ECON 4337 Comparative Economic Systems

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ECON 4337 Comparative Economic Systems

• Lecture 8
• March 12, 2009

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The Former Soviet Union
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The Former Soviet Union Command Economy

• Russian Empire until 1917
• Soviet Russia until 1922
• Former Soviet Union or Union of Soviet
  Socialist Republics (USSR) until 1991
• Russian Federation
• The Former Soviet Union
• December 1922- December 1991

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The Former Soviet Union Command Economy

• The Historical Background
• Economy of the Russian Empire
• Duality between traditional agricultural and
  military-driven industrial development
• Communal agrarian practices
• Mir
• 1861 The Peasant Emancipation Act
• Serfdom abolished

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The Former Soviet Union Command Economy

• The Historical Background
• Economy of the Russian Empire
• Industry
• In 1600s, Tsar Peter the Great
• Initial foundation of heavy industry and
  modernization
• Forced and paternalistic in nature
• Traditionalist view
• Industry is alien to Russian culture

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The Former Soviet Union Command Economy

• The Historical Background
• Socialist economy not started until the First
  Five-Year Plan in 1928 by Joseph Stalin
• Lenins New Economic Policy (NEP) (1921-1928)
• We are not enough civilized for socialism
  (Lenin)
• Temporary retreat from socialism
• Taxes on liberalized trade within the country
• Limited restoration of markets
• Partial reprivatization
• Seen as a threat to the goals of proletarian
  revolution and reversed

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The Former Soviet Union Command Economy

• The Command Economy
• Subsystems existed
• Self-sufficient communes with barter exchange
• Individual small-scale proprietorships
• Medium-sized businesses producing for the market
• State-owned large scale enterprises

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The Former Soviet Union Command Economy

• The Command Economy
• Joseph Stalin favored socialism in one country
• Closed the economy
• Made the currency inconvertible
• Accelerated industrialization
• favored producer and military goods at the
  expense of agriculture
• Debate between geneticists and teleologists
  on industrialization
• Superindustrialization

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The Former Soviet Union Command Economy

• The Command Economy
• Joseph Stalin Period
• Prioritized industry over agriculture
• Agricultural collectivization collective
  ownership by peasants
• Discouraged individual production
• Eliminated rich peasants, Kulaks

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The Former Soviet Union Command Economy

• The Command Economy
• Joseph Stalin Period
• The First Five-Year Plan
• Gosplan (The Central Planning Board)
• Commanding in nature
• Aggregated adjustable annual plans
• Goal was to catch up with capitalist industrial
  countries
• Average growth rate was 21.6!
• ¼ of GDP was being invested

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The Former Soviet Union Command Economy

• The Command Economy
• Joseph Stalin Period
• The First Five-Year Plan
• Drawbacks
• Private consumption dramatically decreased by
  12.5 in 9 years
• Shortage economy (consumption and agricultural
  goods)
• Extensive bureaucracy in planning and executive
  institutions
• Rent-seeking behavior

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The Former Soviet Union Command Economy

• Implementation of Soviet Central Planning
• Annual / medium term (5-year) / perspective
  (15-year) plans
• Overly large production facilities gigantomania
• Monopolization
• Ratchet effect
• Storming

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The Former Soviet Union Command Economy

• Implementation of Soviet Central Planning
• Prices and Money
• Prices reflected planners' priorities in
  distribution and production rather than relative
  scarcities
• Retail prices
• Free provision of public goods (health,
  education)
• Low prices for mass consumption goods (food,
  housing, transportation)
• High prices for luxury goods
• Gini in the Soviet Era was .23-.26, slightly
  higher than Nordic countries

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The Former Soviet Union Command Economy

• Implementation of Soviet Central Planning
• Prices and Money
• Sticky (fixed) prices
• Gap between prices and scarcity values increased
  over time ? Hidden inflation
• A second economy (or shadow economy) formed
• Private economic activity outside of the
  state-owned first economy constitutionally
  outlawed with a few minor exceptions (like
  individual agricultural plots)

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The Former Soviet Union Command Economy

• Implementation of Soviet Central Planning
• Agriculture
• Agricultural performance dwindled
• Three categories of agricultural producers
• Kolkhoz (Collective farm)
• Guaranteed a supply of agricultural goods to the
  state at minimum cost
• Received subsistence-level, non-guaranteed income
• Faced low procurement prices ? productivity
  declined
• Overcharged for state-owned tractors and
  machinery, utilities and consumer goods

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The Former Soviet Union Command Economy

• Implementation of Soviet Central Planning
• Agriculture
• Three categories of agricultural producers
• Sovhoz (State farm)
• Worked as state employees and received guaranteed
  wages
• Had access to better inputs at wholesale prices
• Got subsidized when needed ? productivity declined

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The Former Soviet Union Command Economy

• Implementation of Soviet Central Planning
• Agriculture
• Three categories of agricultural producers
• Individual farmers
• Land in auxiliary household plots was
  state-owned livestock was privately owned
• Worked on these plots for themselves and produced
  their own produce
• Also worked for the collective or state farms
• Very productive occupied 4 of the arable land,
  produced 40 of fruits, berries and eggs, over
  60 of potatoes and 30 of milk, meat and
  vegetables
• Soviet Union became dependent on grain imports

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The Former Soviet Union Command Economy

• Implementation of Soviet Central Planning
• Command Trade Isolationism
• State monopoly of foreign trade
• Planners determined how much, what and from (to)
  whom to import (export)
• Exports needed to pay for imports
• Exported indirectly through foreign trade
  bureaucracies
• Bilateral and politicized foreign trade

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The Former Soviet Union Command Economy

• Implementation of Soviet Central Planning
• Command Trade Isolationism
• 1949 Council of Mutual Economic Assistance (CMEA
  or Comecon) founded for integration with
  socialist satellites
• Two strategies
• Extensive development that prioritized capital
  goods at the expense of consumer goods
• Autarkic focus on import substitution and minimal
  dependence on Western markets
• Intra-CMEA trade was allowed but totally planned
• Prices determined in a concerted fashion and
  fixed for five years

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The Former Soviet Union Command Economy

• First Reform Attempts
• Nikita Khrushchev (1953-1964) initiated
  destalinization
• Embraced the idea of peaceful coexistence and
  competition between socialism and capitalism
• Reforms in three areas
• Improvements in agricultural policy
• Administrative decentralization
• Aggressive use of foreign trade, military and
  industrial assistance to aid regimes sympathetic
  to the USSR

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The Former Soviet Union Command Economy

• First Reform Attempts
• Leonid Brezhnev (1964-1982)
• Managers were no longer to meet physical targets
  but were to focus on what was called realized
  output (i.e. value of sales)
• Management was allowed to retain a large slice of
  the difference between the value of sales and the
  cost of materials (i.e. profits)
• Those reforms were supposed to be implemented
  over a period of 5-10 years and as implementation
  progressed, all important aspects were slowly
  revoked and central power was emphasized again
• Growth rate decreased from 10.3 during 1950s to
  0.6 in the 1980s

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The Former Soviet Union Command Economy
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The Former Soviet Union Command Economy
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The Former Soviet Union Command Economy
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The Former Soviet Union Command Economy
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The Former Soviet Union Command Economy

• First Reform Attempts
• Mikhail Gorbachev (1985-1991)
• Focused on urgent internal needs of Perestroika
  (i.e. economic restructuring)
• Emphasized Glasnost (i.e. openness)
• Forged greater political and economic unity with
  Warsaw Pact countries and proceeded with
  concerted reforms
• Economic goals could be achieved by political and
  ideological concessions
• Opened the economy
• Eliminated state monopoly on foreign trade

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The Former Soviet Union Command Economy

• The Transition Period
• Shock Therapy
• August 1991 Coup détat
• December 1991 Collapse of the USSR
• Boris Yeltsins shock therapy between 1992-1994
• Price liberalization
• Mass privatization
• Foreign trade liberalization
• Introduction of fully convertible ruble
• His efforts were not successful his greatest
  achievement was to destroy the Communist Partys
  political and economic monopoly

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The Former Soviet Union Command Economy

• The Transition Period
• Shock Therapy
• Price liberalizations
• Hidden inflation came into open
• Arbitrage opportunities
• Mass privatization
• Voucher privatization
• Within almost two years, 70 of large and
  medium-sized enterprises and 80 of firms
  employing fewer than 200 people were sold to
  citizens, employees and managers
• Local elites seized lucrative formerly SOEs and
  increased their regional authority

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The Former Soviet Union Command Economy

• The Transition Period
• Shock Therapy
• Privatizations failed to improve efficiency
• Generated arrears
• In 1997, 78.1 of enterprises were in arrears
• ?Subsidies and tax-arrears
• Barter economy
• In 1997, barter accounted for 90 of industrial
  output
• Income inequality increased
• By 1999, gap between the top and bottom was
  40-fold
• State revenues plummeted and tax rates were
  raised
• Size of the shadow economy increased

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The Former Soviet Union Command Economy

• Between 1990-1995, industrial production fell by
  55
• Massive capital flight due to instability and
  hyperinflation
• Growth rate slowed from 8.2 in 1999 to around
  3.3 in 2001
• Putins target 8 per year