Demise of the Command Economy
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Command economy directed from a
central planning commission.
Most advanced nation in rocketry in
mid fifties.
Soviet leader Nikita Khrushchev
predicted Soviet Union will surpass
west economically in next twenty
years.
Gross National Product(GNP) was 6%
per year.
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Adopted by Stalin (1930s)
After taking power in 1927, Stalin banished
private enterprise and imposed strict
authoritarian control over the economy.
Combined communist ideology and Russian
nationalism to build socialism.
Main priority was to build military strength
through rapid industrialization.
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Large enterprises made centralized control
efficient
Enterprise Branch Ministers Gosplan
Council of Ministers
Managers were told what and how much to
produce
Price of commodities set by central authority
Prices of social necessities set below
production costs
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Elements of market system present.
Enterprises allowed to retain a portion of
their profits.
Cost of production much less than the cost of
manufactured goods, resulting in a
substantial profit turned over to the
government.
ADVANTAGE
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Rapid industrialization
High rates of economic growth by
western standards until mid 1970s
Surpassed United States in production
of many industrial and farm products
by 1975.
World’s largest producer of basic
commodities in 1989.
Real per capita consumption increased
by 150% in between 1950 and 1970.
High literacy rate.
Health care easily available.
No unemployment.
Guaranteed housing at minimal price.
DISADVANTAGE/PROBLEMS
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Inefficient
Rigid economic system not open to
rapid technological changes.
Complex annual planning.
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Lack of innovation for plant managers.
Lack in planning led to shortages.
Prices poorly reflected cost or demand
“Soft” budget constraints.
Quantity over quality.
Growth through oppression and not
technological progress.
Access to commodities became a
struggle for consumers, whereas party
elites enjoyed imported products.
From 1966-1970 GNP held at 5.3
From 1971-1975 GNP fell to an averaging 3.7 per year.
After 1975 GNP averaged between 2.6 and 2.7 per year.
Lack of sophisticated techniques in computers, software and
communications electronics, and the design and
manufacturing automobile
 Under Khrushchev’s liberalization program, major strides
were made in housing, education and health care.
 More attention given to consumer goods; income inequality
was reduced.
 Amidst the relaxation of the police state and the decline in
Communist Party discipline, the black market flourished
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1976-1980 five-year plan deliberately set quotas
based on a lower growth rate
Managerial and worker discipline declined with
the rise in corruption and lack of incentives to
motivate a socially protected workforce.
Despite economic stagnation, the average
Russian was not immediately disturbed.
(nonexistent unemployment, higher than ever standard of living,
free healthcare and education, inexpensive housing, political
freedom, etc……..)
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Mikhael Gorbachev was elected general secretary of the
Communist Party on March 11, 1985 after early deaths of Yuri
Andropov and Konstantin Chernenko.
HE wanted to prove that socialism can adapt, innovate and be as
productive as capitalism.
Gobachev introduced perestroika-his vision of a new socialism.
Perestroika program consisted of “three closely intertwined
directions fit together into a vague concept of uskorenie
(acceleration).”
Three directions
 Technological progress
 “democratization” of the economy
 Social orientation of production
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A few months after taking office in 1985, Gorbachev adopted the incentive
system , which relied on success indicators that complemented the
mandated output targets
This system lowered branch ministries’ interference in the day-to-day
operations of enterprises .
Gorbachev also launched an aggressive campaign to decrease alcohol
consumption
Production and sales of alcohol were cut; harsh penalties imposed for public
drunkenness
Ambitious investment campaign launched with emphasis on the machinebuilding industry, which supplied most of the capital equipment for the
economy.
Gorbachev was criticized by Western observers for making adjustments
rather than fundamental changes
Investment was dramatically increased
Even though there was increased investment, neither productivity nor
product quality showed improvement
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Hoarding mentality led to more shortages.
Shortages provoked an up rise in black market.
Input shortages due to reduced centralized coordination.
Monopolistic enterprises control black market prices.
Smaller profit shares were taken by government which left a large portion of
profit unreported.
Anti-alcohol campaign led to reduction in tax receipts from the sales of
alcohol.
External shocks-fall in world price of oil, the Chernobyl disaster, earthquake
in Armenia, and the war in Afghanistan.
Deficit rose to 10% of GDP in 1988 and 20% in 1991.
Deficit not covered by finance but by printing money.
Law on State Enterprise and the growth of the private sector resulted in
wage rate to rise.
Proposals to reform by Leonid Abalkin, Stanislav Shatalin, and Grigori
Yavlinsky.
Gorbachev hesitant.
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On January 2, 1992, then Russian president Yeltsin implemented the
‘shock therapy’ program advocated by Western advisers-goal a complete
transition.
Inflation skyrocketed
Exchanged rate plummeted
Enterprises favored price increase over output increase.
Most Russian lost all their savings.
Interenterprise debt-collapse of one could lead to the collapse of many.
Corruption and criminality escalated
Investment collapsed due to lack of government ability to fund
investment.
In the first three years following of shock therapy
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Real GDP fell 33%
Industrial production fell 44%
Investment declined 60%
Unemployment, poverty increased drastically.
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[ According to an article in Business Week (1-2009), Brezhnev contributed to the ruination of the
Soviet Economy by not having started reforms
in the early 1970s. By the time of Mikhail
Gorbachev in the late 1980s, "the Soviet Union
was all but bust." Gorbachev made it worse by
printing too much money and creating "a
colossal monetary overhang. Russians may have
thought that their savings evaporated when
prices were liberalised at the start of 1992; in
truth, their cash was already worthless." ]