1 Variants of Transition among Former Socialist Economies Chapter X The Former Soviet Union: The...
-
Upload
derrick-harper -
Category
Documents
-
view
222 -
download
0
Transcript of 1 Variants of Transition among Former Socialist Economies Chapter X The Former Soviet Union: The...
1
Variants of Transition among Former
Socialist EconomiesChapter X
The Former Soviet Union:
The Myth and Reality of the Command Economy and Russia’s Economic Transition
2
Transformation of Russian economy in 1990s Centrally planned economy was replaced by
an economy operating on the basis of market forces and private property
Some of the former communist states of Central Europe began their process of economic transition earlier
3
Historical Background of The Soviet Economy: Until December 25, 1991 USSR was the largest country in the world
Occupied 1/6th of the earth’s inhabited land
293 million population (third largest in the world)
128 ethnic groups
4
Historical Background of The Soviet Economy: Until December 25, 1991
Ethnic Groups in USSR Eastern Slavs (70 percent)
Russians Belorussians Ukranians
Turkic Baltic Finno-Ugric Caucasian Persian Armenian
5
Historical Background of The Soviet Economy: Russian Empire before 1917 Intermediate case compared to underdeveloped
Asia and to industrially developed Western and Central Europe
Duality between traditional agriculture and military-driven industrial development
This duality produced undecided attitudes toward change and reforms: Change is seen as industrialization at the expense of agriculture
6
Historical Background of The Soviet Economy: Russian Empire before 1917
Peasant Emancipation Act of 1861 Abolished serfdom Granted personal freedom to the peasants
However, the freedom given by Peasant Emancipation Act was constrained by collective decision-making in rural communes (mir)
7
Historical Background of The Soviet Economy: Russian Empire before 1917
Rural Communes (Mir) Rural communes started in 1400s and survived into the 19th
century
Collective land ownership
Held back private farming in most of European part of Russia
Communal Agrarian Practice feeding the uniqueness of the Russian economic tradition
Allowed Russia to avoid industrial capitalism
Given the Russian peasants egalitarian (democratic) and collectivists instincts → Forced Russia into agrarian communism
8
Historical Background of The Soviet Economy: Russian Empire before 1917
Industrialization Industry was considered as alien to Russian culture
Initial foundation of heavy industry in late 1600s under Tsar Peter the Great was associated with his pro-western policy of modernizing Russia
Peter’s industrialization continued in the aftermath of Russian army’s defeat in the Crimean War with the Ottoman Empire, Britain and France in 1854 Industrialization’s belated implementation driven by
militarization
9
Historical Background of The Soviet Economy: 1917 Revolution In 1917, in the middle of the First World War,
after the elimination of the Russian autocracy system and Tsar Nicholas, Union of Soviet Socialist Republics (USSR) under the control of the Bolshevik party and Lenin was established
The socialist economy in Soviet Russia did not start until the First-Five Year Plan in 1928
10
Historical Background of The Soviet Economy: New Economic Policy (NEP) 1921 Repair the conflict between the workers and the
peasantry
Allowed limited restoration of markets
Partial reprivatization of previously nationalized
industries
Banks taking responsibility for maintaining critical state control over strategic key industries controlled by the state
11
Historical Background of The Soviet Economy: New Economic Policy (NEP) 1921 Result of NEP reforms, the recovery of
agriculture surpassed that of industry and was perceived as a possible political threat to the goals of the proletarian revolution → thus aborted
The Soviet economy rejected the use of market forces and turned to command central planning
12
Command Economy:Launching the Model Several economic subsystems coexist that ranged
from Self sufficient communes with mostly barter exchange
Individual small-scale proprietorships
Medium-sized businesses that produced for markets with the use of hired labor
Also publicly owned large-scale enterprises (mostly in heavy industries) that by nature were socialist prototypes using direct administrative allocation of resources and assigned labor
13
Command Economy:Launching the Model This economic pluralism produced political break in
the ruling Communist Party
Leon Trotsky, founder of the Red Army in the Soviet Union, was Stalin’s chief rival for power
Advocated super-industrialization in the Soviet Union that would lead to a worldwide permanent communist revolution
Call for liberalization of domestic and international markets
14
Command Economy:Launching the Model
Divisions between Trotsky and Stalin Trotsky and Stalin agreed about the need for
rapid industrialization, but they disagreed whether this should be done in isolation or in an international context
Trotsky supported the idea of an international permanent revolution, believing that true socialism could not be achieved in the Soviet Union without an international revolution
15
Command Economy:Launching the Model Stalin supported an autarkic model of socialism in
one country
Exterminated his opponents (Trotsky) in the party
Established his own cult
Reasserted economic traditionalism in the guise of revolutionary socialism
16
Command Economy:Launching the Model Implementing socialism in one country
required speedy industrialization For self-sufficiency
Military Buildup
Social transformation from a relatively backward agro-industrial economy into an urban industrial one ordered by the political center
17
Command Economy:Launching the Model Disallowed market allocation of resources
State monopolized foreign relations
Closed the economy through restrictions on foreign trade, currency inconvertibility, and limited trade specialization
Accelerated industrialization, which favored producer and military goods at the expense of agriculture, assumed unbalanced economic growth
18
Command Economy:Launching the Model Pressure for super-industrialization reinforced by
hostility toward Communism by Britain, Japan, Poland and Chinese Nationalists
The possibility of foreign military invasion → a push for rapid change instead of gradualism
The debate on industrialization between the genetics and the teleologists Focused on the feasibility of economic engineering
19
Command Economy:Launching the Model The genetics argued that planning could give the
market as with indicative planning Argued for objectivity of economic laws and viewed
planning as a navigating tool Movement toward general market equilibrium
The teleologists leaned toward social engineering, with resource allocation determined by planners A biased economy with an imposed equilibrium reflecting
the preferences of the ruling elite Sought to eliminate markets that bred capitalism
20
Command Economy:Launching the Model Super-industrialization favored the
teleologists that asserted the need for long-run plans and opposed market forces
First Five-Year Plan in 1928 Central comprehensive planning Ensured political control over the diverse republics Grouping them into economic regions to meet
nation-wide production needs
21
Command Economy:Launching the Model Prioritize industry over agriculture for sociopolitical
reasons
Emphasize on regional specialization
Deemphasize republic-level diversification
Establish state monopolies in key industries
Eliminate the entrepreneurial subsystems alien to socialism
22
Command Economy:Launching the Model Agricultural collectivization
Forced collective ownership on peasants as a stepping stone to comprehensive public ownership
Success of industrialization program turned out to be a disaster for agriculture
An over-industrialized and over-urbanized economy with an inadequate and no longer self-sufficient agricultural sector
23
Command Economy:Soviet Central Planning: The Beginning Central administrative planning eliminating waste of
market forces, thus pushing structural and social reorganization of the economy
Central planners steered individual sectors to assigned targets and instructed every enterprise, industry and region
State control over virtually all means of production and over investment, production, and consumption decisions
throughout the economy
24
Command Economy:Soviet Central Planning: The Beginning Proportionate allocation of resources that are
established a priori by central planning
The initial industry-biased growth to be compensated for in the long-run by future production increases in the reprioritized sectors of consumer and agricultural goods
The economic strategy consisted of plans relying on mass enthusiasm with little use of material incentives
25
Command Economy:Soviet Central Planning: The Beginning Economic policies designed by Five-Year Plans and Annual
Plans
A dual role → allocating resources and setting targets for economic growth
According to those economic policies, the State Planning Committee (Gosplan) formulated countrywide output targets for certain planning periods
Responsible for plan feasibility studies and for research on the methodology of balancing nationwide proportions
26
Command Economy:Soviet Central Planning: The Beginning The goal of First Five-Year Plan was to catch up
with capitalist industrial countries
Success of the initial industrialization push attributed to central planning accomplished at cost of forced collectivization and a major decline in living standards The share of private consumption declined
Concentrated investment in growth-supporting sectors based on domestic savings
27
Command Economy:Soviet Central Planning: The Beginning Industrialization produced an extensive bureaucracy
in planning and executive institutions interested in increasing their own power → rent-seeking
Merger between the party, planners, and the ministerial and local government bureaucracies resulting in the formation of a new class nomenklatura Consisted of party members appointed to particular
government jobs
28
Soviet Central Planning:Implementation Planning versus market
Planning is concerned with expanded reproduction and particular investment, with consumption deemphasized Soviet planning → Prioritized investment to catch
up with the West industrially and militarily Ignored static efficiency in favor of high rates of economic
growth
29
Soviet Central Planning:Implementation A system of annual, medium-term and perspective plans
Increase in the building of overly large production facilities that would employ up to 10000 people, gigantomania, that led to industrial and regional monopolization
The problems of implementation: Informal bargaining by enterprise to lower their quotas plagued
the implementation of plans The ratchet effect that is an increase in the planned assignment
if the previous plan’s target was achieved Storming arose from holding off production followed by last-
minute attempts to meet production quotas
30
Soviet Central Planning:Implementation Prices were used by planners to ensure compliance with
plans and continuous control over plan implementation
Domestic prices were distorted because they reflected planners’ priorities in distribution and production rather than relative scarcities
Pricing disabled rational decision making by producers
The planners used wholesale prices to balance inter-sectoral outputs and to provide for comparison of alternative production mixes based on different technologies
31
Soviet Central Planning:Implementation In agriculture, government procurement prices
designated quotas promoted specific crops, individual regions and financially controlled collective farms
Retail prices produced inequality in income distribution
Two policies to solve: Free provision of public goods (health care and education) Low prices for mass consumption goods (food, housing,
transportation) while raising prices for luxury goods
32
Soviet Central Planning:Implementation The gap between sticky prices and scarcity values
increased over time and lowered the effectiveness of planning
The planned creation of a socialist market where efficiency of production rose with diminishing inequality in income distribution failed Success in creating a second economy where market
forces partially corrected artificial shortages
33
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model Surviving agricultural producers:
State Collective Private farm
Stalin’s industrialization was dependent on the mass collectivization of peasants and the elimination of the well-off peasants (kulaks)
34
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model The collective farm (kolkhoz)
A pseudo-cooperative, with elected management ensuring a supply of agricultural goods to the state at minimum cost
The income of peasants at subsistence level maintained by household plots and individually owned livestock
Exploited by paying low procurement prices and by overcharging for state-owned tractors and machinery
Not have guaranteed wages and were paid in labor days Payments were arbitrary and variable depending on
regions, seasons and specific farms Consumer goods sold to kolkhozes at high prices
35
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model The state farm (sovkhoz)
Factories in the fields and were run under more favorable policies
If underpaid, compensated by subsidies State employees and got a guaranteed wage Have access to better inputs at wholesale prices
36
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model The individual farmer
Found in private sector Land in auxiliary household plots not privately
owned and cultivated only by peasants and state employees
Livestock was privately owned but usually pastured on collective or state land
Individuals worked on these plots for themselves and owned their produce but also worked for collective or state enterprises
37
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model The collective farm (kolkhoz) versus the
state farm (sovkhoz) Their coexistence served the sociopolitical goal of
crowding out entrepreneurship A decline in productivity and in absolute
production On collective farms because of price discrimination and
compulsory deliveries On state farms because of subsidization
38
Soviet Central Planning:Agriculture: The Peculiarity of Soviet Model Agriculture deprioritized resulting in
dependence on grain imports
The increasing role of imports of agricultural products and other goods inspired reforms in export sector and the overall economy
Raising questions about maintaining itself as a closed economy?
39
Soviet Central Planning:Closed Economy: Command Trade Isolationism Its ideological underpinning is an autarkic
socialist country encircled by hostile imperialist countries
The anarchy of world markets could undermine the effectiveness of central planning
Domestic firms were protected from foreign competition and world prices
40
Soviet Central Planning:Closed Economy: Command Trade Isolationism State authority over foreign trade and foreign currency
transactions through state monopolies
Planners determined imports and exports by balancing domestic inputs with projected outputs and making up for potential discrepancies
Export production derived from the need to pay for imports
Producers of exportable goods did not have direct relationships with foreign buyers but dealt with foreign trade bureaucracies organized at the industrial level
41
Soviet Central Planning:Closed Economy: Command Trade Isolationism Foreign trade relations bilateral and highly politicized
The use of trade for greater integration with the socialist satellites through Council of Mutual Economic Assistance (CMEA or Comecon) founded in 1949
As a multilateral body to persuade these countries to adopt a uniform strategy of communist industrialization with the USSR
CMEA membership → USSR, Czechoslovakia, Hungary, Poland, East Germany, Romania, Bulgaria, Albania (withdrew in 1961), Mongolia, Cuba and Vietnam joined later, Yugoslavia as an associate member
42
Soviet Central Planning:Closed Economy: Command Trade Isolationism Two principles:
Extensive development that prioritized capital goods at the expense of consumer goods
An autarkic focus on import substitution and minimal dependence on western markets
CMEA countries dependent on soviet energy resources and raw materials
The idea of socialist international division of labor suggested intra-industrial rather than inter-industrial specialization
A collective isolationism from world markets and a tendency to create a socialist alternative to international capitalist trade
43
Soviet Central Planning:Closed Economy: Command Trade Isolationism Intra-CMEA specialization acknowledged the benefits of trade
for economic development
The international socialist division of labor was shaped by concentrated planning rather than markets
The problems of inefficiency and non-competitiveness of individual national industries increased in the mid-1960s, leading to declining intra-bloc trade
Liberalization of trade with the West brought about by technological backwardness in the course of the arms race
Decade of trade promotion ended in 1979 with the Soviet invasion of Afghanistan
44
The Reform Cycle:Reluctant Reform Thinking Soviet economy characterize pervasive protectionism
Enterprises were shielded against bankruptcy through centralized subsidies
No financial discipline and managers’ performance assessed on basis of compliance with the government's plans
People were protected against economic fluctuations and the possibility of unemployment
The state monopoly of foreign trade protected domestic firms from external shocks and from competition with foreign goods
The network of commodity flows with preset prices and quotas created a sense of certainty in domestic trade
THIS ECONOMIC STABILITY LACKED ANY IMPETUS TO CHANGE
45
The Reform Cycle:Reluctant Reform Thinking Reform and reformism unacceptable and interpreted as
dangerous Western imports
The strengths of Stalin’s economic model → Mobilization of resources for industrial catch-up Development of a military-industrial complex The postwar recovery through extensive growth
The weaknesses of Stalin’s economic model → Undervaluation of the opportunity cost of planned priorities
absent appropriate criteria to assess economic performance Protectionism downplaying economic incentives Vertical institutional structure producing shortsighted
bureaucracies and compartmentalism
46
The Reform Cycle:First Attempts at Economic Reforms Khrushchev’s Period Nikita Khrushchev, Communist Party General
Secretary during 1953-1964, initiated destalinization in domestic politics and economics
In foreign policy Khrushchev embraced the idea of peaceful coexistence and competition between socialism and capitalism
Higher standards of well-being and consumption without cutting back on military control over the Soviet block
47
The Reform Cycle:First Attempts at Economic ReformsEconomic Reforms during Khrushchev’s period
Agriculture (reduced taxes and canceled old debts)
Administrative Decentralization (through delegating authority of decision-making to regions and away from ministries)
Aggressive use of foreign trade and military and industrial assistance to aid regimes sympathetic to USSR
48
The Reform Cycle:Gorbachev’s Revolution Reducing soviet economic performance and a
widening technological gap with the West
The initial strategy to form greater political and economic unity with Warsaw Pact countries and proceed with concerted reforms
Raised the issue of real socialism
Opened debate over the divergence between existing practices and theoretical socialism in his policy of openness (glasnot)
49
The Reform Cycle:Gorbachev’s Revolution
Perestroika (Economic Restructuring) Opened the economy into international competition
hoping that it would provide incentives to change
Eliminated the state monopoly on foreign trade to end Soviet enterprises’ insulation from international competition
Wanted to duplicate the success of China’s gradual opening to foreign trade that had spurred its economic growth
50
The Reform Cycle:Gorbachev’s Revolution
Radical reform started in 1990 Open debate over transition to a market economy
by dismantling central planning introducing different kinds of property relations to promote
individual entrepreneurship
Replacement of the vertical planning hierarchy by horizontal market linkages and direct interaction between demand and supply → introducing economic decentralization
Removal of the central authority → distancing of the Communist Party from economic matters
51
The Reform Cycle:Gorbachev’s Revolution
Secessionist Movements Decentralization of economic decision
making stimulated the nationalist sentiment of individual republics and sped up secessionist movements
The disintegration of the Soviet Union in 1991 and the rise of economic nationalism fragmented the reform movement by diverting it into the individual political realms
52
Legacies of Soviet Economy
State-planning for state-owned industries and demand structuring by the state budget
State-determined monetary policy with a one-tier banking system
State-run monopolistic firms, producing a narrow range of goods at state-administered prices and facing monopolistic suppliers
Risk-aversion by managers who were reluctant to innovate
Full-employment guarantee and as a consequence, the systemic impossibility of firms going bankrupt- a soft-budget constraint policy
State monopoly in foreign trade, administered prices and exchange rates reflecting the inconvertibility of the domestic currency
Fiscal revenues generated by turnover taxes and mandatory transfers of profits used to subsidize firms
53
Problems with Legacies of Soviet Economy Monopolistic producers and risk-averse managers
lacked the motive to innovate
Full-employment guarantees hidden unemployment and favor labor-intensive production processes
Domestic production is not exposed to international trade and therefore, becomes non-competitive
State provision caused the creation of poor quality of public goods
54
Slowdowns and Stagnations
Slowdown in growth rates from the mid 1970s
Economic stagnation in 1980s
Central planners’ inability to deal with a complex, over-industrialized economy’s need for constant adjustment
A succession of reforms failed to improve central planning, was unsuccessful in questioning state ownership
Late 1980s → legal recognition of private enterprise ranging from introduction of cooperatives to individual proprietorships
55
Collapse of the USSREstablishment of Russian Federation After the collapse of the USSR in December
1991, the Russian Federation faced the demanding need for moving away from Centrally Planned Economy
Boris Yeltsin, the first democratically elected president of Russia, launched the sixth reform to undo the legacies of Soviet model
56
Transition in Post-Soviet Russia:Boris Yeltsin (1991-1999) Destroyed of Communist Party’s monopoly
politically and economically
Failed to build a new pluralist society
Finished off the remnants of command economy system
Yeltsin took great steps toward developing a market economy: Price liberalization Mass privatization of state enterprises Foreign trade liberalization Introduction of full convertibility of ruble
57
Transition in Post-Soviet Russia:Problems with Yeltsin’s Reforms Price and foreign trade liberalization created high inflation and
decline in domestic production
Mass privatization was accompanied by political rhetoric, contrary to the West’s economic emphasis on the fundamental importance of private property for the institution of a market economy
Voucher privatization forced negotiations in the regional implementation of privatization
Several local elites succeeded in seizing formerly state-owned enterprises
Local established elites continued to exercise their power
58
Transition in Post-Soviet Russia:Problems with Mass Privatization By the end of 1995, Russia had completed the privatization of
over 120,000 enterprises
55 percent of the large and medium-sized enterprises sold could be classified as non-competitive worker-management buyouts
Labeled as destatization officially and grabitization informally
This mass privatization failed to improve economic efficiency and induce normal market behavior
Instead generated effects of persistent arrears (non-payment of outstanding liabilities) and sliding into a barter (non-money) economy
59
Transition in Post-Soviet Russia:Problems with Barter Economy and Persistent Arrears The emergence of arrears due to the enterprises’ failure to keep
pace with collapse of demand in the short-run and to continue to produce
The underdevelopment of banking system played an additional role
Emergence of risk-free tax arrears and reliance on state subsidies
Resurfacing of barter economy 1960-mid 1980s → inefficient planned distribution Late 1980s-early 1990s → general shortages 1992-1994 → enterprises’ financial deficits Starting in 1997 → institutionally built into system and accounted
for 90 percent of industrial output
60
Transition in Post-Soviet Russia:Problems with Barter Economy and Persistent Arrears Barter economy and persistent arrears (amount overdue)
locked regions into local transactions, hindered competition and corrupted the effectiveness of property rights
Privatization and price liberalization created income inequality
State revenues, which consisted mostly of profits from state-owned enterprises during the Soviet era dropped as a result of the recession and mass privatization
Issuance of short-term state bonds that offered high interest rates crowded out private investment
61
Transition in Post-Soviet Russia:Deep Recession Russian industrial production fell by 55 %
Consequently, tax rates were raised creating a shadow economy
Budget debt increased
The rate of export dropped
The fall in oil prices magnified the current account deficit, causing a financial crisis that resulted in the devaluation of ruble in 1998
Severe economic instability and hyperinflation
62
Conclusion: The Soviet Model of a Command Economy Created by a combination of internal economic
underdevelopment and international political discontinuity in the aftermath of WW I, when workers’ revolutions threatened many nations
Designed to produce a transition from a relatively backward nation to a modern industrial society
Central planning that is a superior tool for balancing economic proportions and maximizing the use of resources, produced disproportionate and inflexible economic outcomes
Producing many problems, agriculture being a prominent example