not through trade, but through technological innovations at home. At this point innovation was particularly needed due labourer gradually tended to become more scarce. The economy was forced to increasingly rely on higher labour productivity, more capital-intensive and/or more efficient production.

The importance of technological innovation was highten in 1965 when Japan's economic growth was the same as the USSR's. While the Soviet Union also showed itself capable to do remarkable things, such as Sputnik in 1957 and the first man in space in 1961, these had typically been military responsibility. Khrushchev's successor, Leonid Brezhnev was incapable of carrying for the Soviet economy, which led to the economic stagnation which would consume and eventually lead to its demise.

Economic growth under Brezhnev

Between the 1960 and 1970, Soviet agriculture output increased by 3 percent annually. Industry also improved, with the Eighth Five-Years Plan (1966–1970) showing the output of factories and mines increased their output by 138 percent, compared to 1960. Under Brezhnev, the Politburo abandoned the decentralization experiments of Khrushchev. By 1966, two years after taking power, Brezhnev abolished the Regional Economic Councils, which were organized to manage the regional economies of the Soviet Union. The Ninth Five-Years Plan delivered a change: for the first time industrial consumer products out-produced industrial capital goods. Consumer goods such as watches, furniture and radios were produced in abundance. However, the Plan still left the bulk of state's investment in industrial capital-goods production. This outcome was not seen as a positive sign for the future of the Soviet state by the majority of top party functionaries within the government; by 1975 consumer goods expanded 9 percent slower than industrial capital-goods. The policy continued despite Brezhnev's reaffirmation of his commitment for the rapid shift of investment which would satisfy Soviet consumers and lead to a higher standard of living. This did not happen.

From 1928-1973, the Soviet Union was growing economically at a phase that would eventually catch up with the United States and Western Europe. This was true despite the advantage the United States had—the USSR was hampered by Joseph Stalin's bold policy of collectivization and the effects of the Second World War which had left most of Western USSR in ruins. In 1973, the process of catching up with the rest of the West came to an abrupt end, with this year being seen by some scholars as the start of the Brezhnev stagnation. The beginning of the stagnation coincided with a financial crisis in Western Europe and the US. By the early 1970s, the Soviet Union had the world's second largest industrial capacity and produced more steel, oil, pig-iron, cement and tractors than any other country. Before 1973, the Soviet economy was expanding at a rate faster, by a small margin, than that of the United States. The USSR also kept a steady pace with the economies of Western Europe. Between 1964-1973, the Soviet economy stood at roughly half the output per head of Western Europe and a little more than one third that of the US.

The stagnation

Main article: Brezhnev Stagnation

See also: Leonid Brezhnev, Yuri Andropov, and Konstantin Chernenko

Period	GNP (according to the CIA)	GNP (according to Grigorii Khanin)	GNP (according to the USSR)
1960–1965	4.8	4.4	6.5
1965–1970	4.9	4.1	7.7
1970–1975	3.0	3.2	5.7
1975–1980	1.9	1.0	4.2
1980–1985	1.8	0.6	3.5

After reaching high growth rates in the aftermath of World War II, the Soviet economy went into secular decline in output growth. When this decline started is a matter of debate; official statistics of the USSR claims it started in the 1970s, something official CIA statistics agrees with. However, other sources, both Soviet and non-Soviet suggest that economic decline was already apparent in the 1960s. It is generally accepted that Soviet statistics falsly tended to exaggerate growth by economic failures, for example, to adjust for hidden inflation. There is, however, little agreement on the statement of how much overstatement. Official Soviet statistics shows a drastic fall from 7.7 percent (1965-1970) to 3.5 percent (1980-1985). Grigorii Khanin, Soviet economist claims, on the hand, that the Soviet stagnation started as early as in the 1960s.

Different factors for the economic stagnation is difficult to assess, but the first relates to the choice of economic growth strategy. By relying on the rapid mobilization of capital, labor and raw materials to generate economic growth, the USSR was bound sooner or later to run into constraints on the availability of resources. Some argue, that these constraints were begin to digg in in the early 1970s and there was little reform policy could do to combat this, with the exception being radical reforms. The second problem being the apparent inefficiency in the planned economy, a problem which would become the centre of the reform debate in the USSR.

Brezhnev during his visit to the United States in June 1973

The extensive growth in the Soviet Union, instead of intensive growth led to dependence on increasing its quantity which in turn led to worsening quality in goods produced in the USSR. The rapid growth in labour supply can easily be explained with the progressive rise in the proportion of the population engaged in the workforce, with policies aimed, in particular, at raising the participation of women in the Soviet labour force. The rate of accumulation of fixed capital was well in excess when compared to the output of growth, by devoting a much larger share of national income to investment. The investment was most higher than what a normal market economy could sustain. Full use was made of the USSR's vast reserves of fossils and other raw materials found in the country. However, it was clear that labor participation could not increase indefinitely and in the early 1970s it increased to its zenith of 85 percent. A number much higher than what was found in Western Europe and the United States.

Despite an elaborate system of wages and bonuses; which were mostly dependent on performance on enterprise level, the motivation and moral of the Soviet workforce shrunk due to the shortages of consumer goods, the sporadic shortages in other sectors and the meager and poor selection of those consumer goods that were available. The planned economy typically gave installation of new capacity precedence over maintains over older constructions, such as the road networks, distribution and storage facilities. This led to, for example, oil and gas pipelines to become increasingly overstretched and dilapidated. This led to environmental problems, but most if not all them, were overlooked by the Soviet government. These environmental issues would later prove to be major strains on the Soviet economy. However, under Leonid Brezhnev, the Soviet Union became the world largest exporter of petroleum, in which the USSR benefited from an overall net gain averaged around 3 percent.

Gorbachev's reforms

See also: Perestroika, Uskoreniye, and Gospriyomka

Comparison between USSR and US economies (1989) according to 1990 CIA The World Factbook
	USSR	US
GDP (1989 - millions $)	2,659,500	5,233,300
Population (July 1990)	290,938,469	250,410,000
GDP Per Capita ($)	9,211	21,082
Labor force (1989)	152,300,000	125,557,000

Before Mikhail Gorbachev ascended to the General Secretaryship of the Communist Party of the Soviet Union; Gorbachev had garnered much inspiration for his reforms during state visits during the 1970s to country's like West Germany and France. There he found out that capitalism wasn't as moribund as the USSR had claimed, and despite the defects of the capitalistic system, those countries offered goods unrivalled in the USSR. Since 1983, Gorbachev was rethinking the Soviet order after reading some of Vladimir Lenin's oldest work on bureaucracy and came to the conclusion that the bureaucracy problems of the 1920s still hadn't ended.

After getting rid of the remaining Brezhnev cronies in the Politburo; Gorbachev launched general line in regards to the economy to improve discipline within the Soviet workforce. The politburo, persuaded by Yegor Ligachev took the risk of discouraging alcohol consumption. What followed was the threefold increass in the price of vodka were decreed and vineyards were hacked down in Georgia, Moldova and the Ukrainian SSR. On this occasion, Gorbachev fell out of social opinion, however, most bystanders admired his non-Brezhnev attitudes.

While Gorbachev pushed for uskoreniye (literally meaning acceleration), results were slower to emerge. Early on Gorbachev tried to improve the Soviet agriculture through administrative reforms, however these reforms failed to save the ailing economy. No equivalent administrative reform was ever taken in regards to the industrial sector. Nevertheless a re-jigging of budgetary aims took place. The Twelfth Five-Year Plan which was scheduled to begin in 1986, the politburo declared that an increase in the quantity and quality of industrial output was needed for the maximizing of investment in the machine-building sector. This policy was defended by Nikolai Ryzhkov and Gorbachev, they were, in effect putting the ideas they elaborated under the encouragement of Yuri Andropov. However, both Gorbachev and Ryzhkov increasingly understood that this could not save the economy in itself, therefor, the Twelth Five-Year Plan was based upon false promises. The frustration of the central leadership continued to rise until Gorbachev launched the program of perestroika (literally meaning reconstruction).

Gorbachev as seen in 1985

While Gorbachev's views continued changing, he left several of his fellow Andropov appointees bewildered; and inside the politburo he could only count on Eduard Shevardnadze's continuing support. This was not a sign that Gorbachev thought that communism was inferior to capitalism, quite the opposite, he was still unshaken in his opinon that the Soviet model had beaten capitalism in the sectors of education, healthcare and transport among others.

The Chernobyl disaster gave the communist leadership a horrific jolt. While the normal strategy to when disaster hit the USSR was to deny it ever happened. But Gorbachev, just beginning to understand the enormity of the event, dispatched Ryzhkov, then Chairman of the Council of Ministers, to Chernobyl to investigate the situation. What the Chernobyl accident proved was the incompetence and disorganization of the Soviet workforce, another appailing proof of the decline of Soviet communism. It is rumoured that the Chernobyl accident led Gorbachev to consider even more radical reforms, such as capitalistic methods. By mid-1986 it became clear that Gorbachev's previous economic policies offered no basic solution to the economic problem, at the same time Gorbachev was coming to recognize that it wasn't enough to just replace the older Brezhnev personnel with younger versions, he therefor initiated the policy known as glasnost (meaning openess). Gorbachev used most of this time to find like-minded individuals who believed in a radical reform to save the USSR seeing that people like that were rarities within the party.

In June 1987 Gorbachev presented the detailed economic plan which would become the Law on the State Enterprise. Apart from introducing elective principal on the choice of managers, the Law allowed entities such as factories and mines the right to decide what to produce after satisfying the basic requirements of the state planning authorities. Enterprises were to set the prices of their products, and not the government. The reform envisaged the creation of five state-owned banks and the allowance of a private sector in services and small-scale industry. The re-introduction of small-scale services was to happen at the same level as seen under Lenin's New Economic Policy of 1921. There was, however, still going to be a predominance of state ownershop and regulation of the economy. Gorbachev's arguement for this proposal was that the USSR was in a "pre-crisis" condition, and if it wanted to maintain its military and industrial strength, some basic features of the planned economy needed to be decentralized. The reform was to take its effect sometime in January 1988. Four months after the Law on the State Enterprise took effect, Gorbachev proposed the Law on Co-operatives, which stated that co-op members were allowed to set their own prices and deals both internally and externally. The fiscal deincencitives were still strong and the local Soviets were to deny official registration to the co-ops. Yet the law was still significant, for the first time since the years of NEP people were allowed to set up their own enterprises. By November Gorbachev began to denounce the legacy of the USSR, both the planned economy and Joseph Stalin while praising Lenin as a humanitarian and the success of the mixed economy of his time.

The collapse

The GDP of the USSR and the former Soviet Republics

By 1988, the optimism of the top leadership was starting to disappear. Before Gorbachev came to power, the normal prescription given by the Soviet government was that it was impossible to have an economic crisis under developed socialism. In reality nearly all index showed economic decline and the technological lag between the USSR and the industrially-advanced countries was widening, with the only exception being the armed force which was more advanced than many of its counterparts in the west. Under Brezhnev, the USSR had been left far behind in information technology and bio-technology. The Ministry of Finance depended heavily on popular consumption of alcohol and relied to an even greater extent to petrochemical fuels at high prices, such as, for example, oil and gas. Oil and gas constituted eighteen percent of exports in 1972 and 54 percent by 1984.

According to some historians such as Robert Service, the USSR was beginning to resemble a Third World country during its last years due to ineffective rule. Soviet agriculture remained so inefficient that two fifths of hard-currecny expenditure on imports were for food. By the early 1980s, revenues earned by exports to the west could no longer only be used to buy more advanced technology and equipment; two fifths of the USSR's hard currency purchases abroad were of animal feed; and the purchase of energy by the Eastern European countries at lower than the world market price deprived the USSR of the full value of their trade in one of its key sectors. The industrialization which the country and its people had been so proud of, had led to numerous ecological disasters on small and large scales. Example being that the waters in the Caspian Sea, Lake Baikal and the river Volga had been poisoned and the air in major cities such as Chelyabinsk was dangerous to breathe.

During Gorbachev's fight for economic reform, he committed many grave mistakes such as his anti-alcohol campaign and then later the excessive investment in machine-tool industry in 1985-1986 without producing long-term gains in development. When the government raised retail prices it had the undesired effect that people buying up and hoarding all manners of goods; therefor shortages in the shops became an even more normal phenomena compared to what it already had been. Because the Law of the State Enterprise gave the workers the power to elect their own managers 1988 saw the wages for the urban work force increase by nine percent in 1988 and thirteen percent in 1989. The Soviet budget was becoming massively deficit and the country went more or less bankrupt. Foreign indebtment and domestic inflation rapidly increased which in turn led to a decline in industrial output. The USSR by the end of 1988 was entering a state of economic emergency.

If that wasn't enough, 25,000 people died because of the 1988 Spitak earthquake due poorly built structures apartments and other buildings during the Brezhnev stagnation. While the Soviet war in Afghanistan was soon ending, the war still continued to involve massive expenditures from the Soviet side and the Chernobyl disaster was both a financial as well as human disaster. The USSR's resources were already stretched to its breaking points, hade to cope with the reconstruction process of Armenia.

The reorientation of the industrial sector towards the needs of the civilian consumer would, according to Gorbachev, lead to material improvements. But instead of the material improvements Gorbachev promised the Soviet people, he gave them deterioration. Instead of progress and the univeral-well being of the USSR, Gorbachev's reform led to a reversion to the state of food-rationing, Soviet queues, which were already legendary for their length, became even longer, a reversal of the trend of them becoming smaller. By 1988, the rationing of meat was policy in twenty-six of the fifty-five regions of the Russian Soviet Federative Socialist Republic. Sugar was even scarcer; only two out of the fifty-five regions did not ration it. Simontanously, hospital reported that they were running out of medicine and there was no end in sight of the inadequate provision of housing and everyday services. It should be noted however, that Soviet agriculture increased from a low 1 percent in the beginning of the 1980s to just under 2 percent in the second decade. This growth was however to small and too slow to feed the population.

To the dismay of the politburo and nearly all commentators in the west and the USSR, a full-scale economic crisis had occured. The abruptness of its introduction as well as its depth suprised the politburo. This left Gorbachev with two alternatives, either stop with the reforms or continue with even more radical ones. While never giving serious considerations for the first, Gorbachev talked about the need to create a Socialist Market Economy, a term he never defined. However, many of his economic advisors advised him that it should contain more market than socialism. By August 1991, it was clear that the economy led to the collapse of the USSR, but the fight between the communist hard-liners and the democratic capitalistic forces led by Boris Yeltsin.

Economic system

Planning the planned economy

Main article: Five-Year Plans for the National Economy of the Soviet Union

File:Poster13.jpg

Soviet propaganda poster reading; "Be vigilant at your post!". The image depicts a uniformed railroad worker, presumably displaying his vigilance at preventing accidents and sabotage.

This system of planning was composed of of a set of All-Union ministries, and several state committees such as, for example, the Gosplan (later known as the State Planning Committee) and the state committee's for pricing, labour and material supply. The heads of these agencies compromised the leadership of the Council of the People's Commissars (1917-1946), later known as the Council of Ministers of the USSR (1946-1991) and the Cabinet of Ministers of the USSR (1991); the Chairman of this executive arms of government were effectively heads of government. The dominant driving force in economic matters was the Communist Party of the Soviet Union (CPSU), proven by that nearly all principally economic policymakers belonged to its Central Committee.

With Stalin's reforms putting 90% of production under direct state control, and with the coordination of markets almost entirely suppressed, the implentation of the the broad centralized economic plan required detailed, centrally-minded plans for inputs and outputs of all branches of the economy. To make it easier for the monitoring and processing of information between the centrally-planned authorities and the state enterprises, several branches of ministers were established, typically along sectoral lines, for example, Ministry of Agriculture and Food. Annual plans consistent with the Five-Year Plans generating sets of targets for the ministries, with the Ministers in turn distributing these amongst the individual enterprises under their control. The primary target for each ministry were specified in terms of physical volume of production, and rewards for mangers and ministers were tied closely to the fulfillment of the Five-Year Plan. Efficiency and financial gains was of secondary importance in the USSR, with loss-making enterprises rarely, if ever, shut down by the state. The losses were normally absorbed by the state budget, or the extension of credits and the through cross-subsidization within the ministries. Direct competition between enterprises were normally supressed, with the Soviet government viewing it as a "drain of planning resources".

Under the planned economy, the CPSU enforced distribution priorities, with the traditional top priority being that of heavy industry, which was viewed by Marxist-Leninist economics as the "key" to continuing and rapid economic growth. The Soviet leadership also saw it as a basis for a large defence industry which would guarantee both national security and influence abroad. The consentration on the sector of heavy industry led to a relatively slow growth for consumer goods which in turn led led to the Soviet agriculture sector being neglected by Soviet planning authorities.

State Planning Committee

Main article: Gosplan

Combining the broad goals laid out by the Council of Ministers with data supplied by lower administrative levels regarding the current state of the economy, Gosplan worked out, through trial and error, a set of preliminary plan targets. Among more than twenty state committees, Gosplan headed the government's planning apparatus and was by far the most important agency in the economic administration. The task of planners was to balance resources and requirements to ensure that the necessary inputs were provided for the planned output. The planning apparatus alone was a vast organizational arrangement consisting of councils, commissions, governmental officials, specialists, etc. charged with executing and monitoring economic policy.

The state planning agency was subdivided into its own industrial departments, such as coal, iron, and machine building. It also had summary departments such as finance, dealing with issues that crossed functional boundaries. With the exception of a brief experiment with regional planning during the Khrushchev era in the 1950s, Soviet planning was done on a sectoral basis rather than on a regional basis. The departments of the state planning agency aided the agency's development of a full set of plan targets along with input requirements, a process involving bargaining between the ministries and their superiors.

State bank and the ruble

Main articles: Gosbank and Soviet ruble

The Soviet ruble of 1961

Obverse of 1 ruble

Reverse of 1 ruble

Overall, the banking system was highly centralized and fully controlled by a single state-owned Gosbank, responsive to the fulfillment of the government's economic plans. Banking specialists who had worked with banking system before the communists took control, were naturally skeptical towards socialist finance system. The largest obstacle for them being that they didn't understand how "money didn't matter" as the communists told them. The Soviet financial system was not realized; the belief that "money follows planning" and would grow at the same rate as GDP proved later to be wrong.

One of the first major obstacles to the new leadership; was that "money matters" and not "bricks, steel and tractors" which they had been talking about during the hey days of the revolution. Therefor the Soviet banking system used two types of money; bank money and cash. Cash was used to pay workers so they could buy consumer goods, while enterprises maintained two bank accounts, the first being cash so they could pay the workers and second being bank money, which was used for materials, taxes and other transactions. These two bank accounts was to be under strict control of the Gosbank's local branches. Bank money could therefor not be converted into cash.

Financial self-sufficiency, meaning full economic accounting, was not a priority. Producers seemed to have little interest in prices. Higher prices brought in more bank money for the enterprises, which could not pay for workers' wages or the buying of consumer goods. The seller was therefor contempt with the prices set up by the government or the party apparatus. There were these prices which were suppose to be used under the "contract campaign", which set prices, delivery dates, assortments and quality. Official prices were suppose to be in price books handed by the government, but they were often missing. The Main Administration for Metal (Gump) only employed three people in its pricing departments, hence, leading to producers having considerably leeway in setting prices themselves, particularly in the 1930s.

See also

• History of the Soviet Union
• Enterprises in the Soviet Union
• Eastern Bloc economies

Post-communism:

• Economy of post-Soviet Russia
• History of post-Soviet Russia
• Decommunization

References

Notes

Bibliography

• Dyker, David A. (1992). Restructuring the Soviet economy. Routledge. ISBN 0415067618.
• Mawdsley, Evan (1998). The Stalin Years: the Soviet Union, 1929-1953. Manchester University Press. p. 162. ISBN 0719046009.
• Sandle, Mark; Bacon, Edwin (2002). Brezhnev Reconsidered. Palgrave Macmillan. ISBN 033379463X.{{cite book}}: CS1 maint: multiple names: authors list (link)
• Service, Robert (2009). History of Modern Russia: From Tsarism to the Twenty-first Century. Penguin Books Ltd. ISBN 0141037970.
• IMF and OECD (1991). A Study of the Soviet economy. Vol. 1. International Monetary Fund. ISBN 0141037970.
• World Bank and OECD (1991). A Study of the Soviet economy. Vol. 3. International Monetary Fund. ISBN 9264134689.
• Gvosdev, Nikolas (2008). The Strange Death of Soviet communism: a postscript. Transaction Publishers. ISBN 1412806984.
• Gregory, Paul R. (2004). The Political economy of Stalinism: Evidence from the Soviet secret archives. Cambridge University Press. ISBN 0521533678.
• Davies, Robert William (1998). Soviet economic development from Lenin to Khrushchev. Cambridge University Press. ISBN 0521627427.
• Hosking, Geoffrey A. (1993). The First Socialist Society: a History of the Soviet Union from within. Harvard University Press. ISBN 0674304438.
• Moss, Walter (2005). A History of Russia: Since 1855. Anthem Publishing. ISBN 1843310341.