USSR

The Search for Growth

 Political History
• Tsars
• Ivan the Terrible (1533-1584) – Territorial Expansion and Strong Centralized Decision making
• Peter the Great (1682) – Imperial Russia – Oriented Russia to the West
• Feudal serfdom lead agricultural state
• Reforms - Encouraged Industrialization, FDI, protective tariffs, high taxes; yet low industrial capacity
• 1917 – Vladimir Lenin – “Peace, Land and Bread”
• Followed Marxism – Abolition of private property…
• New Economic policy post the Civil War – private trade and small manufacturing legalized
• Agricultural production increased more rapidly than industrial production
• 1927 – Joseph Stalin - Industrialization
• Collectivization
• Central Planning (Five Year Plans)
• 1956 – Nikita Khrushchev – Condemn Personality Cult, Virgin Lands Campaign, Sputnik,
Hungary Invasion
• 1964 – Leonid Brezhnev – Planning Reform, Invasion of Czechoslovakia, Afghanistan
• 1985 – Mikhail Gorbachev – Radical reforms, Glasnost, Perestroika
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 Vladimir Lenin (1917-1924)

• Ideologically followed Marxism.

• Wanted to lead people directly from Feudalism to Socialism, skipping the
Capitalist phase.
• War Communism - Nationalization of major industrial establishments;
Mandatory confiscation and rationing of crops.
• New Economic Policy – Large industrial firms remained govt. controlled,
private trade and small manufacturing firms legalized.
• Turned control of factories to worker committees, Private land holdings
redistributed to individual peasants.
• Agricultural Production increased more rapidly than industrial production.
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 Joseph Stalin (1927 – 1953)

• Thrust USSR into league of industrialized nations but ruthless and brutal methods.
• Industrial-led growth driven by investment and forced increase in industrial labor.
• Collectivization
• Punished those who owned land and supported private land ownership; deported, jailed,
resettled or killed.
• Kulaks (wealthy peasants) - 3.5 million sent to slave labor, 3.5 million resettled, more than
3.5 million killed.
• Remaining peasants encouraged to combine their land and form collective farms or join a
state farm as an agricultural labor.
• Percentage of agricultural population that worked on colletive farns jumped from 1.7% to
93.5%.
• Each collective farm told what to produce, what to deliver, to whom, at what prices, and
from whom to obtain supplies

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 Joseph Stalin (1927 – 1953)

• Central Planning
• System that ignored market signals, relied on government ownership of means of
production and centrally planned economy by introducing five-year plans.
• Politburo(select decision makers from Communist party) made strategic decisions
such as level of national output and division of output between consumption,
investment, govt. exp. and defense, and delegated day-to-day decision making
powers to ministers.
• Gosplan (planning ministry) created detailed plans to achieve Politburo’s goals
and passed the initial plan to Gossnab (agency responsible for distribution inputs
to producers and ministries) and both passed the detailed plans to enterprises.
• This information was filtered back to the hierarchy and Gosplan set next plans
based on the feedback.

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• Firms produced to meet production targets and not to make profits; state owned, Govt monopoly
• Banking system controlled. Govt. allotted all credit to the enterprises..GROSBANK
• Prices played a passive role in the system to aid in measurement, accounting, aggregation and control and
not reflect demand-supply mechanics. Wholesale prices fixed by govt., Retail prices decided by demand
considerations or political priorities. Prices based on cost of production, not inceptive to produce ceaper
goods.
• Foreign trade was discouraged, imports restricted barring high priority sectors such as defense and
technologically sophisticated products. Exports consisted of metals, minerals and oil to pay for the imports.

Exporting firms were paid the ruble charge, importing firms were charged the ruble price as well.
• State exploited ownership position to generate revenues. Illegal to employ someone to make goods for sale
or to buy and resell for private profit.
• Below plan output was punishable by law.
• Whatever profit was retained was subjected to 100% tax.
• Govt. expenditure targeted towards investment, in heavy industry and high priority sectors such as defense
and R&D.
• Second Economy developed where privately organized trade remained active.
• 1/3rd agricultural labour hours devoted to private agriculture(1974) 6
 Joseph Stalin (1927 – 1953)

• Economic Progress under Socialism

• USSR grew to be a superpower under Stalin’s 25 year rule as economy grew
rapidly.
• GNP increased by 5.8% from 1928-1940 ( highest ever in USSR)
• Controlling wages and determining prices lead to channelizing of massive
amounts of capital in heavy industry. National income grew 87%, industrial
production grew 137%.
• Collectivization swelled urban labor force, work force doubled.
• However, brutal measures were used to achieve this and it came at a great
human cost; firm managers were motivated by fear as below-plan output was
punishable by resettlement or death; 3.5 million died because of
collectivization; 7 million died due to famine in the countryside.
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COMMAND ECONOMY
• Govt makes all strategic decisions.
• Govt. allocates all resources based on central planning – labour,
capital, natural resources.
• Govt decideds prices, inputs, outputs, wages.
• Govt control over all sectors – lack of competition
• Production target based on Govt , rather than market.

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 Nikita Khrushchev (1956-1964)
• Condemned personality cult
• Opened discussion about weakness in the planning system, but no
fundamental changes were made
• Planning power shifted from industrial ministries to ministries based on
geographies and ensured coordination among ministries
• Emphasized consumption and reduced use of piece rates in industry
• Increased utilization of existing resources
• Virgin Lands Campaign (increase seeding of 42 million ares)
• Plow-Up campaign
• Shift to industrial production and services from agriculture and also
from countryside to cities
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 Nikita Khrushchev (1956-1964)

• Technological prowess - Launch of Sputnik

• Warsaw’s pact – military alliance to invade Hungary
• Creation of special trading zone – Committee of Mutual Economic
Assistance

• Foreign policy blunders, deterioration of agricultural output &

slowing of economic growth led to his downfall

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 Leonid Brezhnev (1964-1982)
• Major Economic reforms to increase growth rate
• Re-concentrated decision making power back to industrial based ministries
• Reduced number of centrally planned targets and focussed on other factors apart
from gross production
• Enterprise managers given more discretion over allocation of generate profits
• Led to managers minting bonuses without increase in productivity
• Reforms stopped and recentralization of decision making in 1971
• Stagnation
• Consumption by consumers increased
• Ownership of standardized items like refrigerators, TV, cars increased
• Fixed rewards for labours, reduced income disparity and brought stability and
normalcy
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 Leonid Brezhnev (1964-1982)

• Drive growth by aggressive investment programs, though reduction in

ROI
• Move from extensive to intensive sources of growth
• Led to new reforms every year and increase in corruption and
bureaucracy
• Invaded Czechoslovakia and Afghanistan
• Defence expenditure consumed large national output

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 Yuri Andropov & Konstantin Chernenko
(1982-1985)

• Andropov well informed about stagnant economy and corruption

• Increased discipline, organized raids, fined and jailed who didn’t follow law
• Reduced sale of alcohol
• Gave managers increased power to restrict workers from changing jobs
• Removed and replaced various Brezhnev officials
• Discipline reduced bottlenecks and brought significant improvements
in railroads and industry
• Andropov’s death in 1984, Chernenko came to power and died within
the year

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 Mikhail Gorbachev (1985-1990)

• Strong communist credentials and a man of ideas who had travelled the world
• Initial policies followed Andropov
• Tightened discipline
• anti-alcohol campaign – raised prices and reduced production
• Supported quality control board
• Proper formulation of five year plans

• Call for greater intellectual openness – Glasnost

• Reduced state control over culture, intellectual and religious activities
• Freedom of expression – Artists, performers and Nobel winners provided freedom
• Reduction in censorship and foreign languages
• Increased awareness about corrupt and inefficient practices
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 Mikhail Gorbachev (1985-1990)
• Weakness in centrally planned economy
• Pricing and incentive system discouraged innovation
• With prices at cost of production, no incentive to use cheaper inputs
• New inventions not incorporated
• Large firms not ready to change the organization and performance
• Production focussed on industrial and agriculture rather than service sector
• Rate of growth declined
• Failure to comprehend the shift required from extensive to intensive methods of
development
• Failure in use of scientific tools and technology
• Overexpansion of capital stock and diminishing returns to over utilization of
natural endowments
• Knowledge generated by Soviet researchers not shared due to separation of
research institute from firms and overconcentration on defence issues 15
 Gorbachev’s Strategy (1986)
• New reform policy
• Legalization of private trade
• State enterprises allowed to retain and distribute profit
• Government still owned and controlled almost all firms and activities
• Law of State Enterprises
• Increase independence of state enterprises and make them self financing and self managing
• Fewer targets and number of orders to decline
• Firms in greater control of their funds, managers could reallocate funds
• Government still retained tax policy, product pricing and minimum labour standards
• Law of Cooperatives
• Reduced restrictions on private enterprises
• More autonomy from central control and same legal rights as state enterprises
• Transfer prices directly into cash that could be spent on consumer goods
• Retail prices under control, but wholesale prices set free
• Banking reforms – Commercial banks could form and extend credit for firms with interests
• Greater investment in R&D for defence industry
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• Increased the budget deficit and expanded the money supply
USSR GDP Growth

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Russian GDP

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