5 Reform

Foreign Trade in USSR• 60 foreign trade organizations (FTO)

– No direct interaction between Soviet enterprise and a foreign entity

– FTOs specialized by group of products • Soyuzneftexport - world’s largest oil exporter

• Ministry of foreign trade– Purchased commodities from producers at

domestic prices– Sold at world prices– Vice-versa for imports– Little incentive for enterprises to produce for

export even when world prices were high

• Major imports in 1980s:– Agricultural products (grain, fertilizer)– Machinery and equipment– Chemicals, metals, fuels– Medicine, computers, furniture, rolling ball pens, pantyhose

• Major exports in 1980s:– Oil and oil-related products– Natural gas– Military hardware

Council for Mutual Council for Mutual Economic AssistanceEconomic Assistance

• Trade with COMECON members:– 60 - 75% of trade

• Trade with capitalist countries 10-25% of trade in Comecon

• West Germany, Italy, France• Low volume of trade

• Relationship with hostile capitalists limited• Unwillingness to become dependent on technology imports

– Countries did not fully specialize according to comparative advantage

– In absence of objective prices, difficult to determine comparative advantage

– “Block isolation”• USSR subsidized ECE countries with cheap fuels• 1960s: USSR tried to create supra‑national planning agency

– did not want to produce according to the needs of the Soviet Union

COMECON or CMEA, 1949 – 1991

Eastern Europe: socialism imposed• Behind the rest of Europe economically

• serfdom and reactionary autocratic governments• agricultural economies, impoverished peasants• hyperinflation in 1920s• unemployment in 1930s

• Socialist movement supported from Moscow• More homogeneous

– ethnically, culturally, religiously• More industrialized than USSR when socialism began • Small, resource poor, not self-sufficient

– trade aversion not as strong• Central planning based on 5-year plans

– emphasis on machinery, heavy industry• Experienced socialism for shorter time

– memory of market forces much stronger• More open for trade with the West

– susceptible to world market conditions• world recession of late 70s/early 80s

• Stronger information flows from outside– lower travel restrictions in Hungary, Poland, Yugoslavia, Germany

• Central planning not as complete as in USSR• 1948: Yugoslavia expelled from Soviet block • 1956, 1968: revolts in Hungary and Czechoslovakia

USSR after Stalin (1960s)

Nikita KhrushchevNikita KhrushchevGeneral Secretary,General Secretary,1953-64 1953-64 ““We will bury you!”We will bury you!”

• 1956: Khruschev condemned Stalin's personality cult

• Soviet Union as a world power – Aid to developing & socialist countries – space technology and weaponry research– launched first artificial earth satellite Sputnik– first manned orbital flight

• Industrial growth slowed• Reforms:

– Publications on western innovations– Decentralization disruption, inefficiency

• Agricultural reform:– State procurement prices raised – Farms given more control over production

decisions - decentralization– Increase investment in agriculture

• “Virgin Lands Campaign” to develop new fields in Kazakhstan

– Output increased, agriculture still inefficient

Growth Rates of Output

USSR in 1960-70s:Economy grew more complex – planning complicatedOversized, inefficient bureaucratic apparatus

– USSR GDP 40-70% of US economy– world's largest producer of oil and steel– parity with US on strategic nuclear weapons – 6.4 times ahead of US in manufacture of tractors– 16 times ahead of US in manufacture of grain harvesters– agriculture used 3 times more capital per unit of output, but

had 6% of US labor productivity

• 1928-70: USSR grew 5-6% per year• 1970-85: 2% per year • Extensive growth –Increasing capital inputs

• Public postpones consumption to finance investment• system borrows from the future

–Mobilization of labor• Shifting labor from countryside, women in labor force• Limit – population growth

• Intensive growth – making resources more productive– working more efficiently• Extensive growth trap

• Capital grows faster than labor• Substitution between the two is low• Investment poorly allocated

–No market, no price for capital–Lack of incentives for efficient allocation

Soviet Growth Model (B.Ickes)

• 1965: Market-oriented reforms (Liberman)–Give enterprises more control over production mix

and some flexibility over wages–Work for profit, allow enterprises to put a proportion

of profit into their own funds–Resistance from planners: started issuing more

detailed instructions for enterprises –Resistance from workers: reforms aimed at increasing

productivity by pushing aside surplus labor

• 1960s-80s : best period for ordinary citizens –Rising wages, living standards, stability, peace–Administratively-set prices kept low–Building millions of one-family apartments–Manufacturing more consumer goods, appliances

• Social and political reforms stopped –Crime and soaring alcohol and drug abuse–Dissidents began to surface

StagnationStagnation BrezhnevBrezhnev

Brezhnev Brezhnev ((1964 -1983)

Per Capita GDPCountry 1938 1990

Western Europe Austria 1,800 19,200 Italy 1,300 16,800 Spain 900 4,900Eastern Europe Czech 1,800 3,100 Hungary 1,100 2,800 Poland 1,000 1,700 Romania 700 1,600

Declining Standards of Living

Arms Race

• Militarization in 1970-80s:– USSR GDP <70% of US GDP– Defense spending: USSR 15-40% of GDP, US <7%

• No spillover of technology to civilian sector – 80% of all R&D in USSR were in military– Military received higher quality inputs, best

manpower– Wall of secrecy around military R&D– New materials, processes, mechanisms available

to military denied to civilian uses• no Teflon pans or toasters, poor car industry

– Many non-military scientific discoveries and inventions lie around for years without being introduced into practical applications

Income Distribution• socialist economies have more equal distributions• UK and Sweden have distributions similar to socialist• money inequality omits inequality in access to goods and services in

socialist economies depending on one’s position in Party hierarchy

• Air pollution • Chernobyl • Disappearance of Aral Sea in

Uzbekistan and Kazakhstan• 1960: Aral Sea -world's 4th

largest lake • Caused by diversion of waters

for cotton production

Aral SeaAral SeaEnvi

ronm

e

nt

Yugoslavia (1945-89)• Federation of six ethnic republics • Extreme regional economic differences

– Northern republics much better off– Result: low labor immobility between regions

• 1952: “Market Socialism”– worker management- decentralized decision-

making – replace central planning with indicative planning – enterprises control profits– agriculture: private farms– rapid growth– reduction of regional differences via

investment in lagging regions– integration into world economy

• BUT: • Competition between firms prevented• Political authorities interfered in firm operations• Investment decisions made by party officials• Managers not responsible for losses – soft budget

constraintTitoruled 1945-80

Romania• Absolute authoritarian rule

– enforced by secret police• Policies

– 1970s: borrowed heavily from the West to build massive state-owned industrial base

– Export food and oil to pay off his nation's debt – People half-starved– Refusing medical treatment for the elderly so they

would die more quickly – Birth control and abortion illegal so that population

would grow• highest abortion rate and the highest infant mortality rate

in Europe– Taxes on childless women– Villages of ethnic minorities resettled – Personality cult: palace, portraits of himself as a young

man on every public building– 1989: refused concessions to the reformers

• executed by revolutionaries

Nicolae Ceausescu 1965-89

BulgariaTodor Zhivkov 1954-89

Albania

Over 600,000 concrete bunkersacross a country of 3 million

Enver Hoxha, 1946-85