Download EC225 Russian Industrialisation Part 9. The End of the Soviet Model

EC225 Russian Industrialisation
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Spring Term, 2003/04
Lecture 14. Perestroika to
Katastroika
This lecture considers the Soviet economy at the end of the
1980s; it describes how economic developments unfolded in
such a way that a difficult situation unfolded rapidly into a
catastrophe.
Part 9. The End of the
Soviet Model
The purpose of these lectures is to describe and analyse the
end of the Soviet model of state socialism in Europe. Why did
the Soviet economy collapse? Was the collapse inevitable and
predictable, or was it contingent or accidental? Where has it
left Russians and Russian society today?
Overview
Djankov, Simeon, Edward Glaeser, Rafael la Porta, Florencio
Lopez-de-Silanes, and Andrei Shleifer (2003). “The New
Comparative Economics.” Journal of Comparative
Economics 31(4), 595-619.
Ellman, Michael, and Vladimir Kontorovich, eds (1998). The
Destruction of the Soviet Economic System: an Insiders’
History, especially chapter 2 by Ellman and Kontorovich,
“What We Learn From the Insiders.”
Hanson, Philip (2003). The Rise and Fall of the Soviet
Economy: an Economic History of the USSR since 1945,
chapter 9.
Harrison, Mark (2002). “Coercion, Compliance, and the
Collapse of the Soviet Command Economy.” Economic
History Review 55(3).
Treml, Vladimir G., and Ellman, Michael (1993). “Debate:
Why Did the Soviet Economic System Collapse?” Radio
Free Europe/Radio Liberty Research Report, 2(23),
available in class.
1
After Brezhnev: a “Pre-Crisis
Situation”?
Table 1. Soviet Leaders, 1924 to 1991
Lenin
Stalin
Khrushchev
Brezhnev
Andropov
Chernenko
Gorbachev
Died January 1924
Died March 1953
Retired October 1964
Died November 1982
Died February 1984
Died March 1985
Resigned December 1991
Table 2. Soviet Growth Rates, 1950 to 1987
GDP per Industry Consumer Food
head
and con- durables products
struction
1950-64
1954-73
1973-82
1982-87
3.9
3.5
0.9
1.2
8.2
5.7
2.5
2.6
10.5
10.0
5.1
5.5
2.7
3.1
1.1
–1.8
Source: Harrison (2002).
2
The Gorbachev Factor
“Restructuring”: Perestroika, 1987
After the death of Brezhnev and two stopgap successors the
Politburo appointed its youngest member to bring the Soviet
system up to the end of the millenium. Gorbachev already had
a reputation as an innovative leader, and so he proved to be,
but he also displayed many traditional features. Most obvious
was his tendency to try to solve problems by all means
available, whether or not they were calculated to be consistent
and compatible with his central objectives. It was two years
before it became absolutely obvious even to the most sceptical
Cold Warrior that he was a new phenomenon in Soviet life.
§ “Acceleration”: uskorenie
§ “Openness”: glasnost’
§ “New thinking”
§ Limits to “new thinking”: full employment
Assault on Planning
Industrial reform, 1987: firms to be rewarded for using
capacity profitably; last attempt at a Chinese style transition to
a market economy?
§ Planners to limit output targets to share of firms' activity
declining from 70 to 30 per cent.
§ Firms to sell residual output on the market, without
guarantee of finding a seller, on self financing basis.
Immediate problems:
§ Ministerial officials supportive of acceleration and aiming
to fulfill ministerial plans failed to cut claims on firms' output
§ Firms continued to lack, or claimed to lack, spare capacity
to allocate to market output
§ Firms’ failure to find a market and cover costs remained
without penalty, i.e. not forced to lay off workers, or go
bankrupt
§ No differential reward to expanding market-oriented
activity; firms with potential for profitable market-oriented
activity continued to lack interest in making efforts required to
realise it.
Assault on the Ministries
Gorbachev identified the failures of the “era of stagnation”
with the accretion of ministerial power. Think of three levels
of power:
§ Government
§ Ministries
§ People as producers and consumers
Assault on the Party
From 1987 Gorbachev identified the party nomenklatura as
the major obstacle to reform. The system was opened up to
electoral competition, and in 1989 there were relatively free
elections in which the communist party suffered major losses
to democrats and Gorbachev supporters.
3
4
Unintended Financial Consequences
Foreign Policy
Table 2. Soviet Monetary Growth, 1971 to 1990: the Increase
in Cash in Circulation, Billion Rubles
Defensive Sufficiency
Gorbachev rejected the principle of Mutual Assured
Destruction through nuclear overkill. The forecast of a nuclear
winter and extermination of human life following a largescale
atomic exchange being popularised by Carl Sagan had a
devastating impact on the thinking of Soviet military and
political leaders. The Soviet Union moved to end the Cold
War through multilateral nuclear disarmament.
End of Empire
Gorbachev made it clear that the fate of each East European
satellite lay in its own hands. He took halting steps towards
greater independence for the Baltic states but here his
coalition began to disintegrate and he began to lose control of
police actions on the ground. In the rest of the USSR he tried
to hold the Union together and proposed a new Union treaty
with greater Republican rights and emphasising the voluntary
character of the Union. This issue ended in the conservatives’
putsch of August 1991, the emergence of El’tsyn as the
effective leader of democratic forces in Russia, and the
collapse of the Soviet Union, formalised at the end of 1991.
Gorbachev was completely sidelined and the communist party
temporarily banned. Perestroika had ended in catastrophe and
Gorbachev, much admired abroad, was despised at home for
his contradictory policies and indecisiveness.
Billion
rubles
1971-85
(annual average)
1986
1987
1988
1989
1990
Per cent of cash in circulation,
beginning of year
3.3
3.9
5.9
11.7
18.3
26.6
..
6
8
15
21
25
Source: Ellman and Kontorovich (1992), 121
Table 3. The USSR Budget Deficit, 1985 to 1989
1985
1986
1987
1988
1989
The financial deficit
The monetary deficit
Billion
rubles
Billion
rubles
15.3
47.4
54.4
82.6
82.9
Per cent of
GNP
2.0
5.9
6.6
9.4
9.0
13.9
45.5
52.5
80.6
80.8
Per cent of
GNP
1.8
5.7
6.4
9.2
8.7
Source: Ellma n and Kontorovich (1992), 114. The financial deficit is the gap between outlays and current tax
revenues (variant 3 in the source). The monetary deficit (variant 2 in the source) is that part of the financial
deficit not financed by sales of government bon ds to the public, i.e. the part that was monetised .
5
6
Lecture 15. Why Did the
Economy Collapse?
This lecture considers the underlying dynamics of the Soviet
economic collapse, analysing it as the outcome of a game of
strategy played by a dic tator and a producer.
Was the Soviet System Unstable?
Figure 1. Soviet and Former Soviet Real GDP per Head, 1928
to 1998
$US and 1990 prices, log scale
10000
1000
1928 1938 1948 1958 1968 1978 1988 1998
Source: Maddison (1995), 200, and (2000), 278.
7
Economic Evidence
§ Soviet productivity was rising until the collapse
§ The productivity trend was stable
§ From the 1920s to the 1980s GDP per head rose by a factor
of five, real consumption by less
§ Returns to accumulation diminished; diminished more
sharply than they should have by international standards;
more sharply still after the mid-1970s; but were not negative.
§ Until the mid-1970s the Soviet economy was catching up
but not yet overtaking the advanced capitalist countries
§ After the mid-1970s Soviet productivity growth ceased to
catch up; remained positive; did not fall to zero.
Reservoirs of Loyalty
§ Dissident opposition was always narrow.
§ Emigres revealed substantial loyalty to basic Soviet values.
§ Gorbachev-era surveys show that while significant
majorities favoured the concepts of perestroika and a market
economy, most continued to support state ownership of heavy
industry and state guarantees of basic incomes and jobs; they
did not want consequences of a market economy such as free
prices, unemployment, or rich people.
Summary
According to the evidence the Soviet political economy, while
not dynamic and not problem- free, was stable and had many
attributes of legitimacy. Still it collapsed. Why?
8
The Nature of Command
A High-Effort Equilibrium
The Command System
§ Dictator gave orders to producers
§ Output depended on producers’ effort
§ Distribution of output between producer and dictator
depended on the degree and character of coercion
§ Coercion was unrestrained by law (Gorbachev: “our state is
not yet law-governed”; Stalin: “the plan is the law”).
Coercion: Three Aspects
§ Mobilisation: the dictator extracted output from producers,
returned a basic wage to producers, and allocated the rest to
government objectives of national development and defence.
§ Monitoring : the dictator made producers account for inputs
and outputs through planning, statistics, and police work.
Otherwise, how could the dictator know he was getting it all?
If planners didn’t monitor, the producers would convert part
of the output into their personal income by consuming it
directly or diverting it to illegal markets. However,
monitoring was costly because it required planning,
accounting, statistics, and police work. Thus planners had to
choose: monitor and pay monitoring costs, or don’t monitor
but let producers steal a share of the rents.
§ Incentives. The dictator’s income depended crucially on
producers’ effort. The harder producers worked, the bigger the
dictator’s surplus. He had to invent artificial rewards and
punishments big enough to overcome the dislike of effort.
Then producers could choose whether to supply effort and
receive a reward, or withhold effort and pay a penalty.
Summary
The command system did not mean absence of choice.
Planners decided how much coercion, and producers decided
how much effort. If producers had had no choices, there
would have been no need for an incentive system.
A former Soviet official told the British journalist
We need to understand the
William Keegan: “We used to work in a centrally
logic of the dictator’s
controlled system where they told you what to
produce. Now they’ve stopped telling us what to
decisions, but the dictator
produce, so we don’t produce anything” (The
needs first to understand the Observer, 18 October, 1998).
logic to which producers will respond. This is because each
will act strategically, taking into account the other’s response.
Figure 2. The Producers’ Choice: Work or Shirk
9
Producers work hard
IF
Gain from working hard
IS GREATER THAN
Cost of working hard
IF work hard
AND monitoring is STRICT
THEN
IF work hard
AND monitoring is LAX
THEN
Gain reward for working hard
Avoid penalty for not working hard
Spend effort working hard
No rewards gained
No penalties avoided
Effort is spent working hard
Work hard IF
Reward gained + penalty avoided
ARE GREATER THAN
Cost of effort
DON'T work hard
ever
Figure 3. The Dictator’s Choice: Monitor or Let Shirk and
Steal
The dictator monitors
IF
Effort is high
AND
Effort is low
AND
Costs of monitoring and rewards
ARE LESS THAN
output stolen + future output lost
if don't monitor
Cost of monitoring
IS LESS THAN
output stolen
if don't monitor
10
Two Applications
What Happened under Perestroika?
Who triggered the collapse: producers or the dictator? In
theory there are two possibilities:
§ Producers could have withdrawn effort in protest at
inadequate incentives. Evidence?
§ Maybe the dictator responded to rising monitoring costs by
shutting down the monitoring system. Remember: when the
dictator doesn’t monitor, producers always choose low
effort. Evidence?
Summary
The dictator abandoned the command economy, but producers
signalled that the time had come.
Trends in Monitoring Costs
The stability of high output depends partly on monitoring
costs. Changes in production that make monitoring more
costly can narrow and eventually eliminate the scope for a
high-output equilibrium. When monitoring collapses, effort
will collapse too.
Figure 4. High Effort Equilibrium Conditions
Reward costs
Rents protected
reward maximum
Effort costs
reward minimum
Monitoring costs
Table 1. Party Membership, Share in Working Population
Early 1920s
1940
1956
1973
1986
<1
3
7
11
15
11
12
Conclusions
§ Command economies are not intrinsically unstable.
Stability is conditional and conditions for an equilibrium of
high effort based on high coercion can be identified. These
conditions may keep the income (but not necessarily
welfare) of all parties better off than if monitoring and
effort are allowed to collapse.
§ Second, the Soviet economy was stable until it collapsed.
Possibly adverse trends in monitoring costs ensured that
one day it would collapse. But eventual collapse could not
have been forecast on the basis of the command economy’s
intrinsic properties alone.
§ The dictator’s surrender triggered Soviet collapse; workers’
resistance provided a signal but did not force his hand.
Lecture 16. The Economy In
Transition
This lecture considers the Russian economy in transition. All
transitional economies experienced an initial fall in output, but
whereas the central and east European economies tended to
stabilise and recover quickly the economies of the former
Soviet Union tended to display much worse outcomes. In
Russia stabilisation took much longer and recovery has only
begun. The initial expectations of western economists seem to
have been let down by a missing factor required for low
market transaction costs: institutional quality or social capital.
The Collapse of Output
Figure 1. Real GDP Per Head: Transitional Economies, 1950
to 1991
Real GDP per head, dollars
10000
Czechoslovakia
Hungary
USSR
Poland
Bulgaria
Yugoslavia
Romania
1000
1950
1960
1970
1980
1990
Source: Maddison, A. (1995), Monitoring the world economy, 1820 -1992, appendix D
Factors in the collapse of output:
§ The end of coercion
§ Disintegration
§ Continuation of the soft budget constraint
13
14
Hyperinflationary Trends
Everywhere the collapse of the old system was associated
with a sharp rise in the price level, as price controls were
lifted. In some countries, mostly in the former Soviet Union,
this was translated into a hyperinflationary impulse, which
resulted in further destruction of the supply side.Causes of this
were the same as of the previous European hyperinflation of
the 1920s, brought about by the disintegration of empires and
autocratic regimes (German, Austro-Hungarian, Russia):
burgeoning demands for government expenditure, plus
collapse of revenue (economic activity and institutions). In
Russia following factors were involved:
§ Fiscal crisis
§ Monetisation of the deficit
§ Inflation expectations and flight from money
§ Effects on supply
15
Stabilisation, Restructuring, and
Institutions
At first western economists thought two things were required
but with experience a third thing was added.
§ Stabilisation: stopping the fall of output and rise of prices.
§ Restructuring : reorganising the allocation of resources so
as to satisfy social choices more efficiently.
Economists debated whether these could be done
simultaneously in a so-called “Big Bang”, or in sequence by
means of a strategy of “gradualism”.
§ Institutions : with hindsight we find that, given sufficient
institutional underpinning stabilisation and restructuring
could be done either simultaneously or in sequence; it
didn’t much matter which. On the other hand without
institutional foundations, neither could be done at all.
Why do institutions matter? Rising prices and falling output
meant a negative supply shock. The supply shock and
disintegration were caused by the destruction of the old
transaction mechanism and the failure to replace it with
another: in other words there was a sharp rise in transaction
costs.
In a well functioning exchange economy, transactions are
cheap because of three institutions:
§ rule of law: ownership rights are protected and contracts
are enforced.
§ trust: buyers and sellers share confidence in money and do
not have to know each other personally to trust that exchange
will be enforced.
§ competition: many sellers compete, information is
widespread, transactions are transparent.
16
Transition Achievements
Transition Achievements Measured
Against Institutional Possibilities
Figure 2
Figure 3. The Institutional Possibilities Frontier
Losses from Private Disorder
Real GDP, percent of 1989
120%
Private orderings
100%
Poland
Czech R.
80%
Independent judges
Slovak R.
Hungary
Romania
Bulgaria
60%
Kazakstan
Russia
Regulatory state
Ukraine
40%
20%
1989
1992
1995
IPF
1998
Source: EBRD (2000), Transition Report Update, May. Figures for 1999 are provisional and those for 2000 are
forecasts.
Transition in Central and Eastern Europe
What progress has been achieved across the region? For some
countries transition was painful but the pain is mostly in the
past and recovery is under way. Whether or not they adopted a
Big Bang or gradualism has made little difference to long run
outcomes.
Transition in Russia
The Russian inflation followed four phases.
§ Inflation
§ Stabilisation without restructuring
§ Banking crisis
§ Reintegration of banking and industry
17
State
ownership
Losses from Dictatorship
Source: Djankov et al. (2003), 599.
The position of the IPF depends on civic capital which reflects
the ease with which a given society achieves cooperation
among its members. Example: the transaction costs associated
with raising taxes to provide public goods.
18
Figure 4. Institutional Possibilities and Transition
Losses from Private Disorder
• Russia, 1995
CEE, •
1995
•
• Russia, 1990
CEE, 1990
Losses from Dictatorship
Source: Djankov et al. (2003), 608.
Djankov et al. suggest that the IPF may become flatter as a
result of economic development. Implications:
They conclude that the outcomes of reform in a given
country should be measured against its institutional
possibilities, not against an abstract model of a market
economy. Implications:
19