Economic Weakness and the Failure of Reform

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  • Economic Weakness and the Failure of Reform
    • Long Term Economic Weakness
      • From 1928 to 1980's soviet economy was a command economy. At one point west feared communist growth under Stalin of 7.1% would overtake capitalism
      • However growth halted under Khrushchev only reaching 5.3% an arms race was expensive. 1970's growth was 2%, 1980 0.6%, strategies to reverse the decline failed
      • Fundamental Economic Weakness
        • Soviet Economy was fundamentally flawed
          • Soviet economy failed to create incentives for hard work or innovation. Poor / Rich Gap (7x difference in US / 3x in USSR) Less incentive for workers to improve, therefore lower labour productivity
        • Waste was a big problem. Gosplan and state planning measured and rewarded production. Quality of products and amounts used were irrelevant, large amounts produced, but often wasted. In 1980's Gosplan estimated 12% of machinery never used (including 20% of tractors)
        • Soviet Economy had never been fully modernised; agriculture lacked sophisticated machinery. (Agriculture used much more labour than US) Transport system never fully modernised; transporting food difficult. Lack of storage facilities, meant much that was produced was wasted. Grain often rotted before use. (American farms were 6x as productive with less labour)
        • Soviet economy struggled in arms race, 1965 - 1985 GDP on defence was 12 - 17%. (US was 6%) This spending starved other areas of much needed funds
        • Centralisation was a chronic problem. E.g gov set timetable for agriculture meaning farmers could not use their expertise. Schedules for fertilisers were set, arrived at wrong time or were wrong for crop. Production could not be maximised
    • Gorbachev and Perestroika
      • Gorbachevs economic policy changed radically from 1985 - 1991
        • Andropovs ban on alcohol was continued by Gorbachev, alcohol production in state factories down by 50%
          • 4.5 million alcoholics, 15 litres for each citizen per year, however citizens were now drinking illegally made alcohol meaning less money was made from government alcohol
            • Government alcohol revenues dropped by 67billion (9% of GDP), campaign was abadoned
        • Acceleration was an economic initiative designed to end economic stagnation. A huge increase in investment was meant to modernise soviet economy and become efficient (20% increase in production in 15 years)
          • Acceleration failed, major reason was decline in global oil price. Fell from $70 to $20 a barrel. Combined with alcohol money loss, Soviet government had less money than mid 1980s.
            • Gorbachev financed acceleration from Western countries, debt grew from $18.1 billion to $27.2 billion. Gorbachev invested in energy production ignoring economic experts who suggested high tec machines
              • Investment did not led to greater growth. Debt grew, less money for modernisation and consumer goods. This created an economic crisis
        • After failure of acceleration partial market reform was introduced.
          • Small scale work was allowed to make private money for families
          • Law on state enterprise devolved power from central gov to factory management, factories could set their own prices.
            • This failed as little power was actually devolved, high prices meant government payed for higher prices increasing debt
          • Law on co-operatives made it legal to set up large scale private companies. 200,000 were made and had huge profits bigger than state enterprises
          • Gorbachev restricted Gosplan power, first devolving then abolishing
        • Problems with the market grew with a partial market. Both planning and free market could not work. Communist gov subsidised prices, failing free market. Private company prices were expensive so gov enforced price capping and caused problems
          • Partial market reforms created economic crisis.
            • Reforms undermined planning system, while creating no market alternative. No way of distributing goods and there were food shortages, economic reforms had failed, GDP shrunk by 4%. Worst economic performance in soviet history.
            • Gorbachev finally cut subsidies to reduce spending and economic stabilisation. Prices grew rapidly; Gorbachevs approval rating dropped to 21%, Number of strikes increased, faith within communism ended, nationalist movements emerged
      • Initially he attempted to stimulate economic growth within the existing system. This failed, aspects of free market introduced, yet retaining command economy.
        • Eventually he abandoned central planning in order to create a genuine free market. These political and economic reforms were known as 'Perestroika' (Restructuring)
          • Rationalisation 1985-86; Initial economic reforms designed to stimulate growth, modernisation, production.
            • Reform 1987 - 1990; Reforms intended to introduce market forces into economy. Political reforms designed to build support for economic change.
              • Transformation 1990 - 1991; Abandonment of fundamental aspects of system such as single party rule and command of process (party lost control of process)
          • Perestroika had 3 stages;
    • Transition to a market economy
      • Gorbachev believed central planning needed to be abolished, but was under heavy opposition from communist party
        • 500 day program used to minimise economic problems, predicted it would take 2 years to fully privatise. Gorbachev supported but had to back down due to party.
          • Radical reform continued, but gov did not adopt plan due to Gorbachev lack of decisive action
            • Private property was introduced, stocks and shares were traded. However economy continued to decline
              • Sov gov and rep gov bankrupt, neither had economic power to govern

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