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The rise and decline of the Soviet economy

The rise and decline of the Soviet economyRobert C. AllenDepartment of Economics, University of reasons for the rapid growth of the Soviet Union before roughly 1970 and forits subsequent growth slowdown are analysed. The concentration of investment on heavyindustry and soft budget constraints explain most of the growth in the 1930s. The growthslowdown was due to disastrous investment decisions following the elimination of surpluslabour and the diversion of research and development resources to the military rather thanthe failure of firms to carry out plans or diminishing returns to et d cadence de l conomie sovi analyse les raisons de la croissancerapide de l Union Sovi tique avant 1970 et du ralentissement de sa croissance dans l apr semble que la concentration de l investissement dans l industrie lourde et des contraintesbudg taires relativement douces expliquent le gros de la croissance dans les ann es 1930.

Many scholars of the Soviet Union would disagree in judging Soviet economic performance a ‘success’ for three reasons: ~1! political repression and the famine mortality following the collectivization of agriculture,~2! negligible growth in con-sumption, and ~3! the failure of the Soviet Union to achieve a western standard of living.

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Transcription of The rise and decline of the Soviet economy

1 The rise and decline of the Soviet economyRobert C. AllenDepartment of Economics, University of reasons for the rapid growth of the Soviet Union before roughly 1970 and forits subsequent growth slowdown are analysed. The concentration of investment on heavyindustry and soft budget constraints explain most of the growth in the 1930s. The growthslowdown was due to disastrous investment decisions following the elimination of surpluslabour and the diversion of research and development resources to the military rather thanthe failure of firms to carry out plans or diminishing returns to et d cadence de l conomie sovi analyse les raisons de la croissancerapide de l Union Sovi tique avant 1970 et du ralentissement de sa croissance dans l apr semble que la concentration de l investissement dans l industrie lourde et des contraintesbudg taires relativement douces expliquent le gros de la croissance dans les ann es 1930.

2 Leralentissement de la croissance est attribuable des d cisions d investissement d sastreuses la suite de l limination du surplus de travail et du d tournement des ressources de recher-che et d veloppement vers le secteur militaire, bien davantage qu l chec des entreprisesdans la r alisation des plans ou aux rendements d croissants sur le civilisation@has#much to learn from Russia and Russia much to learn fromwestern Innis1In 1945 Harold Innis visited Moscow to attend the 220thanniversary of the Soviet ~formerly Russian!Academy of Sciences. He kept a diary of his observations inwhich he warned against the danger of Russia and the West each becoming fanat-ical and talking about the merits and demerits of the capitalist system.

3 For Innis,Innis Lecture delivered at the 35th annual meeting of the Canadian Economics Association, Mon-treal, June All quotations are taken from Innis~1981, 23, 47!.Canadian Journal of Economics0 Revue canadienne d Economique, Vol. 34, No. 4 November0novembre 2001. Printed in Canada0 Imprim au Canada0008-40850010859 8810rCanadian Economics Association System is a fanatical term to be avoided. Instead , universities must take@the#lead in adopting a neutral position based on the search for truth. In this paper I take up Innis s challenge by reconsidering the broad outlines ofSoviet economic history. The predominant interpretation today is failure Sovietsocialism could never have worked; it was always a big mistake.

4 Economists, onboth the left and the right, point to poor incentives and principal-agent problems~Kornai 1992; Roemer 1994; Bardhan and Roemer 1993!. While there were cer-tainly many things wrong with the Soviet economy and even more so the Sovietpolitical system, a review of the evidence suggests that the condemnation of theeconomy is too sweeping: in certain respects and in certain times, it performedwell; in others, it did not. The Soviet Union was one of the great experiments of thetwentieth century, and it behooves us to analyse its history carefully to see whatworked well, what worked badly, and per head is the first indicator that economists usually use in assessingperformance, and I begin with it.

5 The growth record divides in two sometime around1970. Before then, the Soviet economy was one of the most successful in the worldusing per capita GDP as the measure of performance. Maddison~1995!has esti-mated GDP in 1991 dollars for the fifty-six leading economies back to 1 plots the proportional growth in GDP per head from 1928 to 1970 againstthe level of 1928 when the first Five Year Plan started. The squares indicate theOECD countries. It should be noted that they were the rich countries in the world in1928, as, indeed , they had been in 1820. The exception to this generalization isFIGURE 1 Economic growth, 1928 AllenJapan, which was poor in 1820 and in 1928 and has been the most successfuleconomy in the world since then.

6 Among the OECD countries, the poorer havegrown faster than the richer, as countries like Spain, Norway, and Ireland havecaught up with the leaders. The convergence regression summarizes this , it should be emphasized , has not extended beyond the OECD; thepredominant tendency in the world economy has been income divergence~Pritchett1997!. In 1820 western Europe was two and a half times richer than South Asia; by1989 the lead had grown to fifteen times. The non-OECD countries appear mainlyin the lower left hand of the graph with low initial income levels in 1928 and lowgrowth since. A few countries like Argentina had high incomes in 1928 and haveshown slow growth since initial successes that fell off the does the USSR fit into this pattern?

7 Its income was low in 1928, and itsgrowth rate was high. It was the most successful non-OECD country in this by the OECD standard it did well, since it grew faster than the OECD con-vergence regression a stringent standard , since it requires particularly rapid growthfor poor countries. From 1928 to 1970 the USSR did not grow as fast as Japan, butwas arguably the second most successful economy in the scholars of the Soviet Union would disagree in judging Soviet economicperformance a success for three reasons:~1!political repression and the faminemortality following the collectivization of agriculture,~2!negligible growth in con-sumption, and~3!the failure of the Soviet Union to achieve a western standard ofliving.

8 These objections, however, are not decisive. First, while the repression andfamine were certainly deplorable, the issue in an economic assessment is how theywere related to economic performance. Simulations discussed later show that thestate terrorism accompanying the collectivization of agriculture did increase growthbut by only a small amount. Conversely, the Soviet policies that were decisive forincreasing growth did not have dire consequences. Second , the view that consump-tion per head did not rise in the 1930s was propounded by Bergson~1961!usingdata available in the 1950s. Evidence that has subsequently become available andadvances in index number theory suggest that per capita consumption increased byone-quarter in the gains accrued to the urban population and to thosewho moved to the cities.

9 If the GDP increase were only steel and tanks, one mightdismiss the growth record as a failure, but rapid growth in consumption as well asinvestment was a good performance. Third , the right comparison group for assess-ing Soviet performance is not the United States, despite the enthusiasm of bothcommunists and Americans for that comparison, but rather other countries with asimilar level of income in 1928. The USSR outperformed all of those countriesexcept Japan. Some commentators have speculated that Tsarist Russia would haveclosed the gap with the West had the 1917 revolution not occurred~Gregory 1994!,but the claim is speculation unsupported by began to slow down in the 1960s, and success turned to failure after1970, when the growth rate dropped dramatically.

10 GNP grew in excess of 5 per cent2 Allen~1998c!provides a detailed discussion. Hunter and Szyrmer s~1992!reassessment of Sovietperformance leads to the same conclusion reached in Allen~1998c!.Rise and decline of the Soviet economy861per year from 1928 to 1970, but the annual rate dropped to per cent in 1970 75,then to per cent in 1975 80, finally hitting per cent in 1980 85~table 1!.The rapid growth before 1970 was due to exceptional growth of the capital stock, abig increase in employment~especially in the 1930s!, and some expansion of thecultivated acreage. Productivity grew at a rate similar to that of the East Asianeconomies during their boom. Indeed , the sources of high-speed growth in theUSSR look much like those of South Korea or Taiwan~Young 1995!


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