Behind the Soviet Economic Crisis
Bell, Daniel
Can perestroika—the reconstruction of the Soviet economy—work? The shape of the world economy, in particular the relations of the advanced industrial societies to the markets of tomorrow,...
...What the Soviets have been doing is printing money to pay for the deficit, and that action multiplies the money in circulation and increases the "savings...
...The Soviet Union knows it has to move to a convertible ruble if it wishes to expand its foreign trade and encourage investment...
...The Soviet Union is the largest country in the world in respect to area size, about 22 million kilometers...
...That would be the proverbial "camel's nose under the tent," and demands might spread for other forms of private property...
...At the same time, the Soviet Union has a budget deficit of 10 percent of GNP, or more than twice that of any industrial nation...
...The Soviet Union has lost control over all the East European nations...
...The monetary problem is multiplied by the artificial value of the ruble vis-à-vis other currencies, and in the black market the ruble is being discounted by as much as 80 percent...
...Rather than take up each of these issues seriatim, let me combine them into a general discussion of the realistic prospects of perestroika...
...How does one explain the discrepancies between resources and performance...
...It is the second largest military power in the world...
...The basic historical fact is that the Soviet Union has not been a planned economy...
...He can "shock" the economy by releasing prices (as the Poles are now doing) or resort to more subsidies and direct allocation of scarce goods to key sectors...
...But about three-fourths of that has been in energy, raw materials, and heavy production for the military, and these are relatively unproductive...
...The obvious fact about Japan and Germany, for example, is that they have had forty-five years of peace—longer than any previous period in modern history—to carry out reconstruction...
...2. "Planning" is a failure, and the question that faces the Soviet authorities is how to introduce market mechanisms and to end retrograde subsidies, especially for food and housing, which are in short supply...
...China is first and the United States third...
...Enterprises usually seek to make their targets by going outside the plan and exchanging goods by barter, a practice that the Russians call blat...
...Until recently, even, interest costs on capital were never measured, thus obscuring further capital costs and the choice of inputs...
...But as major reforms take hold in these East European countries, it also becomes an incentive to break away from the Soviet Union and seek to join EFTA (the European Free Trade Area) or even apply at some later time to the Common Market...
...The government proposes to cut the budget deficit in half by issuing bonds at 5 percent interest, but that is unlikely to make any real dent in the mountain because, increasingly, the Russians are turning to black markets to get rid of their rubles...
...And equally ominous is the willingness of strategic working-class groups such as the miners to go out on strike...
...The total savings is estimated at about 460 billion rubles, of which 300 billion rubles lie "under the mattress...
...the remainder has been a backward consumer economy, as reflected in the rankings of the standard of living...
...In this way, the Soviet Union built a heavy industrial base...
...Consider the other side of the ledger: • By every realistic measure of output per capita, the Soviet economy has not grown in the last twenty years—the so-called period of Brezhnev stagnation...
...An outright currency reform, such as took place in Japan and Germany after World War II, is politically impossible because that would only ignite the anger of the population in their feeling of being cheated...
...Under the economic plan adopted at the end of December 1989, the consumer sector is to receive priority in Soviet production...
...Gorbachev's advisers, such as Oleg Bogomolev, the head of the economics section of the Academy of Science, have proposed privately that the Soviet Union sell apartments to the individuals living in them and then, quite literally, burn the money to take it out of circulation...
...By tangible indicators: there are 515 radios per 1,000 persons (or 50th in the world...
...Some very good analytical mathematics was being done, but none that involved computational problems...
...But this would mean a two-tiered monetary system that would be difficult to manage...
...Soviet factories were "directed" to turn out three times as many television sets, washing machines, and other scarce consumer goods as before...
...The only rational solution is to use market mechanisms whereby buyers and sellers can match their needs of supply and demand by the information signals of price...
...In the main hotels in Leningrad there were no computer reservation systems, and tickets for the overnight trains to Moscow had to be obtained by courier service...
...Given the literally millions of interdependent product and wage-price relations of a modern complex economy, it has been estimated that it would take thirty years of computer time to plot such input-output relations...
...It is the second largest wheat producer in the world...
...The territories that were acquired after World War II are restive, and there is little now that Gorbachev can do to halt the secession of Lithuania, Latvia, and Estonia, the most productive areas of the Soviet Union...
...If we exclude the oil-rich Arab shiekdoms and the "hideaway protectorates" such as Monaco, Liechenstein, and the Cayman Islands, the Soviet Union ranks 17th in the developed economies of the world, falling behind Czech46 • DISSENT Behind the Soviet Economic Crisis oslovakia and what was East Germany in its standard of living...
...It is the third largest economy in the world (in Gross Domestic Product) after the United States and Japan, and about double that of what was West Germany...
...Gorbachev here is in the classic double bind: there is a falling supply of consumer goods available for the public and rising demands for higher wages to buy scarce goods...
...But there is one overriding condition that is necessary for any change: political stability...
...This essay was written originally in February 1990 for a Japanese audience...
...But for bureaucratic and political reasons (that is, the loss of control and the fear of price rises), the Soviet authorities have feared to move to the market...
...When I was in the Soviet Union in the spring of 1988, giving lectures in Leningrad and Moscow, there was not one computer at the Institute of Mathematics in Leningrad...
...The more immediate and "scary" problem that the Soviet Union faces is the extraordinarily large "overhang" of rubles in private hands...
...In the past three years, the Soviet Union has invested about 150 billion rubles a year, or about 40 percent of national income, the highest in the world...
...Need for Stability The discussion so far has been on the crucial structural reforms that are necessary in the Soviet economy...
...Certain targets are set, and materials and labor are allocated to factories having a priority, and efficiency is measured by physical units of output rather than profit...
...Either way, Gorbachev may yet realize the truth of an old remark of the English political philosopher Thomas Hobbes, who said that "Hell is truth seen too late...
...It leads in steel, but no one any longer measures the "strength" of a nation by the index of steel, as was true until World War II...
...3. How to rearrange sector divisions so as to move about fifteen million persons out of manufacturing into service sectors...
...Canada, China, and the United States have 10 about million kilometers each...
...I distinguish here between Eastern Europe—Poland, Czechoslovakia, Hungary, and to a lesser extent Romania and Bulgaria— and the Soviet Union...
...5. How to manage the huge overhang of rubles held by Soviet citizens that can blow the economy apart in a triple-digit inflation and at the same time to achieve a realistic convertible ruble that will make international trade and foreign investment possible...
...And it is not at all clear how far the necessary structural reforms will go...
...Those computers were reserved for the military...
...There are five major economic problems that have to be resolved: 1. The Soviet Union has been a dual economy: one sector is devoted overwhelmingly to heavy industrial production, with the major output going to the military...
...In terms of its potential and actual performance, the Soviet Union is a mystery...
...What are crucial today are the knowledgebased, high-technology industries of a postindustrial society, and the industrial structure of the Soviet Union is not geared to those kinds of enterprises...
...Will the Soviet Union be able to maintain its position as an economic power, leaving aside for the moment the crucial political questions of the secessions of republics and political stability...
...The paradox is that investment in the Soviet Union is extraordinarily high...
...In the short run, this provides an advantage to the Soviet Union, since its main exports are oil and natural gas, while it 48 • DISSENT Behind the Soviet Economic Crisis buys cheap manufactured products from the East European countries...
...What Reforms Are Needed...
...and they have chosen shortages...
...Because of its continuing relevance we print it now as background for the piece following it, an essay on the problems of planning and socialism written by the author.—Ens...
...Ethnic conflicts are on the rise...
...And yet: According to every reputable Soviet economist and, in fact, according to Mikhail Gorbachev, the Soviet economy is in shambles...
...In standard of living, the Soviet Union ranks 60th of 211 countries in the world...
...At the meeting of the new Soviet parliament, the Congress of People's Deputies, which ended on December 23, 1989, Prime Minister Nikolai Ryzhkov put forth a new five-year plan that delayed price reforms until 1993-95, rejected private property and the market, and proposed the continuation of "planning" mechanisms...
...Now the Soviet empire is on the verge of breaking up...
...But this would create a huge stock of private property, and some individuals would begin to make profits by selling the apartments...
...4. How to make Soviet agriculture more efficient...
...Two leading Soviet economists, Nikolai Shmelev and Vladimir Popov, in their book The Turning Point: Revitalizing the Soviet Economy, published in November 1989, point out that in sixteen basic categories of goods, WINTER • 1991 • 47 Behind the Soviet Economic Crisis such as turbines and metal-cutting machines, the actual output was only a half or a third of the planned targets...
...Today between 20 and 25 percent of the labor force is in agriculture, compared to less than 4 percent in the United States— despite the fact that in wheat growing, the main crop, the regions in the two countries are comparable in their geography...
...It could reduce that by heavy taxes, but that would wipe out the "savings" of the Soviet citizens and simply mean a wage cut...
...It is the largest producer of crude steel in the world, almost 50 percent more than Japan and almost double that of the United States...
...The three larger economies of Eastern Europe are engaged in a drastic turnabout of their societies...
...It is the leading nation in having the largest number of scientists and engineers, about 13.5 million persons out of a total of 120 million in the labor force...
...In a "socialist" economy, as the Hungarian economist Janos Kornai pointed out in a penetrating book a number of years ago, the authorities are forced to choose between inflation and shortages...
...310 television sets per 1,000 persons (or 30th in the world), and 40 private automobiles per 1,000 persons (or 103rd in the world...
...Not having any goods to buy, the Soviet middle class, perforce, has had to "save...
...About 25 percent of the Soviet land is arable...
...q WINTER • 1991 • 49...
...it accounts for 20 percent of the world's oil output and about 40 percent of its natural gas...
...Let me outline some basic data...
...The reason, they argue, is that Gosplan, the central planning agency, is simply incapable of plotting in real time the interdependent relations of materials, energy needs, and labor, so as to direct resources in a proper way...
...The Soviet Union is a far different question...
...The Soviets have taken the first step in Comecon, the enclosed trading bloc with the East European nations, by switching to world prices for their commodities, denominated in hard currencies...
...It has been a mobilized economy, similar to the war economies of the industrial nations that fought World War II...
...They eagerly want investment from capitalist societies, and some investment, particularly in Hungary, is already taking place...
...By its own admission, the Soviet Union cannot feed itself and has to import each year several million tons of grain—its second largest import, after machinery...
...Given the analysis of Shmelev and Popov, it is doubtful that they will achieve half...
...It is the largest producer of oil and natural gas in the world...
...All three have abandoned central planning and nationalization and are turning to the market...
...The Soviet Union has gone through three succession crises that created political upheavals...
...The shape of the world economy, in particular the relations of the advanced industrial societies to the markets of tomorrow, depends upon the answer to that question...
Vol. 38 • January 1991 • No. 1
