SOVIET ERA ECONOMY
In the Soviet era, agricultural products were bought up by the state and distributed through its trade networks. The distribution was inefficient. Food shortages were common. Among the problems were poor infrastructure, roads and transport, a lack of well-sited storage and processing facilities and outdated equipment. A large amount of the food that actually reached consumers was produced locally on private plots by collective and state farm workers.
The Soviet economic system was in place for some six decades, and elements of that system remained in place after the dissolution of the Soviet Union in 1991. The leaders exerting the most substantial influence on that system were its founder, Vladimir I. Lenin, and his successor Stalin, who established the prevailing patterns of collectivization and industrialization that became typical of the Soviet Union's centrally planned system. By 1980, however, intrinsic defects became obvious as the national economy languished; shortly thereafter, reform programs began to alter the traditional structure. One of the chief reformers of the late 1980s, Boris Yeltsin, oversaw the substantial dissolution of the central planning system in the early 1990s. [Source: Library of Congress, July 1996 *]
The Soviet Union produced goods according to central plans and goals of the government rather that according to needs and desires of consumers. Some shops were empty except for shelves with violins and chamber pots. Pepsi was the first U.S. consumer product to be manufactured in the Soviet Union. Production was launched after a 1972 agreement. At the time it was considered a breakthrough agreement.
There a few ill-fated attempts at entrepreneurship. Once some workers in Moscow rehabilitated an old tram system on their own and rode around collecting fares from passengers. Instead of turning the money over to the state they kept themselves, that is until they were caught and put in jail.
In the mid 1980s, 51 percent of all sales were in foodstuffs, 21 percent were in clothes and footwear, 8.4 percent were in durable goods such as furniture, carpets, bicycles and motorcycles; 1.6 percent were in detergent, soap and perfume; 1.4 percent was in reading materials; and 15.7 for others. Family had little money left over for eating at a restaurant, going to circus or a concert, or traveling.
Lenin Era Economy in the Late 1910s and Early 1920s
The basic foundation of the Soviet economic system was established after the Bolsheviks assumed power in November 1917. The Bolsheviks sought to mold a socialist society from the ruins of post-World War I tsarist Russia by liberally reworking the ideas of political philosophers Karl Marx and Friedrich Engels. Soon after the revolution, the Bolsheviks published decrees nationalizing land, most industry (all enterprises employing more than five workers), foreign trade, and banking. The peasants took control of the land from the aristocracy and farmed it in small parcels. [Source: Library of Congress, July 1996 *]
Beginning in 1918, the new regime already was fighting for its survival in the Russian Civil War against noncommunist forces known as the Whites. The war forced the regime to organize the economy and place it on a war footing under a stringent policy known as war communism. Under such conditions, the economy performed poorly. In 1920 agricultural output had attained only half of its pre-World War I level, foreign trade had virtually ceased, and industrial production had fallen to only a small fraction of its prewar levels. *
Beginning in 1921, Lenin led a tactical retreat from state control of the economy in an effort to reignite production. His new program, called the New Economic Policy (Novaya ekonomicheskaya politika — NEP), permitted some private activity, especially in agriculture, light industry, and services. However, heavy industry, transportation, foreign trade, and banking remained under state control.*
Lenin’s New Economic Policy
Regarded as partial retreat from Bolshevik principles, the New Economic Policy (Novaya ekonomicheskaya politika — NEP) permitted certain types of private economic activity, so that the country might recover from the ravages of the Civil War. The interval was cut short, however, by the death of Lenin and the sharply different approach to governance of his successor, Joseph Stalin. [Source: Library of Congress, July 1996 *]
The NEP was announced at the Tenth Party Congress of the Russian Communist Party met in March 1921 to hear Lenin argue for a new course in Soviet policy while Kronshtadt mutinee was still tkaing place. Lenin realized that the radical approach to communism was unsuited to existing conditions and jeopardized the survival of his regime. Now the Soviet leader proposed a tactical retreat, convincing the congress to adopt a temporary compromise with capitalism under the NEP program. *
Under the NEP, market forces and the monetary system regained their importance. The state scrapped its policy of grain requisitioning in favor of taxation, permitting peasants to dispose of their produce as they pleased. The NEP also denationalized service enterprises and much small-scale industry, leaving the "commanding heights" of the economy — large-scale industry, transportation, and foreign trade — under state control. Under the mixed economy called for under the NEP, agriculture and industry staged recoveries, with most branches of the economy attaining prewar levels of production by the late 1920s. In general, standards of living improved during this time, and the "NEP man" — the independent private trader — became a symbol of the era. The Soviet sold ceramic plates in 1924 that read, "He Who Does Not Work Does Not Eat." *
Economy Under Stalin
Lenin died in 1924, and by 1927 the government had nearly abandoned the NEP. Stalin sought a rapid transformation from an agricultural, peasant-based country into a modern industrial power and initiated the country's First Five-Year Plan (1928-32). Under the plan, the Soviet government began the nationwide collectivization of agriculture to ensure production and distribution of food supplies to the growing industrial sector and to free labor for industry. By the end of the five-year period, however, agricultural output had declined by 23 percent, according to official statistics. The chemical, textile, housing, and consumer goods and services industries were also performing poorly. Heavy industry exceeded the plan targets, but only at a great cost to the rest of the economy. [Source: Library of Congress, July 1996 *]
By the Third Five-Year Plan (1938-41), the Soviet economy was once again on a war footing, devoting increasing amounts of resources to the military sector in response to the rise of Nazi Germany. The Nazi invasion in 1941 forced the government to abandon the five-year plan and concentrate all resources on support for the military sector. This period also included the large-scale evacuation of much of the country's industrial production capacity from European Russia to the Urals and Central Asia to prevent further war damage to its economic base. The Fourth Five-Year Plan (1946-50) was one of repairing and rebuilding after the war.*
Throughout the Stalin era, the government forced the pace of industrial growth by shifting resources from other sectors to heavy industry. The Soviet consumer received little priority in the planning process. By 1950 real household consumption had climbed to a level only marginally higher than that of 1928. Although Stalin died in 1953, his emphasis on heavy industry and central control over all aspects of economic decision making remained virtually intact well into the 1980s.*
The University of Maryland economist Mancur Olson told Newsweek, "The essence of Stalin's system, and of communism now, is that everything is owned by the top guy or the Politburo. Everyone else therefore has no incentive to protect that property but to steal it back."
See Separate Article on Economy Under Stalin
Postwar Growth of the Soviet Economy
Soviet economic growth rates during the postwar period appeared impressive. Between the early 1950s and 1975, the Soviet gross national product (GNP) increased an average of about 5 percent per year, outpacing the average growth of the United States and keeping pace with many West European economies — albeit after having started from a much lower point. [Source: Library of Congress, July 1996 *]
However, these aggregate growth figures hid gross inefficiencies that are typical of centrally planned systems. The Soviet Union was able to attain impressive growth through "extensive investments," that is, by infusing the economy with large inputs of labor, capital, and natural resources. But the state-set prices did not reflect the actual costs of inputs, leading to enormous misallocation and waste of resources. In addition, the heavily bureaucratic economic decision-making system and the strong emphasis on meeting targets discouraged the introduction of new technologies that could improve productivity. Central planning also skewed the distribution of investments throughout the economy.*
The aggregate Soviet growth figures also did not reveal either the generally poor quality of Soviet goods and services that resulted from the state monopoly over production or the lack of priority given the consumer sector in the planning process. Eventually, diminishing returns from labor, capital, and other inputs led to a severe slowdown in Soviet economic growth. Furthermore, the availability of inputs, especially capital, labor, and technology, was decreasing. Declining birth rates, particularly in the European republics of the Soviet Union, placed constraints on the labor supply. By the mid-1970s and into the 1980s, average Soviet GNP growth rates had plummeted to about 2 percent, less than half the rates of the immediate postwar period.*
Although such rates might have been acceptable in a mature, modern industrialized economy, the Soviet Union still trailed far behind the United States, other Western economies, and Japan, and in the 1980s another challenge arose from the newly industrializing countries of East Asia. Furthermore, the standard of living of the average Russian citizen, which had always been below that of the United States, was declining. In the 1980s, with the advent of modern communications that even Soviet censors found impossible to restrict, Soviet citizens began to recognize their relative position and to question the rationale of their country's economic policies. This was the atmosphere in which the Gorbachev regime undertook serious economic reform in the late 1980s.*
Oil and the Soviet Era Economy
It can be argued that the Soviet Empire was propped up with Russian oil. Ten million barrels of the 12 million barrel a day production went to support the Soviet Union and its satellites in Eastern Europe, Cuba and North Korea. The other two million barrels was sold on the world market and was the Soviet Union’s primary source of hard currency. The oil and hard currency were essential for supporting the Soviet Union’s 4-million man army, its 45,000 nuclear weapons, its space program and its impressive Olympic team.
Large deposits of oil were discovered in Siberia. Particularly large was the deposit discovered in Kogalym, Siberia in the 1970s. In the 1980s and 90s, wasteful Soviet oil exploration and extraction techniques depleted wells, which often fell far below their potential capacity. Soviet technology was not capable of exploring and extracting as deeply and efficiently as Western technology. These handicaps played a big part in Russia's plummeting oil production during in the 1980s and 90s. In 1994 the number of oil wells drilled was only one-quarter the number drilled in 1983. In the mid 1990s, it was estimated that 20 percent of the oil that left Russia was smuggled out of the country.
Soviet dumping of cheap oil in the 1960s led to the formation of OPEC. Some argued that roots of the Soviet Union’s demise lie in the Energy Crisis of the 1970s, when the West was forced to downsize and modernize it energy-sucking rust-belt economy. The Soviet had no incentive to do the same and in fact were making a windfall from selling oil. Up until that point the Soviet Union had been globally competitive. Afterwards stagnation set in. There was “no mechanism for self correction.”
Russia's excessive consumption of energy results from the Soviet system, which artificially priced energy far below the level of world market prices and thus subsidized it. Soviet energy-pricing policies disregarded resource utilization in the quest for higher output volumes and discouraged the adoption of conservation measures. Soviet planners also skewed resources toward the defense-related and heavy industries, which consume energy more intensively than other sectors of the economy. Until the 1980s, the national economy managed to survive under such policies because of the Soviet Union's rich endowment of natural resources. *
Efforts to Reform the Soviet Economy
During several distinct periods, Soviet leaders attempted to reform the economy to make the Soviet system more efficient. In 1957, for example, Nikita S. Khrushchev (in office 1953-64) tried to decentralize state control by eliminating many national ministries and placing responsibility for implementing plans under the control of newly created regional economic councils. These reforms produced their own inefficiencies. In 1965 Soviet prime minister Aleksey Kosygin (in office 1964-80) introduced a package of reforms that reestablished central government control but reformed prices and established new bonuses and production norms to stimulate economic productivity. Under reforms in the 1970s, Soviet leaders attempted to streamline the decision-making process by combining enterprises into associations, which received some localized decision-making authority. [Source: Library of Congress, July 1996 *]
Because none of these reforms challenged the fundamental notion of state control, the root cause of the inefficiencies remained. Resistance to reform was strong because central planning was heavily embedded in the Soviet economic structure. Its various elements — planned output, state ownership of property, administrative pricing, artificially established wage levels, and currency inconvertibility — were interrelated. Fundamental reforms required changing the whole system rather than one or two elements. Central planning also was heavily entrenched in the Soviet political structure. A huge bureaucracy was in place from the national to the local level in both the party and the government, and officials within that system enjoyed the many privileges of the Soviet elite class. Such vested interests yielded formidable resistance to major changes in the Soviet economic system; the Russian system, in which many of the same figures have prospered, suffers from the same handicap.*
Upon assuming power in March 1985, Gorbachev took measures intended to immediately resume the growth rates of earlier decades. The Twelfth Five-Year Plan (1986-90) called for the Soviet national income to increase an average of 4.1 percent annually and labor productivity to increase 4.6 percent annually — rates that the Soviet Union had not achieved since the early 1970s. Gorbachev sought to improve labor productivity by implementing an anti-alcohol campaign that severely restricted the sale of vodka and other spirits and by establishing work attendance requirements to reduce chronic absenteeism. Gorbachev also shifted investment priorities toward the machine-building and metalworking sectors that could make the most significant contribution to retool and modernize existing factories, rather than building new factories. Gorbachev changed Soviet investment strategy from extensive investing to intensive investing that focused on elements most critical to achieving the stated goal.*
During his first few years, Gorbachev also restructured the government bureaucracy (see Perestroika). He combined ministries responsible for high-priority economic sectors into bureaus or state committees in order to reduce staff and red tape and to streamline the administration. In addition, Gorbachev established a state organization for quality control to improve the quality of Soviet production. *
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Last updated May 2016