Development under Communism: Russia & Eastern Europe Flashcards
Quote
“Power tends to corrupt; absolute power corrupts absolutely.” -Lord Acton (1887)
Important Data
Allen (2001): rise and decline of soviet economy
Millar (1970): collectivised agriculture
Davis (1992): defence portion of GDP
Relevant economic theory
- Centrally planned economy (vs market economy)
- Total Factor Productivity growth (portion of output unexplained by production inputs)
- Agricultural shift to industrialisation (implications)
- Trade specialisation (comparative advantage)
- Resource scarcity (recovery time, allocation to produce two goods bc factor of input)
- Supply and demand of consumer goods (allocative inefficiency, disequilibrium)
- Aggregate demand (lacking amount of consumers to even form one)
- Crowding out effect (rise in government aka public sector expenditure reduces/eliminates private sector spending)
What was the pre-requisite for adopting the Soviet model?
Initially Tsarism with market economy and agricultural being primary sector
1917: Bolshevik revolution (the end of the imperial rule and the eventual formation of Soviet Union).
1930 onwards: centralised state administrative system (implemented by Stalin)
Which countries used the Soviet model?
Soviet Union (USSR)
Central, eastern and south-eastern Europe (CESEE)
How did the First World War attribute to adoption of Soviet model?
- War and mobilisation strained economy, particularly unrestrained usage of grain and redistribution to armies and towns, caused civil unrest and civil war, eventually leading to the 1917 Bolshevik Revolution
- Soviet government replaced Tsarist regime and nationalised industries to the point where almost all industries were state-owned and economic acitivity was managed by the state (unofficial market economy continued to exist alongside it)
= facilitated growth of state involvement in economy
Post-WWII in Europe
Post-WWII: European governments pursued active and development-focused economic policies
State: active in war itself and post-war reconstruction
Nationalised strategic industries and heavily participated in resource allocation
WWII induced disintegration of economies and manpower loss that was larger in east Europe relative to west Europe
It was easier for the state to play a large role in the economy when the loss of human lives and population exchanges after war left private assets without owners nor the skills to operate them
1940s: CESEE countries had to reject Marshall aid from US and introduce a Stalinist command economy that had totalitarian governance due to pressure from USSR
What are the characteristics of Soviet economic policies?
1928:
1. Prevalence of Marxism
2. Economy is led and centrally planned by the state through a 5-year plan
3. Agricultural collectivisation:
Millar (1970):
peasant households coercively placed in collective farms where large portion of agricultural output with its price was controlled by State
4. Nationalisation of large-scale industries (transport, network, and energy sectors, financial institutions and agricutural collectivisation)
5. Wages & prices are fixed and state sets target to producers, resources and distribution of finished product
-> no market for inputs like land, capital or machinery bc state owned all factors of production
6. Prioritisation of industrial output growth rather than technological efficiency and product quality
7. Key consumer products and industrial inputs were rationed -> famine
What was the key goal of Soviet economy and how was it achieved?
Rapid industrialisation and agricultural collectivisation
Requires investment into industry but savings were limited
Central planning became a TOOL to mobilise resources
= achieved high rates of growth
but standards of living and economic wellbeing were affected by famine and political repression
= Soviet Union failed to achieve western standards and failed to achieve high consumption rates
BUT: comparing USSR with US is unfair, should be with countries of similar income like Germany
When did Soviet economy achieve impressive levels of economic growth?
1928-1970
Allen (2001) Figure 1: 2nd fastest-growing economies globally in 1928 with Japan being first
What attributed to Soviet economy’s impressive levels of economic growth?
- Investment concentration in heavy industry with combination of soft budget constraints simulated capital accumulation growth
Allen (1998b) Table 2:
1928: capital stock starting value @ 136.3
Implement investment strategy and replace hard-budget with soft-budget constraint
1939: capital stock becomes 258.7 (90% jump) - Large increase in employment after sectoral shift of labour from agriculture to industry
How was the USSR’s economic growth in 1970?
Catch-up growth was not fully realised
1970s: USSR experienced growth deceleration and economic slowdown
What were the causes of low total factor productivity growth in 1970s?
- 1960s Investment policy
Allen (2001): investment policy leaning towards modernising old manufacturing facilities rather than greenfield construction (new buildings on untouched land)
-> Capital-intensive production that couldn’t be compensated by the output increase
= negatively affected TFP growth - Resource depletion and self-sufficiency policy
Dependency on coal, oil and ferrous metals for the heavy industry caused large depletion in European part of Soviet Union, leading to mining activities getting shifted to Siberia.
= Allen (2001): The cost of resource exploitation was higher than cost of purchasing sources from the global market - Planning
Central planning on national-scale requires large amount of information and computational power
= Planning mistakes, input shortages and disequilibrium of supply and demand for intermediate goods were common
Managers resorted to bulk-holding inputs to reach targets set
Consumer goods shortage were handled through semi-legal, private petty trade and black markets - Defence spending
Large portion of government spending went here, leading to crowding out effect of private investment into economy’s civilian sector
R&D concentrated on military, not businesses
Davis (1992):
12% GDP went to defence spending in 1966-1970
16% in 1981-1985
To fund wars such as Czechoslovakia invasion (1968), Sino-Soviet border conflict (1969) and Soviet Afghan War (1979-1989) - Economic agents’ behaviour
Weak incentives for economic agents bc of fixed targets, no room for innovation nor improvement in production efficiency or product quality
Central planners (Principal) could only see output produced but not economic agents’ effort,
causing information asymmetry and unwillingness to reach targets - Changes in global economy and technologies
1970s onwards: global economy shifted from mass production to flexible manufacturing which required decentralisation of decision-making process and production of a range of goods that reflected consumer and capital markets’ demands
Soviet Union’s centralised planning was unsuitable for flexible manufacturing, it also lacked the consumer market volume to create demand large enough to be aggregate demand
What was the effect of the economic slowdown between 1970-1990?
Effect: 1980s: growth eventually stopped and the Soviet bloc fell behind economically
CESEE also experienced growth post-war and stagnated from 1970s
1989: end of socialist regimes in eastern Europe marked by the fall of Berlin Wall and led to CESEE transitioning towards a market economy
Transition economies had dramatic drop in GDP but since 1995 there’s sustained growth with some variance between countries (unexplained by starting economic levels)
Access to EU may have helped eastern European countries in adopting compatible market institutions with older members of EU, leading to one large market (though having a common currency reaped no clear benefits BUT i’d argue otherwise)
Why did the transition for CESEE from command economy to market economy not work out as well as the Golden Age of western Europe?
- The need to develop institutions such as secure property rights and rule of law regarding investment and innovation
- The absence of labour surplus in agriculture that could’ve been used to improve labour productivity (due to the concentration on industrialisation)
- Structural change that couldn’t converge with western Europe bc of lower level of investment
1970s onwards: CESEE had inefficient investment allocation and deceleration of structural modernisation
but was possible bc of capital stock in developed regions combined with labour shortage - Shift from mass production to flexible production
Incompatibe with centralised planning
Late 1970s: industrial output was uncompetitive and BOP had issues bc of oil shocks which CESEE imported more than western Europe
Hindered investment -> consumption stagnated
