The failure of economic reform, 1985-90

Designed to address the problems with the Soviet economy. Under Gorbachev Soviet economic policy went through 3 stages:

• Rationalisation - 1985-6, Gorbachev tried to improve the way in which the command economy worked.
• Reform - late 1986-1990, Gorbachev attempted to introduce some market measures into the existing command economy in order to create an economy that had the best features of socialism and capitalism.  
• Transformation - 1990-1, Gorbachev abandoned the command economy and introduced a market economy.

Gorbachev's first set of economic measures didn't alter the fundamental nature of the economy. Between 1985-6 Gorbachev:

• continued Andropov's anti-alcohol campaign, cutting state production by 50%
• introduced uskorenie (acceleration), a programme of investment designed to modernise the economy. 

Gorbachev's early measures failed: 

• Anti-alcohol campaign failed as Soviet citizens simply bought alcohol illegally. Thus the government made much less money out of vodka sales - alcohol revenues dropped by 67 billion roubles (9% of GDP). Therefore campaign was abandoned in 1988.
• Acceleration failed for two reasons:
• 1) It was funded by borrowing money from Western governments. Government debt rose from $18.1 billion in 1981 to $27.2 billion in 1988, leading to growing inflation.
• 2) Gorbachev invested in energy production, ignoring advice from experts who argued for more investments in high-tech machines. Therefore, the investment didn't lead to greater growth.

The failure of acceleration led Gorbachev to begin experiments with market reforms. He passed a series of laws to allow market forces to play a bigger role in the economy:

• The Law on Individual Economic Activity (Nov. 1986) made it legal for individuals to make money by doing small-scale jobs such as private teaching or repairs and maintenance. 
• The Law on State Enterprises (June 1987) devolved power from central government to factory management, allowing factory managers to set the prices for the goods they produced.
• The Law on co-operatives (May 1988) made it legal to set up large co-operatives, which functioned like private companies. 

Gorbachev's market reforms created growing economic chaos. 

• The reforms undermined the central planning system, while at the same time failiing to create an effective market alternative. 
• As a result there was no effective way of distributing goods, and shortages of essential goods became increasingly severe. 
• E.g. although Soviet farms produced 218 million tons of grain in 1990 there was no longer an effective distribution system and therefore there were major shortages. 

• By 1990 economic problems led to political problems. 
• Government figures showed that between 1986-90 GDP had shrunk by 4%.
• Furthermore, prices were also rising. 
• Senior Party members were growing rich as they were able to seize control of economic assets, which were being privatised. 
• Consequently, approval ratings dropped, strikes increased and there was a sharp decline in support for the Communist Party. 

To minimise the economic problems that were expected during the transition to a market economy, Gorbachev and Yeltsin commissioned two Soviet economists, Stanislav Shatalin and Grigory Yavlinksy, to devise a plan for the economic transformation.

The '500 Day Programme', published in August 1990, was the result. They proposed widespread privitisation and complete marketisation in less than 2 years. 

Gorbachev initally supported the '500 Day Programme', but under pressure from senior hardline Communists he backed down. 

Nonetheless, he remained committed to an economic transformation, but was persuaded that it should happen at a slower pace. 

• Jan. 1991 - Supreme Soviet introduced private property as an important step towards a free market economy. As a result, Soviet people could own land and factories in a way that had been impossible since the 1920s.
• April 1991 - A law passed to allow citizens to trade stocks and shares. Again, this reform was designed to revitialise the economy through the introduction of market forces. 
• However, the economy continued to decline. Oil production fell 9%, steel and tractor production fell 12%. An official government report stated that the Soviet economy was moving beyond crisis to catastrophe. 
• By summer 1991, Soviet and Republican governments were effectively bankrupt. Neither had the economic power to govern. 
• Consequently, although Yeltsin announced a programme of full marketisation in October 1991, it was difficult to implement. 

Historians disagree over the significance of economic problems in the fall of the USSR.

• Some agree that Gorbachev's reforms created economic chaos, which in turn led to a political crisis, and caused the collapse of the USSR. 
• Others claim that the Soviet econoomy was bound to disintergrate because of its long-term weaknesses. From this point of view Gorbachev's reforms merely sped up the inevitable economic collapse. 
• Finally, some historians argue that Gorbachev's economic reforms could have been successful. According to this interpretation, Gorbachev's mistake was to introduce economic reforms and political reforms at the same time, as political freedoms allowed the citizens to organise in protest against the government when the economy began to fail. Historians who make this argument point to the success of economic reform in China, where economic reform took place without political liberation.