The Soviet Industrial Revolution

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A summary by Bob Allen Nuffield College 2005
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This book undertakes a reassessment of Soviet
economic history

• What institutions and policies worked?
• Which failed?
• Why?
• What lessons does Soviet history have to teach?

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The reassessment is based on three axes

• Repositioning the debate on Soviet performance in
  a world historical context.
• Recalculation of national income from 1928 to
  1940 including, in particular, the growth in
  consumption.
• The use of simulation models to explore
  historical and policy counter factual
  trajectories
• What was the effect of investment strategy and
  collectivization on industrialization and living
  standards in the 1930s?
• What was the effect of famine, world war, and
  fertility on population growth?

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This inquiry leads to a more favourable
assessment of Soviet performance than is usually
reached. It is not an unqualified endorsement
of the Soviet system

• Dictatorship was a political model to be avoided
• Collectivization and political repression were
  human catastrophes that brought meagre economic
  returns.
• The strength of central planning also contained
  the seeds of its undoing, for it required a
  planner. When plan objectives were misguided, as
  in the Brezhnev period, the system stagnated.

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I will examine the following issues

• Soviet growth in a world historical context
• Growth in the late imperial economy
• The standard of living, 1928-40
• Causes of rapid growth, 1928-40
• Soviet demographic history
• The Soviet growth slowdown

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Part I

• Soviet Growth
• in World-Historical Perspective

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The main facts about economic growth include

• Income per head has gone up in almost all
  countries.
• Among the rich countries of the OECD, there has
  been a convergence of income as poor countries
  have grown faster than rich countries.
• The reverse, however, is generally true The
  countries that were poor in 1800, 1900, or
  whenever, have grown less rapidly than the rich
  countries.
• As a result, incomes have diverged around the
  world.

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By many indicators, 19th century Russia was among
the poor countries.

• Income per head
• Share of the labour force in agriculture
• High fertility demographic system
• Capriciousness of the law
• Authoritarianism of the state.

If the normal pattern applied, Russia would have
remained poor throughout the twentieth century.
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The remarkable feature of the Soviet period is
that Russia bucked the trend.

• Japan was the most successful economyone of the
  few poor countries that became rich.
• The USSR was the second most successful poor
  country.
• More recently, South Korea and Taiwan have joined
  the club.
• But these few are exceptions to the general
  pattern.

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USSR did better than most countries that were
poor in 1928 and beat the OECD catch-up
regression line.
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Question Why did the USSR perform so much
better than so many poor countries?
This is not the usual question about the Soviet
economy!
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Part II

• The late Imperial economy,
• 1870-1917

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Per capita income rose in many countries
1870-1913 including Russia. Key questions

• What caused the economic growth?
• Would it have continued in the twentieth century
  and closed the gap with the West?
• Did the pattern of growth play a role in the
  revolutions of 1905 and 1917?

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Agricultural expansion was the main cause of
growth in the late Imperial economy.After 1896,
wheat prices rose world-wide and wheat exports
fuelled growth in Canada, Australia, Argentina,
India, and Russia.
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Without industrial tariffs, Russia would have
become more agricultural. State promotion of
industry was a secondary cause of growth.
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Would Russian growth have continued in 20th
century and closed the gap with the West?

• Only one countryJapandid that.
• Russian growth would have had to be at the top of
  the world league table.
• The causes of Imperial expansion did not continue
• World wheat price collapsed in 1920s
• No more railroads to build (and they wouldnt
  have been profitable)
• Other wheat exporters stagnated or declined for
  half a century.
• Only by changing the bases of growth could the
  economy have continued to develop. Would Tsarist
  Russia have had the institutional revolution of
  Japan?

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Russian economic growth was not fast enough to
benefit all Russians.

• Real wages stagnated.
• Extra income accrued to capital and land.
• In western Europe, growth was fast enough to
  raise wages giving workers a stake in the system.
  This underlay their conversion to social
  democracy.
• In Russia and other peripheral parts of Europe
  (e.g. Spain), growth was not rapid enough to
  benefit workers, and the polity cracked.

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Russian growth was not fast enough to create a
high wage economy.

• Output per worker in industry rose by a factor of
  2.4,
• while real wages were constant

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In the countryside, peasant incomes rose as grain
prices and productivity increased.
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Real wages were again constant.

• The rise in income accrued to land.
• Rising land values were common on the wheat
  frontier around the world.
• Land ownership, therefore, was the dominant
  economic issue in the countryside.
• Increasing returns to scale in agriculture meant
  that the society of small farmers was not in
  equilibrium and explains the appeal of the equal
  division of the (increasingly valuable) land.

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The character of Tsarist development

• A one-off natural resource boom souped up with
  some tariff induced industrialization.
• The wheat boom would not have continued through
  the twentieth century.
• Further growth required doing a Japan. Was the
  Tsar that flexible enough to restructure the
  whole society?
• Growth was feeble enough that labour markets were
  slack, and the gains did not trickle down to the
  working class.
• Rising inequality and disputes about the
  ownership of land, an asset increasing in value,
  underpinned radical politics and political
  instability.

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Part III

• Standard of Living, 1928-40

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GDP grew rapidly 1928-40. Investment soared.
Did the standard of living rise?
Four indicators

• Food consumption per head
• anthropometrics
• Consumption per person
• Real wages

These indicators show that the standard of living
increased.
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Calorie consumption per head
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Anthropometrics

• Life expectancy of men increased by 3 years and
  women by 5 years in the 1930s.
• Army recruitment data indicate that the average
  heights of men in the late 1940s were
  considerably higher than their counterparts in
  1910.

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Consumption per head rose
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Real earnings rose for those who moved from the
country to the city. Thats most city residents
in the late 1930s.
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Conclusion Soviet growth 1928-40 included
rising consumption as well as soaring
investment.This was a remarkable
achievement.How was it accomplished?
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Part IV

• Causes of rapid growth and rising living
  standards, 1928-39

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Explaining Soviet growth must begin with
agriculture, which was the largest sector of the
economy in the 1920s.Detailed comparisons of
European Russia with the Canadian prairies and US
northern plains shows

• Little difference in biological efficiency (crop
  and animal yields).
• Great difference in efficiency in employment and
  labour productivity.

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There was a great difference in employment and
labour productivity.

• The average north American farm was 84 hectares,
  while the average Russian farm was 11 hectares.
• Differences in mechanization played a big role.
• Even without mechanization, the Russian farm
  labour force was larger than necessary for
  cultivation.

Russia was a classic labour surplus economy. The
development problem was increasing the capital
stock to provide jobs for everyone.
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Increasing employment was the secret to raising
investment and consumption concurrently.
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How is this diagram related to history?Movement
from D to E to F involved

• The concentration of investment on heavy industry
  to rapidly increase the industrial capital stock
  and provide industrial jobs.
• The collectivization of agriculture to feed the
  industrial workers, to provide them with raw
  materials, and to push them out of the
  countryside.
• Plan targets and soft-budget constraints to guide
  business output and to ensure full employment.

The movement of labour from farm to factory was
the motor of Soviet growth, and these were the
processes that accelerated that movement.
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I use a multi-sector simulation model to measure
the importance of these factors.

• Model tracks population and accumulates capital
  from one year to the next.
• 50 equations describe the main sectors of the
  economy, and they can be altered to explore
  counterfactuals.

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Counterfactual thought experimentWhat explains
the rise in GDP?
e is the fraction of producer goods output
reinvested in that sector.
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Causes of growth in GDP

• Raising e from .07 to .23 added 50 billion rubles
  to 1939 GDP.
• Soft budgets instead of hard budgets added 60
  billion rubles.
• Collectivizing agriculture only added 20 billion
  rubles.

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Similar conclusions hold if we analyze
consumption per head
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Causes of growth in consumption per head

• Raising e from .07 to .23 added 100 rubles to
  1939 consumption per person.
• Soft budgets instead of hard budgets added 200
  rubles.
• Collectivizing agriculture added 80 rubles.

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This graph contrasts the effects of institutions
on industrialization
Note e .23 in all simulations.
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Overall conclusions

• Expanding heavy industry and industrial
  employment via soft budgets were the keys to
  rapid growth.
• Collectivization made a positivebut
  smallcontribution to economic growth.
• Most of the output gains of Soviet
  industrialization could have been achieved by the
  planned management of industry within the
  framework of the NEP.

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Part V

• Soviet Demographic History

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There are two ways to raise GDP per head

• Increasing GDP
• Reducing the number of heads

Was the rise in GDP per head due to high
mortality from Stalinist repression,
collectivization, and the Second World War?
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A slowly growing population was a significant
feature of Soviet history.

• On constant territory, the Soviet population grew
  70 between 1928 and 1989.
• Over the same period, populations in developing
  countries grew three to five times.
• In the 1920s, the USSR had a high fertility
  population like those in less developed
  countries.
• Why did the USSR not experience a similar
  population explosion? Why did the population not
  reach 1 billion?

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The impact of collectivization and World War II
was studied with a simulation model.

• Both events increased mortality and also reduced
  fertility by changing the age and sex
  distribution of the population.
• Both events caused permanent and persistent
  reductions in the size of the population.
• Neither of these reductions was large enough to
  explain why the USSR did not have a population
  explosion.

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The reason that the USSR did not have a
population explosion was the rapid fall in the
fertility rate.
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If fertility had remained high, the Soviet
population would have approached 1 billion.
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Why did the fertility rate fall?

• Fertility model estimated from Russian/Soviet
  censuses of 1897, 1939, and 1959.
• Results very similar to models estimated for
  third world countries in late twentieth century.
• The key variables explaining fertility decline
  were the education of women and higher incomes.
• Educating women and higher living standards were
  important features of Soviet policy, and they had
  a major demographic pay-off.

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Part VI

• The Soviet growth slowdown
• If the system was so good, why did it fail?

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The Soviet economy grew rapidly until the 1970s
when growth slowed
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The growth slowdown was concurrent with the end
of surplus labour. Weitzman has offered an
elegant analysis linking the two
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The Soviet isoquant was close to a right angle,
and the economy turned the corner in the 1960s
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Simulations of this growth model replicate Soviet
history
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The Soviet economy acted as if investment
suddenly ran into diminishing returns when full
employment was reached, but the appearance is
illusory.

• The real problem was two changes in investment
  policy
• Modernization of old factories rather than the
  construction of new ones.
• Depletion of old oil fields and mining districts
  led to massive redirection of investment from
  Europe to Siberia.
• It was as if the USA tried to rebuild the rust
  belt and supply it with Canadian raw materials
  rather than shutting it down and reconstructing
  the economy.
• The accumulation of unproductive capital created
  the statistical illusion of an almost right angle
  isoquant.

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The Cold War also reduced the growth of the
Soviet economy.

• The allocation of RD resources to the military
  in the 1970s and 1980s cut innovation in the
  civilian economy.
• Half of the decline in the growth rate was a
  decline in productivity growth.
• This decrease provides an upper bound to the
  impact of the arms race with the United States.

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This interpretation of the Soviet decline is the
reverse of those that emphasize incentives.

• Planning worked well in its own terms Shifting
  the energy base from coal to oil to gas was an
  impressive achievement.
• The problem was that this was not the best
  approach to energy problems.
• The problem was not that managers failed to
  follow the plan.
• The problem was that the plans did not make sense.

The early strength of the Soviet system became
its great weakness as the economy stopped growing
because of the failure of imagination at the top.
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