Vladimir Putin described the collapse of the Soviet Union as one of the “biggest geopolitical disasters of the 21st century” (Heywood,2913,p,43). Although the collapse of the Soviet Union was welcomed by the west as the end of communist propaganda, it, however, changed global economic, political and geopolitical dynamics beyond recognition. On the economic front, many intellectuals have described the economic paradigm of the Soviet Union which was a fundamentally command-based economy riddled with internal economic inadequacies proved to be its Achilles heel which ultimately led to its downfall. For much of its existence, the Soviet Union rivalled the USA in, economic, political and military power. While the centrally planned nature of the Soviet Union was diametrically opposite to the free market liberalism of Western economies.
However, after growth stagnated 1985, wide-ranging reforms were implemented to restructure the crippling economy, the Soviet Union eventually and inevitably collapsed along with its promise of an alternative to Western free-market capitalism. Where centralized planning helped accelerate its mid-century economic growth the Soviet Union’s gradual reform process to decentralize economic power ultimately exposed and undermined its economic structure.(Heywood,2013)
Firstly, this essay will be split into two parts, the first being the external economic reason for the collapse of the Soviet Union. They include events such as declining oil prices, Americas “second cold war” (Regan doctrine), the prolonged Soviet-Afghan war and the increasing economic globalisation. These external events had collectively contributed to the collapse, but oil prices were instrumental in damaging the Soviet economy. Secondly, this essay will explore the internal structure and policy decisions made primarily by Gorbachev which contributed to the collapse also. Fixed pricing mechanism and its disadvantages, perestroika and glasnost. These internal policies were fundamental to reducing the Soviet economy. The essay will conclude by arguing that the collapse was inevitable, due to economic mismanagement, slow decision making and adverse external events which brought the Soviet empire to its knees.
Oil prices expose soviet economic and structural fragilities
In 1986 the Soviet Union possessed the same amount of human and natural resources that it had in the 10 years prior. The standard of living, on the other hand, was much lower than most of Eastern Europe let alone the developed western half. There were chronic shortages of food, long ques in stores and overall acute poverty happened to be endemic. The Soviet Union had dealt with far worse calamities and dealt with them with them without compromising the sates firm grip on the economic sphere, much less surrender it (Nitsch,1995). There seem to be no key parameter of the economic performance of the Soviet Union prior to 1985, to indicate a rapidly approaching disaster. From the years 1980 to 1985 the states GDP growth, although slowing steadily compared to the 60s and 70s had still averaged 1.9% annually. This growth trend lackadaisical at most but not disastrous was a constant theme right until 1989. The budget deficit had amounted to less than 2% of total GDP in 1985. However, it was rising sharply and reached over 9% of GDP in 1989, a figure some economist would say is manageable. But for the Soviet administration and Gorbachev, their lack of concern for this figure meant this was the beginning of the end.(Khan,2011)
The economic and financial declination of the Soviet Union was initiated by the plummeting oil prices which were caused by the 1986 crash of global commodity prices. Significantly for the Soviet Union the enormous 70% drop in oil prices were detrimental to state budget and heavily affected their exports (Connolly,2013) .The sudden drop in oil and gas prices from $66 a barrel in 1980 to a poor $20 a barrel in 1986 certainly was a heavy burden to bear for the Soviet economy. However, if adjusted for inflation, oil prices were more expensive in the global markets in 1986 than in 1972, and only a third lower than from throughout the 1970s.(Khan,2011) Interestingly, Soviet incomes had risen 2% in 1985, also if adjusted t inflation wages had increased by an average of 7% for five years. On the macroeconomic level, the correlation between the price of oil and the performance of the Soviet economy was all too clear to see. when Oil revenue declined $260 billion in 1982 to approximately $75 billion in the fiery quarter of 1986. This meant that the government had to increase in borrowing, selling off key assets such as gold and sovereign debt was also higher. The uncertainty regarding public expenditure and finances meant that the economy was exposed by its inherent and underlying flaws which were its over-dependence upon the export revenue of natural resources(Khan,2011)
This systematic and structural flaw created a trade imbalance, subsequently raising the budget deficit. Gorbachev was a victim of adverse circumstance because of the underlying and chronic deficiencies of the Soviet economy which went unaddressed by the oil price increase of the 70s and 1985. Gorbachev recognised this problem, hence his radical reform to diversity and open the economy for investment and enterprise. Not least so because of growing pressure of economic globalisation forcing greater international competition. Taking the example of economies such as Venezuela and Cuba it can be said that this overreliance on natural resources exports was not unique to the Soviet Union and not a terminal issue. It was possible for Soviets to hold out and struggle until oil prices boomed again(Nitsch,2001). The stagnation was clear and worrisome, But as professor Peter Rutland highlighted, “Chronic ailments, after all, are not necessarily fatal.” Even the leading student of the revolution’s economic causes, Åslund, believes that from 1985 to 1988, the energy situation “was not at all dramatic.” Meaning the situation could have been controlled but Gorbachev wasn’t up to the task, his reforms took priority(Aslund,1991).
America, Afghanistan and Economic Globalization
On the International level, the Soviet Union was finding it difficult to finance the burden of the cold war. The Regan doctrine was instrumental in facilitating the demise of the Soviet Union. Meanwhile, the invasion of Afghanistan cannot go unnoticed either even though it wasn’t a big of a reason as the plummeting oil prices it nonetheless took a financial toll on the Soviet finances. The Reagan doctrine was set in motion to bring the Soviet Union into an arms race(Heywood,2013). The Americans realising that at the time Gorbachev took office the Soviet economy was vulnerable. A major instrument for piling pressure on the Soviet Union was Ronald Reagan’s huge defence spending build-up, which had increased defence spending from “$136 billion in 1980 to $253 billion in 1989”.This drastically raised American defence spending to a massive 7% of GDP, dramatically increasing their own federal deficit (Durraj,2010,p36). Yet in its attempt to match the American defence build-up, the Soviet Union was coerced in the early 1980s to raise their share of defence spending from 21 percent to 27 percent of GDP, while it had frozen the production of civilian goods at 1980 levels which led to more shortages and civilians had to look for imports of international goods to meet demand which was costlier due to international import duty tax. (Durraj,2010)
America also debilitated the Soviet Union through economic policies and actions. scholars claim that the USA brought about the fall of the Soviet Union or somewhat weakened it by the fact that Jimmy Carter’s grain embargo, which had produced serious food shortages in the Soviet Union, in direct response to the Afghan invasion. On the other hand, in 1984 Reagan was able to reduce the flow of Western technology and goods to the Soviet Union, also working with western European states limited Soviet natural gas and oil exports to Western Europe. The Soviets losing their most lucrative market (Scarborough,2015). Another effective way in which his economic policies debilitated the Soviet Union was by orchestrating the drastic fall in the oil prices on the global market in the 1980s, therefore denying the Soviet Union large inflows of hard currency. This move was carried out by American and its close allies such as Saudi Arabia who had increased oil production that it flooded the market with cheap oil.(scarbrough,2015).
The Afghan war was also a costly endeavour which the Reagan administration took the opportunity of and provided military and economic support for the mujahedeen (holy warriors) that were battling against the Soviet occupation in Afghanistan. Reagan was determined to land a hammer blow to the Soviets and make Afghanistan, Soviet Union’s Vietnam (Heywood,2013). Consequently, in 1986 the US administration provided the mujahedeen with the highly effective portable surface-to-air Stinger missiles system, which proved devastatingly effective in increasing Soviet air losses especially helicopters, approximately 333 helicopters were destroyed half of those using the stinger missiles and leaving Moscow with an enormous bill which it could not afford to pay. To put things into perspective, the United States spent about $1 billion per year in military and economic aid to the mujahideen; it cost the Soviets nearly eight times as much, for over a decade. This highlights the successful policy of the US to strangle the Soviets in economic submission.
The idea of economic Globalisation also contributed adversely to the Soviet economy. What it did was widen the already high economic disparity between east and west, in terms of living standards and per capita income levels. While the progressive internalisation of trade and investment facilitated a technological and high economic development in the Western world from 1970 onwards, the Soviet Unions exclusion from the lucrative global markets, ensured that the Soviet-dominated east would suffer from economic stagnation. In addition to this, Soviet manufactured products except for military equipment, were sub-par compared to western goods and were nowhere near as competitive in global sales. The Soviets could not match their domestic demand.
The fixed pricing mechanism
Moving on to the Internal economic inadequacies of the Soviet Union the principle of fixed pricing.For a long time in the Soviet union’s history, central planning was deemed the cornerstone of its fiscal and economic policy. Where normally, prices are issued where the supply and demand for services and goods reach certain equilibrium, such that prices and quantity are inseparably linked (Rosefields,1992) The Soviet Union developed an alternative in which prices and quantities are issued by two very distinct arms of the government bureaucracy. Many Soviet price strategies were developed by state planning authorities, it made sense that the role of the Soviet pricing system was a purpose for something greater than simply to equilibrate markets, furthermore, the absence of traditional market forces of supply was very risky. On the other hand, in a country the size of the Soviet Union, underpinned by such a complex economic and political structure, eliminating every facet of a market system proved to be a difficult task. This inevitably led to widespread repressed inflation because the natural rise in prices was slowed or even stopped by the administrative price control. Resulting in high levels of liquidity in consumer’s hands.(Rosefields,1992)
The concept of the second economy in a way soaked up some of the pressures of the excessive inflationary strain upon the economy but it opened a black-market economy were consumers found it more affordable to buy goods. The state turned a blind eye to this because it realised the ideologically defeating fixed price system Gosplan had implemented. The ill thought out policy had created another dilemma which was the shortage economy. To put simply supply could not meet demand, this was endemic throughout the country. Gosplan attempted manual balancing, however, disequilibria persisted. (Bornstein,1975) To understand the sheer scale of the problem of imbalance. For example, ‘In 1985 approximately 100,000 state-owned trucks and vehicles were unusable because there was an insufficient supply of tyres. The communist party favoured a controlled and constant price level to rid itself of inflation by the opposite occurred and inflation hit 14% in 1985 from the 9% in 1980.(Heywood,2013,p48)
Gorbachev Reforms: The final nail in the coffin
Internally within the Soviet Union Gorbachev was preoccupied with pushing through an alternative economic and political model to find radical and quick solutions to his countries problems. Some have argued that although the structural weaknesses may explain why communism has a susceptibility to collapse they do little to explain either it swiftness or timing. But how did economic and political frustrations accumulate over time spill over and bring the regime to its knees? The most plausible answer lies within specific reforms undertaken by Mikhail Gorbachev. He had a direct link to damaging the stability of the Union, however, it was inadvertent rather than intentional. The reforms had three fundamental aspects, the first one being based on the slogan perestroika (Restructuring), involved elements of private ownership and market competition to rectify the long-term economic deficiencies of Soviet central planning(Waller,1991). Drawing on from previous endeavours from market socialism specifically in Yugoslavia. However, the economic restructuring under Gorbachev led to catastrophic consequences: in effect, it replaced inefficient but slow functioning planned economy with one that hardly functioned at all. (Waller,1991). The second part of his reform process had involved the dismantling of limitations to the expression of opinion and political and economic debate. This was referred to as Glasnost (openness). However, glasnost simply provided a greater voice for political to Gorbachev’s opponents, the hard-line communists who were against any economic restructuring reforms that would be a threat to the power of the party-state elite and its privileges, in addition to radical elements who wished to break the apparatus of the central planning and communist rule. Gorbachev was becomingly increasingly isolated. The third major and crucial reform was the abandonment of the Brezhnev doctrine, in the attempt to form a new and consolidated relationship with the west. This doctrine was replaced by the Sinatra doctrine, which allowed the eastern European states to “do it their own way”. The meant that the Soviets and Gorbachev would refuse to intervene in after continuous communist collapsed across eastern Europe, the catalyst for this being the fall of the Berlin wall.(waller,1991)
The mistake during the early years of Mikhail Gorbachev’s leadership was the unrealistic pursuit of his investment plan. While ignoring the imbalance caused by the contentious alcohol campaign . It was understood that the declining of growth would need an incremental rise in gross fixed investment. The five-year plan of Uskorenie (acceleration) proved to be overly ambitious and difficult to achieve (Holden,1992). In general, the plan aimed to increase investment and innovation, especially in engineering, science and R&d. this, on the other hand, ignored the slowdown in growth rate of the economy that it had been experiencing. The target growth rates set for different sectors of the economy such as agriculture were set far higher than they were in the eleventh five-year plan. Gorbachev was faced with mounting pressure to deliver results and prioritising high economic growth, the rise in the consumption brought about the prospect of civil unrest due to the acute shortages of food and goods, in addition to this the swelling military budget needed a boost also to keep up in the cold war arms race. Gorbachev was not coerced into pursuing such an acceleration policy, he did it out of choice a risky one at that. His decision was later found to be clear that it had bought about dangerously high fiscal imbalance in 1989, which led him to abandon the policy. (Holden,1992)
The second part of Gorbachev’s reform process further deteriorated the inflationary pressure and increased fiscal imbalance. Primarily the Law on cooperatives and Law on state enterprises. The Law on State Enterprises resulted in quick wage increases as businesses fought for scarce labour (Legro,1994). Furthermore, the money supply from the financially powerfully enterprise accounts added greater inflationary pressure. By limiting the taxes paid by big enterprises, the state further reduced their budgetary position. Also, a rapid increase in welfare and social security payments added further strain on government finances . In hindsight, this law was detrimental because firstly its implementation was ill thought out and was still operating in a command economy which didn’t really have enough free-market reforms to create higher capital and State interference was much too prominent (Legro.1994).
Another reform that was adding to the fiscal imbalance was the Law on cooperatives. It was the most extreme reform implemented by Gorbachev because cooperatives now had autonomy to self-manage, finance themselves and in effect removed from the planning system. (Aslund,1991) This had allowed a rise in new cooperatives to be established at a high rate. The number of small and medium-size business such as supermarkets, restaurants, cafes etc. allowed a greater choice to the population. With many businesses now earning much greater profits this sparked some public protest however it demonstrated the economic efficiency of free market reforms(Aslund,1991). However, not all were effective the privatised banks which were operating in a distorted economic environment which lacked valid and reliable financial information and little regulation to control risk were a disaster waiting to happen. For the wealthy elite who established these banks simply to reinvest money from businesses, they were already attached to. With an incremental rise in the number of commercial banks providing cheap credit in a sector which lacked any regulatory controls was inevitably going to bring about the prospect of server hyperinflation to an already struggling economy (Aslund,1991)
The combined effect of the policy mishaps shown above created a major shortfall in the government finances and an increase in both repressed and open inflation. The deficit worsened in 1988 and the Soviet government had been battling with budget deficits for many years by ironically printing out even more money (Marko,1995). The dangerous inflationary budget continued to deteriorate even under the financial supervision of Gorbachev whose gross mismanagement by implementing the his new laws, in addition to the highly volatile and unregulated banking system as well as the government being adamant on maintain low state interest rates, had clearly made the inflationary pressure wore resulting in mass public discount and a dire economic situation for state enterprises. This created a vicious circle which could only be rectified by urgent economic reform, but this was hindered by the threat of more open hyperinflation. (Marko,1995)
Having explored a wide range of internal and external economic rationale of how low oil prices debilitated soviet state finances and exposed the structural flaws within economy, secondly the instrumental role of America in facilitating the downfall of the society economy through militaristic and economic means and once and for all finish its cold war rival and played a crucial part in bring it down, however the internal situation of price control mechanism was also hindering growth and open up a plethora of issues such as the shortage economy which hindered productivity. Finally, Gorbachev played a key role in being a catalyst in the downfall of the union through the implementation of perestroika which the centrally planned system could not cope with so suddenly. Overall, the two fundamental economic reasons for the collapses were low oil prices and Gorbachev’s Economic reforms after these events had played out the collapse was indeed inevitable.