Economy

Soviet economy

Is it true that the Soviet Union lost out to the West because the Soviet economy was inferior to free market capitalism? A dysfunctional economic system, government planning of the economy and crashing oil prices are the three most commonly offered explanations for the Soviet demise. But is it really true? Today, many economists are starting to believe that the Soviet Union could have gone on with its economic model for decades ahead, and its eventual disintegration was not the result of an economic failure, but rather the consequence of certain political decisions taken by senior Soviet leaders.

The Soviet economic model has a lot of advocates these days. Although it admittedly could offer the consumer only a sparse variety of basic goods, it nevertheless provided each and every Soviet citizen with a comprehensive package of social entitlements including free universal healthcare and education. In the two decades since the collapse of the USSR the people in Russia and other post–Soviet states have had ample opportunity to compare the ups and downsides between the past Soviet model and the reformed, “free–market” economy. The overwhelming majority say they have not benefited from the change.

Construction of the mining and industrial city of
Magnitogorsk, 1930 (Image from wikia.com)

The reality is that the Soviet economy was completely destroyed with not a single shot fired. What are the free–market businesses that have come to replace Russia´s once robust military production industry and other industrial heavyweights of the Soviet economy? How come Russia´s workers have been unable to assume the management of their own industrial enterprises? Why has Russia failed to preserve its Soviet benefits while embracing the free market, something that China and other Asian socialist nations have performed masterfully?

The Soviet model is often described as a government–planned economy, which implies that it operated under a rigid long–term development plan imposed by the government rather than went with the “natural” developments of a free market. This is an illusion.

Following World War Two, the Soviet economy was actively involved in international markets. It consisted of two major segments: one of them focused on production for domestic consumption and trade with fellow Socialist nations, while the other one catered to the capitalist global market, including commodity, industrial products and financial markets. It was this export–oriented segment that gradually lured the Soviet economy into utter dependency upon the global market and eventually made it hostage to the capitalist system.

Soviet–era plant producing consumer goods (Image
from bse.sci–lib.com)

Soviet–era oil rig (Image from forexaw.com)

How the Soviet economy was dragged into the global market

The ambivalent focus of the Soviet economy sprang from World War Two, particularly the wartime cooperation between the USSR, the United States and Great Britain. Integration into the global market started with similarly insignificant developments.

Aircraft ready to be shipped to the
USSR (Image from rusfan.ru)

Most of the USSR´s non–military industries effectively ceased to exist during the war, their production facilities either demolished by German air strikes or evacuated by the government and subsequently converted to military purposes. The Soviet Union received enormous amounts of supplies ranging from motor vehicles and radio sets to canned food from the United States under the Lend–Lease program, amounting to a whopping $11 billion–worth of materiel on lease or loan.

Lend–Lease has long been the subject of controversy, but that has little to do with economics. The West believes the Soviet Union would not have won the war against Germany if not for allied aid, whereas Soviet historians estimate the overall value of aid at 4 percent of the Soviet industries´ aggregate wartime output, which should mean Russia did not really owe its great victory to Lend–Lease.

Either way, Lend–Lease was the first time ever since the Revolution of 1917 that the Soviet economy would maintain a significant connection to Western markets.

Samples of canned food supplied to the Soviet
Union during the war years under the Lend–Lease
program exhibited at the Central Armed Forces
Museum (Image from englishrussia.com)

Although Lend–Lease was essentially a loan on soft conditions intended to facilitate Russia´s tremendous war effort, it was nonetheless far from a non–refundable subsidy. The United States specified that any non–military materiel provided under Lend–Lease and remaining intact by the end of the war was to be returned to the US. This applied to rail transport, power generators, steam boats, trucks and other American–made hardware used by the Soviets by 2 September 1945. Russia has not fully repaid the Lend–Lease loan to this day.

This wartime cooperation with the Allies initially got the Soviet Union tightly engaged in the global capitalist

economy. In many ways, this was involvement out of necessity, as the United States had gained a decisive edge by the time in terms of industrial output, food production, advanced technology and state–of–the–art production facilities.

A deepening dependency

As the Soviet Union was struggling to rebuild its economy from wartime destruction, the United States wisely used their abundant revenues from wartime arms sales to promote advanced technical research. It was also in this postwar period that the US dollar became the world´s major reserve currency, while the USSR was still busy recovering from the strain of war.

Building up the nation´s gold and foreign currency reserves became a priority for the Soviet economy. But it was this very demand by the USSR that provided the West with a powerful tool to influence the Soviet economy and eventually affect its inner political situation. It also put the Kremlin in a rather ambiguous position, as it had to do business with capitalist economies in a globalized market while preaching ideological opposition between the Communist system and the capitalist system.

Soviet leader Nikita Khrushchev inspects
American–made kitchenware at the American
National Exhibition in Moscow (Image from
www.wired.com)

The beginning of the Cold War in 1946, the nuclear arms race, the Cuban Missile Crisis of 1962, the Détente of the 1970s and the US–Soviet arms control negotiations, President Ronald Reagan´s proclaimed “crusade” against “the evil empire”, Reagan´s “Star Wars” hoax and Gorbachev´s Perestroika were all meant to gauge and further strengthen Russia´s dependency upon the West.

Some present–day analysts consider the American strategy a major success in hindsight, while others believe the Soviet economy was not really dependent upon its own opponents in any vital aspects. Nevertheless, ever since Nikita Khrushchev´s time in office, one of the official mottos dominating the Soviet economy was “Catch up and overtake America.” Such

a mission statement was one of the factors that sustained the notion in Soviet public opinion that the USSR was backward and lagging behind the United States and its allies.

USSR attempts to break loose from Western markets

The Soviet Union made a big attempt at breaking free from its dependency on international trade in the 1950s—1960s. To this end, it sought to expand its own exports markets, going primarily after prospective customers for Soviet–made military hardware. In essence, this constituted a major change in paradigm for the Soviet Union, from spreading Socialism across the world to economic expansion and market penetration.

This tacit shift in strategy did not escape Ernesto “Che” Guevara, who exposed the new Soviet policy to scathing criticism in his Algiers speech in 1965, denouncing it as “imperialist.” The same trend was one of the reasons behind the straining relations and the eventual split between Khrushchev´s USSR and Mao Zedong´s China in the late 1960s.

The Soviet Union was increasingly coming off as a hypocritical power that was supporting national liberation movements across Asia, Africa and Latin America while at the same time competing with the West over arms sales markets and customers. Instead of being a role model for a new, socialist type of state, the USSR was acting more and more like a self–serving capitalist economy, only much less efficient and less flexible.

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