. . Support our Sponsor

. . Flags of the World Maps of All Countries
geographic.org Home Page Countries Index

Russia Unforeseen Results of Reform
https://photius.com/countries/russia/economy/russia_economy_unforeseen_results_o~1315.html
Sources: The Library of Congress Country Studies; CIA World Factbook
    << Back to Russia Economy

    The Soviet economic reforms during Gorbachev's initial period (1985-86) were similar to the reforms of previous regimes: they modified the Stalinist system without making truly fundamental changes. The basic principles of central planning remained. The measures proved to be insufficient, as economic growth rates continued to decline and the economy faced severe shortages. Gorbachev and his team of economic advisers then introduced more fundamental reforms, which became known as perestroika (restructuring). At the June 1987 plenary session of the Central Committee of the Communist Party of the Soviet Union (CPSU--see Glossary), Gorbachev presented his "basic theses," which laid the political foundation of economic reform for the remainder of the decade.

    In July 1987, the Supreme Soviet passed the Law on State Enterprises. The law stipulated that state enterprises were free to determine output levels based on demand from consumers and other enterprises. Enterprises had to fulfill state orders, but they could dispose of the remaining output as they saw fit. Enterprises bought inputs from suppliers at negotiated contract prices. Under the law, enterprises became self-financing; that is, they had to cover expenses (wages, taxes, supplies, and debt service) through revenues. No longer was the government to rescue unprofitable enterprises that could face bankruptcy. Finally, the law shifted control over the enterprise operations from ministries to elected workers' collectives. Gosplan's responsibilities were to supply general guidelines and national investment priorities, not to formulate detailed production plans.

    The Law on Cooperatives, enacted in May 1987, was perhaps the most radical of the economic reforms during the early part of the Gorbachev regime. For the first time since Lenin's NEP, the law permitted private ownership of businesses in the services, manufacturing, and foreign-trade sectors. The law initially imposed high taxes and employment restrictions, but it later revised these to avoid discouraging private-sector activity. Under this provision, cooperative restaurants, shops, and manufacturers became part of the Soviet scene.

    Gorbachev brought perestroika to the Soviet Union's foreign economic sector with measures that Soviet economists considered bold at that time. His program virtually eliminated the monopoly that the Ministry of Foreign Trade had had on most trade operations. It permitted the ministries of the various industrial and agricultural branches to conduct foreign trade in sectors under their responsibility rather than having to operate indirectly through the bureaucracy of trade ministry organizations. In addition, regional and local organizations and individual state enterprises were permitted to conduct foreign trade. This change was an attempt to redress a major imperfection in the Soviet foreign trade regime: the lack of contact between Soviet end users and suppliers and their foreign partners.

    The most significant of Gorbachev's reforms in the foreign economic sector allowed foreigners to invest in the Soviet Union in the form of joint ventures with Soviet ministries, state enterprises, and cooperatives. The original version of the Soviet Joint Venture Law, which went into effect in June 1987, limited foreign shares of a Soviet venture to 49 percent and required that Soviet citizens occupy the positions of chairman and general manager. After potential Western partners complained, the government revised the regulations to allow majority foreign ownership and control. Under the terms of the Joint Venture Law, the Soviet partner supplied labor, infrastructure, and a potentially large domestic market. The foreign partner supplied capital, technology, entrepreneurial expertise, and, in many cases, products and services of world competitive quality.

    Although they were bold in the context of Soviet history, Gorbachev's attempts at economic reform were not radical enough to restart the country's chronically sluggish economy in the late 1980s. The reforms made some inroads in decentralization, but Gorbachev and his team left intact most of the fundamental elements of the Stalinist system--price controls, inconvertibility of the ruble, exclusion of private property ownership, and the government monopoly over most means of production.

    By 1990 the government had virtually lost control over economic conditions. Government spending increased sharply as an increasing number of unprofitable enterprises required state support and consumer price subsidies continued. Tax revenues declined because revenues from the sales of vodka plummeted during the anti-alcohol campaign and because republic and local governments withheld tax revenues from the central government under the growing spirit of regional autonomy. The elimination of central control over production decisions, especially in the consumer goods sector, led to the breakdown in traditional supplier-producer relationships without contributing to the formation of new ones. Thus, instead of streamlining the system, Gorbachev's decentralization caused new production bottlenecks.

    Unforeseen Results of Reform

    Gorbachev's new system bore the characteristics of neither central planning nor a market economy. Instead, the Soviet economy went from stagnation to deterioration. At the end of 1991, when the union officially dissolved, the national economy was in a virtual tailspin. In 1991 the Soviet GDP had declined 17 percent and was declining at an accelerating rate. Overt inflation was becoming a major problem. Between 1990 and 1991, retail prices in the Soviet Union increased 140 percent.

    Under these conditions, the general quality of life for Soviet consumers deteriorated. Consumers traditionally faced shortages of durable goods, but under Gorbachev, food, wearing apparel, and other basic necessities were in short supply. Fueled by the liberalized atmosphere of Gorbachev's glasnost (literally, public voicing--see Glossary) and by the general improvement in information access in the late 1980s, public dissatisfaction with economic conditions was much more overt than ever before in the Soviet period. The foreign-trade sector of the Soviet economy also showed signs of deterioration. The total Soviet hard-currency (see Glossary) debt increased appreciably, and the Soviet Union, which had established an impeccable record for debt repayment in earlier decades, had accumulated sizable arrearages by 1990.

    In sum, the Soviet Union left a legacy of economic inefficiency and deterioration to the fifteen constituent republics after its breakup in December 1991. Arguably, the shortcomings of the Gorbachev reforms had contributed to the economic decline and eventual destruction of the Soviet Union, leaving Russia and the other successor states to pick up the pieces and to try to mold modern, market-driven economies. At the same time, the Gorbachev programs did start Russia on the precarious road to full-scale economic reform. Perestroika broke Soviet taboos against private ownership of some types of business, foreign investment in the Soviet Union, foreign trade, and decentralized economic decision making, all of which made it virtually impossible for later policy makers to turn back the clock.

    Data as of July 1996


    NOTE: The information regarding Russia on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Russia Unforeseen Results of Reform information contained here. All suggestions for corrections of any errors about Russia Unforeseen Results of Reform should be addressed to the Library of Congress and the CIA.

Support Our Sponsor

Support Our Sponsor

Please put this page in your BOOKMARKS - - - - -



https://photius.com/countries/russia/economy/russia_economy_unforeseen_results_o~1315.html

Revised 10-Nov-04
Copyright © 2004 Photius Coutsoukis (all rights reserved)


ctr040601