1

LEARNING GUIDE 9

THE ECONOMY OF THE SOVIET UNION

2

Marx Characteristics of the State after the Revolution

1. A centrally Planned Economy2. Increasing economic production3. Distribution of income according to work

performed4. Increasing economic equality5. A gradual disappearance of classes6. Increasing desire to work for the good of

society rather than for personal profit7. Distribution of goods based on the motto “From

each according to his abilities, to each according to is work”

3

• State would “wither away”• Crime and poverty would be eliminated• “Human history” would replace “class history”• Class differences and & national differences

would disappear• Live in a cooperative, voluntary society• Eventually citizens would recognize that there

basic needs will always be met, therefore greed would disappear

• Formal government would no longer be required --- no ruling class

4

ADDITIONAL PROBLEMS OF CPE

• They may fulfill a target (quota) of a good nobody wants.

• Lack of attention to production costs

• Incentive to exaggerate the demand for labor and material

• Incentive to resist technological change

• The lower the output target, the easier it is to fulfill it.

5

CENTRALLY PLANNED ECONOMY

Explanation Justification

Centralized Planning Planners make all economic decisions aboutwhat to produce, how to produce it, and how todistribute it.

In order to generate economic growthlong range planning is needed anddecisions should be made on soundeconomic information.

State Ownership About 97% public ownership of land,resources, factories business, etc.

This prevents exploitation of workersand promotes the collective good.

Coordination of Resources Gosplan allocates all resources and labour tothose areas emphasized in the five-year plan.

With little or no competition forresources or labour, they should beused efficiently with all effortsfocused on achieving the plan’stargets.

Decentralized DecisionMaking

Very little decentralized decision making, onlyin the area of consumer purchasing where thisconsumer decides what to buy and how much.

Gives the peoples some freedom ofchoice and helps the producersdetermine what consumer good toproduce.

Conformity of PurposeBetween Political andEconomic Bureaucracies

Political leaders pass economic priorities on tothe economic planners who implemented thesepolitical priorities through the five-year plans.

The government and economicplanners must work together in orderto best implement economic plans.

6

Advantages and disadvantages Central Planning

ADVANTAGES• Planning encourages high rates of

economic growth• Planning helps to reduce wastage of

resources.• The distribution of income is more

equal• Essential goods are produced before

less essential goods• Planned economies do not suffer from

unemployment and inflation related to business cycles.

• Private Enterprise –Business person’s guess about future individual demands Public Enterprise – Governments decisions about future national needs

• Capable of choosing suitable goals for the country & select proper methods to implement them

DISADVANTAGES• Planned economies are bureaucratic

and inflexible• There is little incentive for efficient

management.• No profit motive to encourage

innovation to individual effort. The system stifles

• Freedom of choice is restricted (conformity).

• The quality, quantity, and variety of goods are limited.

• Tremendous power of the lives of citizens

• Difficulty in coordinating the interrelated decisions necessary to run a CPE.

7

Rationale for Production of Goods

Private Enterprise

• Business person’s guess about future individual demands.

Public Enterprise

• Governments decision about future national needs.

8

A POST MORTEM ON CENTRAL PLANNINGUSSR in 1980’s

1. The overall growth rate had dropped to almost nothing.2. Steel production had dropped.3. The system limited inventiveness and incentive.4. The system was having difficulty making better and more efficient use of

its plants, factories, and technologies.5. Production targets were often selected because they looked good, not

because they could be achieved.6. The system promoted the production of poor quality products.7. The soviet system rewarded caution and conformity.8. The stem lacked innovation because meeting the quotas were everything.9. Economic reforms encountered obstacles because they involved political

reform.10.Agriculture remained the most troubled sector.11.There was a serious shortage of labour.12.Your people were leaving the farms for the cities13.Planners emphasized high profile projects that were often impractical.14.Soviet citizens faced declining prosperity.

9

Other Criticisms

• Imperfect information and data processing

• No profit motive to encourage innovation

• Freedom of choice is restricted

10

Time magazine cover of January 4, 1988 featuring Mikhail Gorbachev as Man of the Year.

Russian President Vladimir Putin was named Time magazine's "Person of the Year"

11

12

GORBACKEV’S PERISTROIKA REFORMS

13

1. ECONOMY:• Decentralization of decision-making in areas of prices,

employment, wages, research and sales.

• State factories that provided unwanted goods were phased out.

• State factories required to become self-financing.

• Small privately owned business were allowed - - service sector.

14

2. AGRICULTURE

• Decentralisation of state-owned farms• Strengthened agricultural cooperatives

3. TECHNOLOGY• Greater focus on education and research in

high-tech. Fields• Joint ventures with western companies &

governments

15

4. CONSUMPTION

• Higher quality consumer goods imported

PepsiCo Makes a Big Purchase in Russia

16

5. INTERNATIONAL TRADE

• Supported direct trade form the west.

• Joint economic ventures with western businesses

17

6. DEMOCRATIZATON

• Decentralization of the communist party and government

• Greater freedom of political dissent

18

7. CULTURE• Increased freedom of expression was grated in

speech, the press, literature, art, movies and religion

While the government is fighting to increase the birth rate, the death rate is nullifying the effort. Chaif 1980’s Oi-yo

19

Gorbachev’s reform movement perestroika

The aims of Perestroika1. To persuade Soviet citizens to take reasonability for

their own actions.2. To improve the industrial output of the U.S.S.R. 3. To raise the agricultural output4. To improve efficiency in industry and agriculture.5. To improve the quality and selection of goods and

services.6. To reduce the U.S.S.R.’S dependency on foreign

imports.7. To increase worker incentive to encourage personal

initiative and creativity.

20

Actions taken or to be taken to accomplish the Goals of Perestroika

1. As of May 1, 1987, workers in the Soviet service industry were allowed to operate individual enterprises or small cooperatives.

2. As of January 1, 1988 the subsidy system which involved charging less than the cost of production for goods and bailing out failing industries was cut off.

3. Quality controls are being implemented in industry.

4. Workers are to be paid money for exceeding quotas and or being more efficient.

21

5. The lazy and inefficient will face bankruptcy or dismissal.

6. The ambitious and diligent will receive rewards and promotion.

7. The number of planners is to reduced.

8. Consumer demands re to receive more consideration.

9. Some businesses will be run for profit.

10. Some Western-style advertising will be allowed.

22

Gorbachev is implementing the following capitalist measures: (1985)

1. The economy is becoming more decentralized (NEP)2. Competition is being introduced. (NEP)3. Managers now make some production decisions.4. Enterprises can go bankrupt. 5. Workers are paid according to performance6. Quality is stressed.7. Citizens can make profits. (NEP)8. Families or groups can own retail and service industries.9. Enterprises can hire workers.10.Foreign investment is being promoted. (NEP)11.Farmers can sell excess products for profits in open

markets. (NEP)

23

PROBLEMS WITH PERISTROIKA

• Lack of any “overall consistent plan”

• Party members (old guard) and managers unwilling to risk what they had gained.

• Increase in the black market due to poor production

• Hyperinflation

• Attempts at pleasing all pleased no one

24

Time and Place: Former USSR 1985 – 1991 (Gorbachev)

Theory Restructure the Soviet EconomyMove to private enterprise

Aims Move to the rightProduce more consumer goods & less military goodsGet out of the arms race

Role of Government Less government involvement

Policies associated with this program

Encourage foreign investmentLaw on state enterprisesContract brigadesLaw on joint venturesLaw on cooperatives

Results Moved to more private enterpriseDevaluation of the Soviet currencyCreation of the C.I.S.

Criticism and Weaknesses

Moved ….too fast or too slowReactionaries LiberalsOpposition form the army, KGB and Old Guard