Reversal of Fortune: The Fertile Ukraine
From Breadbasket to Bloodland
Ukraine: central the Stalin and Hitler visions
• Stalin: Grain for urban industrialization
• Hitler: Fertile soil and slave labor for 1000 year Reich
1928: First Five-Year Plan...Accumulate surplus value
• Collectivize agriculture: War for Grain
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Crops the property of the Soviet State
• Liquidate the kulak class
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Decision by a troika
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Execution
Exile to forced labor: canals, mines, factories
 Kazakhstan, Urals, Siberia
Remain to farm...to starve
1930: Rapid collectivization...ahead of quota
• “Second serfdom”
• Bountiful harvest  Quota up
1931: Yields down
• Bad weather/Best farmers deported
• Quotas met with seed grain
» Peasant hunger
1932: Widespread starvation
Hunger  Low Productivity  Vicious Circle
• Grain exports key to the “Plan”
• Struggle against theft and hiding of grain
• Famine: A Plot Against Stalin
 Saboteurs hated socialism so much they let their families die
• Failed officials executed and deported
Late 1932 – Early 1933: FAMINE
• Heightened requisitions
• Livestock confiscated
• “Black listed” communities that fell short of quotas
All food confiscated  Zones of Death
• Seed grain seized to meet quota
– Borders sealed against peasant flight
– Cities closed against peasant begging
– Cannibalism/Atomized society: alienation of all against all
• More deportations
– Weak arrivals starved in camps
1933: Harvest brought in by soldiers,urban workers & students
The Toll: 2 ½ million “missing” in Ukraine census
7 million “missing” in Soviet census
Acemoglu and Robinson’s Soviet Story
Growth under extractive institutions
The Easy Part:
• Move resources from low productivity agriculture to higher
productivity manufacturing
The Hard Part:
• Spur innovation/Creative Destruction
» Failure  Eventual collapse
• Modern—innovative defense sector
Andrei Sakharov: “Father” of Soviet H-bomb – leading dissident
• Perverse quotas and prices
– Quota in tons  thick sheet steel/concrete footings on machines
– Quota in areas  thin sheet steel
Prices in Russia’s Virtual Economy (Gaddy & Ickes)
A corn or vodka economy: the setup
• Resource sector produces 100 corn (net of payment to own labor)
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Corn is the coin of the realm
It could be gold, but you can’t eat gold
Or it could be vodka, distilled corn, say 100 bottles. Vodka = liquid cash
All Value Added paid as tax. Tax obligation = 100 vodka in “cash” or in kind
• Manufacturing sector: 100 Vodka + 100 Workers  6 Machines
– Wage is 1 Vodka/Worker
– Resource provider is paid in kind (machines)
• Household sector: 100 Workers
– Each worker is paid 1 Vodka, or whatever the manufacturing enterprise can pay
– Workers receive all “cash” (vodka) collected by government as transfer
• Government:
– Collects all Value Added as tax, in “cash” or in kind (machines)
– Pays all cash it collects to households as transfer payment
Virtual Economy: Each Machine is Really Worth 16 2/3 Vodka
Manufacturing: 100 Vodka + 100 Labor  100 Vodka of Machines
Manufacturing Destroys 100 Vodka in Value
If Machines valued at what they’re really worth, 16 2/3 Vodka
• Value of machine output = 6 x 16 2/3 Vodka = 100 Vodka
• Manufacturing pays Resource Sector 6 Machines for 100 Vodka
– Manufacturing workers receive 100 Vodka from their employer
– Manufacturing operates at loss and owes no taxes
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Resource sector pays 100 Vodka in taxes: 6 Machines = 100 Vodka
Government winds up with 6 Machines and makes no transfers
GDP on value added basis = +100 Resource Sector - 100 Mfg = 0
Personal Income = 100 Wages + Zero Transfer – 100 “Profit” = 0
Loss-making manufacturing ought to shut down
Unemployment
Social discontent
Virtual Economy: Each Machine is Really Worth 16 2/3 Vodka
Manufacturing: 100 Vodka + 100 Labor  100 Vodka of Machines
Manufacturing Destroys 100 Vodka in Value
If Fictitious Price: 1 Machine = 50 Vodka
• Value of machine output = 6 x 50 = 300 Vodka
• Manufacturing pays Resource Sector 2 Machines for 100 Vodka
– Manufacturing workers receive 100 Vodka from their employer
– Manufacturing Value Added
= 300 Output – 100 Labor – 100 Resources Input = 100 Vodka
– Manufacturing owes 100 Vodka in taxes
– Manufacturing pays government 2 Machines = 100 Vodka
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– “Profitable” manufacturing keeps 2 Machines and GROWS
Resource Sector owes 100 in taxes = 2 Machines (the 2 it was paid)
Government winds up with 4 machines
GDP on value added basis = 100 Resource Sector + 100 Mfg = 200
Personal income = 100 Wages + 100 “Profit” = 200
Everybody Keeps Working  Everybody’s Happy
The Siberian Curse (Hill & Gaddy)
• Planner Error
– Forced settlement: The Gulag
– Subsidized settlement
• Frigid temperature  High costs of production
– Energy provided at below-market price
• Downsize overblown cities!
– Russia has “unnatural” distribution of city sizes
• Will global warming help???