ECONOMIC GROWTH, SOVIET

During the first decade of Soviet rule and up to 1929, the Soviet economy struggled to recover from the damages of World War I, the Revolution, and the civil war, and then to find its way through policy zigzags of the young and inexperienced Soviet leadership. It is commonly accepted that during this decade of the 1920s the Soviet economy more or less managed to regain the level of national product of 1913, the last prewar year. In 1929 the Soviet Union embarked upon a strategy of rapid economic growth focused mainly on industrialization. The main institutional instrument used in order to implement growth was the Five-Year Plan, the key economic tool of the centrally planned system.

The record of Soviet growth since 1928 and the main factors that contributed to it are presented in Table 1. The data reflect mostly Western estimates, based partly on Soviet official data following adjustments to conform to Western definitions and methodology as well as to accuracy. One major methodological difference related to the national product was that, following Marxist teaching, the concept of Net National Product (NNP), the main Soviet aggregate measure for national income, did not include the value of most services, considered nonproductive.

One of the main goals of Soviet communist leadership was rapid economic growth that would equal and eventually surpass the West. The primary aim was to demonstrate the superiority of the communist economic system and growth strategy, based on the teachings of Marx and Lenin, over capitalism. The goal was needed also in order to build a sufficient military power base to avert the perceived military threat of the capitalist world in general, initially that of Nazi Germany. Indeed the rates of growth of Soviet GNP were initially, during the 1930s and the first Five-Year Plans, exceptionally high by international comparisons for that period; this made the Soviet model a showcase for imitation to many developing countries that became independent in the aftermath of World WarII. While the Soviet growth rates were still high during the 1950s and 1960s, they were already matched or exceeded at that time by countries such as Germany and Japan, as well as a number of developing countries. The decade of the 1940s, with the devastation of World War II, witnessed stagnation at first and slow growth during the reconstruction efforts later. Growth somewhat accelerated in the aftermath of the death of Josef Stalin, but from the 1960s onward the rates of economic growth began to fall, declining continuously throughout the rest of the Soviet period down to near zero just before the dissolution of the USSR at the end of 1991. Various efforts at economic reform in order to reverse this trend largely failed. As a result, the entire postwar growth record declined further by international comparisons to below that of most groups of developed as well as developing countries, especially a number of East Asian and Latin American countries. While many developed market economies suffered from business cycles and oscillations in growth rates, they experienced sustained economic growth in the long run. Per contra the fall in Soviet growth rates proved to be terminal. Thus, although during the early decades the Soviet economy grew fast enough in order to catch up and narrow the gap with the developed countries, during its last decades it fell behind and the gap widened. The growth record with respect to GNP per capita, followed a similar trend of high rates of growth initially, but declined in later decades (Table 1). While in 1928 the Soviet level of GDP per capita stood around 20 percent of that of the United States, it reached about 30 percent in 1990, probably the best record in terms of comparisons with other Western economies. Throughout the period, the share of private consumption in GNP was lower than in most other nonsocialist countries. Consumption levels did go up significantly from very low levels during the two decades or so following Stalin's death. Also, throughout most of the period, there were relatively high public expenditures of education and health services, which helped to raise the comparative level of welfare and the quality of life. The failure of the communist regime to achieve sustained economic growth on a converging path with developed countries is no doubt the most important reason for the fall of the economy.

Table 1.

The growth record of the Soviet Union—its initial success and eventual failure—is a joint outcome of the selected growth strategy and the system of central planning, including almost full state ownership of the means of production. The centrally planned system was more effective at the start in mobilizing all needed resources, and directing them to the goals of industrialization and growth. The system is also characterized by using commands instead of incentives and decentralized initiatives: emphasis on fulfillment of quantitative production targets rather than on improvements in quality, technology, and efficiency, routine expansion instead of creativity, and rigidity and "more of the same" instead of flexibility—a very high cost for any change. Some of the above characteristics, while advantageous at the start, turned out to be obstacles when the economy developed and became more complex. Other features, such as difficulties in creating indigenous technological innovations, were less harmful initially, when technology could be transferred from abroad, but more of a hindrance later when more domestic efforts were needed.

The Soviet communist growth strategy, following Marxian doctrine, was based on high rates of investment and a rapid buildup of capital stock. High rates of investment come at the expense of lower shares of consumption, sacrificed at the beginning in exchange for hopes of abundance in the future. Central planning, state ownership, and the dictatorship of the proletariat were the necessary tools needed to impose such sacrifices. Next the regime mobilized the maximum possible number of able-bodied men and women to the labor force. A model of growth based mostly on maximum mobilization of capital and labor is called "extensive." The increase in output is achieved mainly through the increase in the amounts of inputs. Under an alternative "intensive" model, most of the increase in output is achieved through improvements in the utilization of a given amount of inputs. These include technological changes and improvements in management, organization, and networks, termed total factor productivity (TFP). The mobilization of capital in the Soviet growth model assumed that the newly installed equipment would embody also the most advanced technology. While this was the case to some extent during the first decade, with heavy borrowing of technology from abroad, the failure to generate indigenous civilian technology, as well as the mounting inefficiencies of central planning, diminished, eliminated, and turned negative the intensive contribution (TFP) to Soviet growth. Only during the 1930s TFP was significant and accounted for about 30 percent of total growth. Soviet leaders and economists were aware of the efficiency failure and tried to reverse it through many reforms but to no avail.

The problem with extensive growth is that the ability to mobilize more labor and capital is being exhausted over time; furthermore, in both cases early efforts to mobilize more resources backfire by reducing their availability in the future. Labor was mobilized from the start, by moving millions of people from farms to the cities, by obliging all able-bodied, especially women, to join the active labor force, and by limiting the number of people employed in services, forcing families to self-supply services during after-work hours. Very low wages compelled all adult members of the family to seek work. Table 1 illustrates that until the 1980s employment grew by a higher rate than the population, indicating a growing rate of labor force participation, achieving at the time one of the highest rates, especially for women, in the world. However, the table also shows that over time the rate of growth of employment declined, from nearly 4 percent per year from 1928 to 1940 to almost zero during the late 1980s. In the Soviet Union, birthrates declined far beyond the normal rates accompanying modernization everywhere. This was due to the heavy pressure on women to work outside the household, provide services in off-work hours, and raise children in small, densely inhabited, and poorly equipped apartments. In this way larger labor inputs early on resulted in fewer additions to the labor force in later years, thereby contributing to declining growth. During the 1980s employment increased at even a slower rate than the population.

A similar process affected capital accumulation. Because a labor force grows naturally by modest rates, the main vehicle of growth is capital (equipment and construction). This is especially true if the rate of efficiency growth is modest or near zero, as was the case most of the time in the USSR. It follows that the share of investment out of the national product must increase over time in order to assure a steady growth rate of the capital stock. An increased share of investment leaves less for improvements in consumption, in the supply of social services, and for defense. Indeed the share of (gross) investment increased in the Soviet Union to more than 30 percent of GNP, and this kept down the rate of growth of the capital stock and thus of output. Furthermore, with the earlier drying up of increments of labor, Soviet growth was driven for a time, still extensively, by capital alone. This in turn forced the system to always substitute capital for labor, a difficult task by itself, more so when no new technology is offered. The outcome was further decline in productivity of capital and of growth.

The early mobilization of labor and capital inputs at the cost of their future decline is part of a general policy of haste by the Soviet leadership, which was frustrated by declining growth, the inability to provide for defense and other needs, and the failure of partial reforms. In addition to the above, there were also overuses of natural resources, over-pumping of oil at the expense of future output, neglect of maintenance of infrastructure and of the capital stock, and imposition of taut plans that forced producers to cut corners and neglect longer-term considerations. Initally this policy of haste produced some incremental growth but at a cost of lower growth later. The results of the policy of haste spilled over to the transition period in the form of major obstacles for renewed economic growth.

The heavy military burden was another significant factor adversely affecting Soviet growth. Early on the Soviet Union was threatened and then attacked by Germany, and following World War II engaged in the Cold War. Throughout the entire period it had to match the military capabilities of larger and more advanced economies, hence to set aside a higher share of its output for defense. During the Soviet system's last decades this share grew to around 15 percent of GNP. This amount was unprecedented in peacetime. The real defense burden was even heavier than shown by the figures because the defense effort forced the leaders to give priority to defense, in both routine production and in technological efforts, thereby disrupting civilian production and depriving it of significant technological innovation.

Additional causes of declining growth over time were the deterioration of work motivation and discipline, increasing corruption and illegal activities, declining improvements in the standard of living, and weakening legitimization of the regime. Collective agriculture, the cornerstone of the communist system, became the millstone around its neck.

See also: economic growth, extensive; economic growth, intensive; five-year plans; industrialization, rapid; marxism; net material product

bibliography

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Gur Ofer