Soviet Economy before and after Gorbachev

SOVIET ECONOMY BEFORE AND AFTER

GORBACHEV

PRESENTATION BY

SHIVRAJ SINGH NEGI

VIBHU TEWARY

VISHNU M J

RUSSIAN REVOLUTION

Economic collapse, famine and military setbacks in the first world war ,all contributed to dissatisfaction against czar’s regime.

Revolution of 1905 bought in some reforms ,but failed to improve economic, political and social conditions.

After February revolution of 1917 , Czar abdicated and a provisional government was formed by Alexander Kerensky.

Bolsheviks overthrew the centrist government in October revolution and dissolved the constituent assembly.

POST REVOLUTION ANDLENIN’S RULE

Bolsheviks were opposed by supporters of old regime ,leading to a civil war between “ whites” and “reds”.

Both the sides indulged in massacres of their opponents, including civilians.

Lenin imposed ‘war communism’ . Civil war ravaged the economy leading to famine

in 1921. Civil war finished in 1921,with the defeat of

whites. Soviet union was established on December 29 ,

1922 by treaty of creation of USSR. Lenin bought in New Economic Policy (NEP). Lenin died in 1924 leading to a succession battle

in party.

STALIN’S RISE TO POWERAND HIS ECONOMIC POLICIES

Stalin marginalized the left opposition in party ,including Trotsky who was exiled and then assassinated in 1940.

He kept changing sides ,finally eliminating all the opposition in the party.

He started the rapid development of economy by Five-Year Plans ,first of which were launched in 1927.

Agriculture was collectivized, and large scale forced labor enforced upon peasants.

Gosplan was established ,which now controlled and directed entire economy .

All the resources were commanded by state to ensure rapid industrialization.

Heavy investment was done in industry, at the cost of agriculture.

RESULTS OF STALIN’S POLICIES The human cost of Stalin's plans was enormous as million died as

a result of famine, harsh working conditions and in purges.

Peasants opposing collectivization were branded class enemies ,and exterminated.

Stalin also exterminated political opponents, and many of the old Bolsheviks ,who might have posed a challenge to his authority in party.

Millions died in forced labor camps also known as gulags.

Their labor was used in construction of many dams,canals,roads,and other industrial infrastructure

Plans increased the production of minerals and fuel.

Heavy machinery plants were built producing machines and cars.

Soviet people benefited from social development.

Unemployment was reduced.

Large number of people were educated .

Health conditions improved ,mass immunizations carried

out. Life expectancy increased.

Many new industrial towns established like Magnitogorsk.

GREAT PATRIOTIC WAR War against German aggression came to be known as Great

Patriotic War. Third plan was interrupted and the entire economy and all

resources were utilized for war preparations The victory established Soviet Union as superpower with

largest land army and largest military production capabilities. The victory,was,pyrrhic as 26 million people were killed and

massive damage done to infrastructure in Nazi occupied areas.

Soviet Union quickly started reconstruction of ravaged economy, with the help of war reparations .Eastern European countries made satellite nations.

Without any help from western powers, it managed to rapidly repair its industry and bring it to pre-war levels.

Soviet union acquired nuclear bomb in 1949.Cold war had started .

Stalin died in 1954. His rule was followed by collective leadership, before

Nikita Khrushchev took charge

Command Economy

•Economic activity is controlled by a

central authority that assigns goals &

allots raw materials to enterprises, rather

than by a market mechanism.

• The means of production are publicly

owned.

•The administrative means used include

Planned economy- state-owned

enterprises, private enterprises by the

state, or a combination of both.

•Command economies are planned

economies, but not necessarily vice

versa.

Foreign trade of the soviet union

• Soviet foreign trade played only a minor role in the Soviet economy.

• The Soviet maintained this low level because of its large energy and raw

material base.

• Other foreign economic activity included economic aid programs.

• The Soviet Union conducted the bulk of its foreign economic activities with

communist countries, particularly in Eastern Europe.

• Trade with the industrialized West, especially the USA, fluctuated,

influenced by political relations between East &West.

• In the 1970s, during the period of détente, trade with the West gained in

importance. In the early and mid-1980s, when relations between the

superpowers were poor, however, Soviet trade with the West decreased.

Foreign Trade (Contd.)

• The Soviet Union imported manufactured, agricultural, & consumer goods

from socialist countries in exchange for energy & manufactured goods.

• It earned by exporting fuels & other products to the industrialized West &

used it to buy agricultural products.

• Soviet aid programs expanded steadily from 1965 to 1985.

• By the 1980’s, the Soviet Union sought increased participation in

international markets and organizations.

• Structural changes in the bureaucracy granting direct trading rights to select

enterprises & legislation establishing joint ventures with foreigners opened

up the economy to achieve the goals established by perestroika.

Consumer goods in the soviet economy• The Russian Revolution led to the rapid

industrialization of the previously agrarian Russian economy & this made the economy lag behind in the output of light industrial production & consumer durables.

• In the early years, wages were rising & priorities were shifting from consumer to producer goods which resulted in inflation. After WWII, wages were better controlled and consumer goods output was increased.

• The stagnation in the 70’s & 80’s led to expectations of increased role for consumer goods in the soviet.

• But despite a greater emphasis on light industry and efforts to restructure the entire planning and production systems, the results were not heartening as was seen in the chronic shortage that would grip the entire economy.

Shortage of consumer goods

• In the 1980s shortages in basic

consumer items was severe, even in

major cities..

• In most cases shortages simply

meant either empty shelves or long

waiting lines.

• By the end of 1991, nearly every kind

of food was rationed. Non-rationed

foods & non-food consumer goods

had almost disappeared from state

owned stores.

• Lines like these were very common during the late 70’s & the 80’s,even in cities like Moscow & St. Petersburg.

The Politburo & the Supreme Soviet

• The Supreme Soviet of the USSR was the highest legislative body in the Soviet Union, & the only one with the power to pass constitutional amendments.

• The Supreme Soviet was made up of two chambers, each with equal legislative powers, with members elected for four-year terms:

1. The Soviet of the Union

2. The Soviet of Nationalities

• The Politburo ,consisting of the top members of the Supreme Soviet, functioned as the central policymaking and governing body of the CPSU.

• The Politburo was responsible to the approval of the Central Committee.

• The Politburo oversaw the operations of the Committee and made all major policy decisions.

Gosplan

• Gosplan (State Planning Commission) was the committee for economic planning in the Soviet Union, created in 1921 .

• Initially Gosplan had an advisory role. Its goal was coordination of the plans of Union republics and the creation of the common Union plan.

• With the introduction of 5-year plans in 1928 Gosplan became primarily responsible for their creation & supervision according to the outlines set by the CPSU.

• In May 1955 Gosplan was split into two commissions: for perspective planning and for current planning. The work of the latter one was based on the five-year plans delivered by Gosplan, with Gosplan planning for 10–15 years ahead.

The New Economic Policy

• Replaced the policy of "War Communism" introduced by

Lenin in 1918 as an emergency plan to help the

Bolsheviks win the Civil War in Russia.

• Under the policy of NEP, private ownership was restored

to small parts of the economy, especially farming (but not

to the land itself).

• The NEP also loosened trade restrictions, which caused

the nation to regain alliances with foreign countries.

• The NEP allowed peasants to lease and hire labour, &

they were allowed to keep a surplus after paying a

certain proportion of their tax to the government.

Agriculture recovered to pre-war levels but industry

lagged behind, leading to “scissors crisis”.

The Five Year Plans(1929-1991)

• Five-Year Plans for the National Economy of the USSR were a series of nation-wide centralized exercises in rapid economic development in the Soviet Union.

• The initial five-year plans were created to serve in the rapid industrialization of the Soviet Union, and thus placed a major focus on heavy industry.

• Altogether, there were 13 five-year plans.

• Each five-year plan dealt with all aspects of development. However, the emphasis varied from plan to plan.

KHRUSHCHEV He started the ‘thaw’ a complex shift in political,cultural and economic

life in Soviet Union.

Forced labour was stopped and censorship eased.

More focus on consumer goods increased living standards,while maintaining high growth.

But the decentralization of industry led to disruption and inefficiency .

Changes affected satellite states too, leading to many uprisings against communist rule .

His rule was marked by several international crisis including Cuban missile crises, construction of Berlin wall.

By the end of Khrushchev’s rule industrial growth had slowed.

Agriculture showed no new progress

1962 party reorganization caused turmoil throughout political chain of command.

Khrushchev was removed from office in October 1964,by Presidium.

He was followed by Leonid Brezhnev and Premier Alexsey Kosygin .

BREZHNEV By the mid−1960s, the Soviet Union was a complex industrialized

society .

Social and political reforms were however largely stopped, which led

to the emergence of the term “Brezhnev stagnation" .

Sharp reduction in economic growth was observed.

As economy became more complex and industrialized it became more

difficult to centrally co-ordinate all the decisions.

Planning was rigid and improving productivity became more difficult .

Arms race further burdened the economy as soviet union had to

sacrifice higher share of society’s resources to defense sector.

In 1965 more reforms were initiated by Prime Minister Alexsey

Kosygin .

These reforms were opposed by planning ministries and military .

The reforms failed to bring any growth.

By 1982,stagnation was obvious as Soviet Union kept importing grain

from USA.

After his death, Brezhnev was followed by Yuri Andropov.

RISE OF GORBACHEV Brezhnev was succeeded by Andropov.

He eschewed radical reforms and failed to bring any relief to economy .He

launched an anti—corruption drive.

Andropov was followed by Chernenko.

Corruption drive came to end.

He supported more investment in agriculture and consumer goods and called

for less micromanagement of economy by CPSU .

After his death in 1985,Mikhail Gorbachev became the General Secretary of

CPSU.

Gorbachev was reform minded and was convinced that only radical reform

could pull Soviet economy out of stagnation.

He bought in wide economic reforms ,which came to be known as

Perestroika.

To muster support for his economic policies, he decide to give people more

freedom of speech and expression.

Democratic environment was created. This came to be known as Glasnost.

PERESTROIKA

PERESTROIKA• Perestroika literally meant restructuring, referring to the restructuring

of the Soviet Economy. This policy brought about the following changes to the structure

• Law on State Enterprises allowed Enterprises to set output levels according to demand from consumers

• Law on Cooperatives permitted private ownership of businesses in the services, manufacturing, and foreign-trade sectors.

• Under perestroika, Ministries of the various industrial and agricultural branches could conduct foreign trade in sectors under their responsibility

• Gorbachev's reforms in the foreign economic sector allowed foreigners to invest in the Soviet Union in the form of joint ventures with Soviet ministries, state enterprises, and cooperatives.

Glasnost• Policy of maximal publicity, openness,

and transparency in the activities of all government institutions in the Soviet Union, together with freedom of information

• Its goals included combating corruption and the abuse of privilege by the political classes

• the main aim of this policy was to make the country's management transparent and open to debate

• Through reviewing the past or current mistakes being made, it was hoped that the Soviet people would back reforms such as perestroika.

PERESTROIKA OR CATASTROIKA???

• Government spending increased sharply as an increasing number of unprofitable enterprises required state support and consumer price subsidies continued.

• Tax revenues declined because revenues from the sales of vodka plummeted during the anti-alcohol campaign

• Republic and local governments withheld tax revenues from the central government under the growing spirit of regional autonomy.

• The elimination of central control over production decisions, especially in the consumer goods sector, led to the breakdown in traditional supply-demand relationships without forming new ones.

THE COLLAPSE

The End Of the Soviet Union Media exposed the many weakness of USSR, and the

true repressive nature of regime . Glasnost resulted in rise of feeling of nationalism in many

of the constituent republics . Public dissatisfaction with economic conditions was much

more overt . Trade deficit,hidden inflation,supply shortages further

contributed to economic woes. Republics,started declaring independence one by one. In Russia ,Boris Yeltsin was elected president.He declared

that russian laws will override soviet laws. Democratic process was opposed ,leading to august

coup,which was crushed by Yeltsin ,with popular support. Communist parties in eastern Europe were thrown out of

power.Germany was united. Gorbachev resigned on 25 december 1991. On 26 december, The Supreme Soviet recognized the

extinction of USSR and dissolved itself a day later.

POST SOVIET ERA ECONOMY:SHOCK THERAPY

• Shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country.

• Policies of Stabilization, Privatization and Liberalization were chosen to implement shock therapy

• January 2, 1992, Russian President Boris Yeltsin ordered the liberalization of foreign trade, prices, and currency

• By the end of 1993, more than 85% of Russian small enterprises and more than 82,000 Russian state enterprises, or about one-third of the total in existence, had been privatized.

IMMEDIATE EFFECTS OF SHOCK THERAPY

• Central bank, which was short on revenue and was skeptical of Yeltsin’s policies, started printing more money. This worsened the already rising Hyper-inflation

• Liberalizing prices meant that the elderly and others on fixed incomes would suffer a severe drop in living standards, and people would see a lifetime of savings wiped out.

• The new class of entrepreneurs and black marketeers that had emerged under Mikhail Gorbachev's perestroika benefited greatly from the opening up of the markets.

MACROECONOMIC STABILIZATION

• The government let most prices float, raised interest rates to record highs, and raised heavy new taxes.

• They sharply cut back on government subsidies to industry and construction, and made massive cuts in state welfare spending.

• These policies caused widespread hardship as many state enterprises found themselves without orders or financing.

• The rationale behind this program was to force producers into making sensible decisions about production, pricing and investment instead of chronically overusing resources—a problem that resulted in shortages of consumer goods in the Soviet Union in the 1980s.

FINANCIAL CRASH OF 1998• Declining productivity, an artificially high fixed exchange rate

between the ruble and foreign currencies to avoid public turmoil, and a chronic fiscal imbalance were the background to the meltdown.

• Asian financial crisis and fall in the prices of crude oil also added to the crash

• The weak economic condition led to a disastrous fall in the value of the currency.

• Investors fled from the country fearing a further decline.

• Massive tax evasion forced the government to stop making timely payment of wages, pensions, and debts to suppliers; and when workers were paid, it was often with bartered goods rather than rubles. The government could not pay off its debt due to the tax evasion.

EFFECTS OF SHOCK THERAPY ON SOCIETY AND ECONOMY

• From 1990 to the end of 1995, Russian GDP declined by roughly 50%

• Agriculture, energy, and light industry suffered from transition problems

• Life expectancy dropped• Increase in Poverty• Increase in Income inequality• Total population fell by about three-quarters of

a million people • Russians on fixed incomes saw their

purchasing power drastically reduced

Economic Resurgence and The Putin Era

Current Economic Condition

• GDP has grown at an average of 6.7% since the crash• Over the last five years, fixed capital investments have

averaged real gains greater than 10% per year and personal incomes have achieved real gains more than 12% per year

• Poverty and inflation have gone down• Foreign Reserves have gone up from $12 billion in 1999

to $315 billion at yearend 2006 • FDI has risen from $14.6Billion to $30Billion• The federal budget has run surpluses since 2001 and

ended 2006 with a surplus of 9% of GDP

BUT SOME PROBLEMS STILL REMAIN…..

• Oil, natural gas, metals, and timber account for more than 80% of exports and 32% of government revenues

• Russia's manufacturing base is dilapidated and must be replaced or modernized if the country is to achieve broad-based economic growth

• The banking system, while increasing consumer lending and growing at a high rate, is still small relative to the banking sectors of Russia's emerging market peers

• Political uncertainties ahead of the elections, corruption, and widespread lack of trust in institutions continue to dampen domestic and foreign investor sentiment

• Law enforcement issues

BUT FINALLY AFTER SO MANY YEARS, THE RUSSIAN

ECONOMY IS LOOKING STRONG