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Thursday, February 5, 2009

WHY GORBACHEV'S ECONOMIC REFORMS FAILED IN THE SOVIET UNION AND POST-MAOIST CHINA'S SUCCESS

                                   INTRODUCTORY COMMENTS 

Today's Buggy Topic

. . . was, believe it or not, posted at the Marginal Revolution about two months ago --- only to have been deleted by the team that runs that laudable econ-blog, Professors Tyler Cowen and Alexander Tabarrok.  The length buggy commentary, it seems, was deleted even though it joined an exchange between Prof. Tabarrok and Prof. Barkley Rosser . . . Tabarrok a flexible libertarian and Rosser a Keynesian and a very good econometrician who edits a journal specializing in up-to-date statistical tools for micro- and macro-economic analysis. 

Why Deleted

That debate was under way half-way through the lengthy thread when prof bug wandered into it and argued his case at length: namely, whether the Soviet Union benefited from a viable economy when it collapsed from its inner contradictions in 1990 and 1991.  Professor Tabarrok, an immigrant to the USA from Communist East Europe, strongly contested the claim of viability.  Prof Rosser, without denying there were problems with the Soviet economy by 1990, nonetheless supported the viable claim. 

The Buggy Take

Enter prof bug's two cents' worth . . . well, maybe a little more than that.  Ha! Surprise! Surprise! 

The buggy guy sided strongly with Tabarrok, setting out a lengthy analysis full of hard economic data to that end.  Next, he moved on to set out the reasons why the post-Maoist Communist Party in China was able to carry out a good number of market-oriented reforms after 1979, with impressive results --- whereas the Soviet Union's decrepit economy couldn't be salvaged by Mikhail Gorbachev's efforts at reform in the late 1980s.  By 1989 the Soviet economy was decrepit. 

Tersely put, Soviet economic growth --- which had been noticeably slowing down when Gorbachev started his reforms in the mid- and late-1980s --- had ground to a halt.   In effect, contrary to what Gorbachev thought, a state and a state-controlled economy in a condition of backwardness and lack of technological advance --- never mind a lack of flexibility and the irrationality of compulsory planning from the center --- couldn't be reformed. 

Far from it, the campaign to reform such a rickety system turned out --- as had previous reformers of decrepit states in history --- did little more than polarize the elites into contending camps: on one side, the old guard Communists and state-bureaucrats opposed all change, and on the other side more radical reformers --- in effect, revolutionaries like Boris Yeltsin --- pushed ever harder for massive innovations.  By 1990, the Soviet system was in turmoil.   When, finally, the non-Russian peoples exploited the first opportunity available to them to secede from the  Soviet Union, the old-guard mossbacks staged a military coup --- only to fail.  Yeltsin and the revolutionaries came to power in the late summer of 1991, sending the Soviet state and its Communist system into the trash-bin of history.

The Last Part: China

No need to say anything more by way of introduction.  The b ugged out argument at that point should be easy to follow.  Please note, though: the follow-up argument in the next buggy post will deal with US-Chinese relations in trade, investment, and exchange rates . . . and the current tensions that engulf the latter.

      WAS THE SOVIET ECONOMY VIABLE WHEN THE SOVIET UNION DISAPPEARED IN 1991?

The Rosser-Tabarrok Exchange

So far, the discussion between Barkley and Alex and some other Barkley-critics, has been illuminating.  That said, Barkley, I fear, is wrong about a number of things about the Soviet economy by 1984, the year Gorbachev took power . . . never mind when the Soviet Union broke apart and collapse seven years later.

Problem One: The slowdown in the growth rates of GDP and per capita income, already very noticeable in the 1970-1980 decade compared to earlier decades (save for the ruin caused by WWII and the recovery period until the late 1940s). Click here for a good, fairly up-to-date table of growth rates and other related matters between the start of Stalinism and forced industrialization and collectivization in 1928 and the collapse of the Soviet Union in 1990-91.

 Click on Continue

Problem Two: What explains the dramatic slowdown, which forced Gorbachev to try reforming a bankrupt system, economic and political alike? Remember, Perestroika and Glasnost --- plus sustained détente with the West --- were the hallmarks of the Gorbachev program.

Essentially, to answer the question, consider the distinction between extensive and intensive growth --- or, in simple English, quantitative vs. qualitative growth. The Soviet economy had rested on mobilizing, at huge human cost through the Stalinist era, labor and capital inputs and investing them in heavy industry . . . the sort, incidentally, that the military could draw on most effectively. Sooner or later, cumulative capital of this sort will be subject to increased diminishing returns unless there are major improvements that are productivity driven --- in technological progress, innovation in organizational and structural arrangements, better management techniques, better marketing and the like. In short, progress in knowledge . . . whether embodied in new machines, improved older machines, or in the other influences just mentioned.

Such productivity driven growth is what we mean by "intensive" growth: an economy progresses by virtue of ever greater knowledge and its application, whether embodied in new or better machines or better management of firms or steady improvements in human capital.   The Soviet Union --- which planned by command centralization 100,000 products (goods and services) --- was simply unable to shift from a quantity-driven economy to a qualitative, knowledge-based one .  Even in the military sphere, it couldn't match the revolution in information-based warfare that the US and its allies in NATO had developed by the mid-1980s and deployed . . . whether in land-based systems or in planned "Star-Wars" anti-missile systems. 

Sidebar Note: 

China, by the end of Maoism in the late 1970s, was in the same situation, even though it planned centrally only about 1000 products).

The Soviet system, it turned out, was totally incapable of effective, sustained progress of this sort: it couldn't innovate outside the military sphere (where most engineering and scientific talents and resources were allocated), and even then --- as you'll see in a second --- it couldn't compete effectively with the West militarily for both technological and financial reasons.

Problem Three : Enter center-stage now the drastic, over-extended inability of the Soviet Union to compete for super-power competition with the United States . . . exactly the sort of thing that a political scientist like me (specializing in international relations) is particularly interested in: namely,  security matters, foreign policymaking, diplomacy, global economic trends, and how and why the power-base of countries --- especially great powers --- enables or prevents them from competing successfully for power, influence, and prestige.

In particular,  to compete with the United States --- which spent about 6-8% of GDP from 1950 until 1990 on defense  --- the Soviet leadership, it turned out, had to commit more than three times that percentage of GDP to its military. Enter American and Soviet allies (or satellites for the latter power). By 1985, the Soviet Union had as allies the most backward states in the world: Vietnam, North Korea, Cuba, the Afghan government, a couple of African catastrophe-states, and (more advanced, but still noticeably backward for European countries) its East European satellites. Against this ragbag collection, the US was allied with the rich dynamic West Europeans --- including France, Britain, and Germany --- as well as Japan.

All these capitalist and democratic countries were far richer than the Soviet Union in per capita income, far more technologically advanced --- markedly shown by the innovative ability of the US, West Europe, and Japan to enter quickly into the computer-driven ICT-dominated information-rich economic world, with the Soviet Union still unable to produce a decent car, TV, or refrigerator.


Problem Four: The inability of such a bankrupt economic-political system --- the two can't be separated as Barkley (whose work I respect) argues in this thread --- to be reformed.

For political scientists who study the history of the rise and fall of great powers since 4000 BC --- when the agricultural revolution created major territorial states and expanding empires --- the hardest thing for a far-sighted political leader to do is reform a bankrupt political system riddled by inefficiency, corruption, nepotism, violence, slothful opulence among the elites, and an alienated population. (Contrary to what Barkley says or implies, the Soviet population by the late 1980s was only one in the industrial world where longevity was shrinking steadily --- a sign of a health crisis and excessive alcohol-consumption --- and yet, a shrinking population on the birth side . . . the latter a sign of pessimism about the future.)
 

Gorbachev, the first Soviet leader since Stalin's death who was fairly young and vigorous when he took office, didn't enter power as the General Secretary of the Soviet Union to dissolve its empire in East Europe, dissolve the Soviet Union itself, and see Communism tossed into a historical garbage-can. He set out instead to salvage all three of these by somehow modernizing them within the structure of a Soviet empire (within Soviet boundaries over non-Russian peoples and in East Europe) and of a concentrated center of power in the CP that resisted changes to yield its monopoly of political power, economic power, prestige and status, and enormous economic benefits like special housing, vacation homes, access to western goods in stores reserved for the CP, and the like.

The second he tried to introduce reforms at home, he faced the dilemma all reformers do in a bankrupt system: he polarized the other elites. Initially, of course, it was the old-guard that refused to consider any devolution of power and influence. Eventually, of courses, there would be former allies who found the pace of reform-change too slow and insufficient . . . in the Soviet case, call them the right in the Soviet and think of like Yeltsin, a member of the powerful Politburo of 20 or so top CP-leaders and the mayor of Moscow: later, in 1990-91, the first elected head of Russia.
The End Game: The Collapse of the Soviet Union and Communism 

To shorten this analysis, by 1990, the old guard feared the changes Gorbachev was introducing --- including a new power base outside the CP. They also, rightly, feared a political rebellion of the non-Russian peoples, now galvanized by Gorbachev's reforms to demand more independence. And on the left, demands were made by Yeltsin and his followers for far more decentralization and democratization . . . hence, as the system was cracking up, Yeltsin called for elections and gained the presidency of Russia. At this point, the old guard sought to foment a coup and overthrow Gorbachev; failed; were defeated; and the rest was history --- a quick collapse of the Soviet Union itself, the disappearance of the CP, the successful exit of the non-Russian peoples from the former empire, and Yeltsin's election as the first democratic president.

 In short, a bankrupt system couldn't be reformed, couldn't compete with the US or the West in power and prestige and economic vigor, couldn't innovate, couldn't shift from a backward economy based on extensive rather than intensive qualitative growth, and fortunately for the world, was overthrown not by reform but by peaceful revolution from within.
  

               WHY POST-MAOIST CHINA HAS SUCCEEDED IN ITS ECONOMIC REFORMS . . .

... So Far Anyway

Yes, why have the Chinese Communists  done much better at reform than Gorbachev's Russia? The sketchy answer:

• Communism existed in the Soviet Union for 72 years when it collapsed: by 1979 in China, when the post-Maoist economic reforms began, it had existed for only 30 years. Most Chinese older than 40 were familiar with and knew what a capitalist system (however imperfect) was like.

• The work-ethos in China, especially among the peasantry (the vast majority), hadn't been eroded in three decades the way it had been in seven decades of collectivized and state-run farms . . . and it was in agriculture that the initial Chinese reforms began (only to be neglected by the end of the 1980s)

• There were managers of big firms in China that had run the same firms before Maoism triumphed in the country in 1949. The small businessmen were killed off, like the landlords; but the big factory owners and managers were kept on, with privileges --- only put under state control. The Soviets had and have no counterparts.

Further Reasons
• Largely an agrarian country with a large but inefficient heavy-industrial sector, China's CP planned only about 1000 products --- the Soviets, remember, 100,000. And the initial successes of moving large numbers of peasant workers off the land --- a reallocation of capital --- and sending the labor into the new town-and-village manufacturing and other businesses being created raised productivity dramatically in agriculture while providing hard-working laborers for these new factories and other businesses. (Even today, though, about 100- to 150 million laborers wander from city to city hoping for temporary work, however badly paid).
• Unlike the Soviets and their empire, moreover, China's new leadership quickly integrated into the global capitalist system and sought multinational transplants and technological transfers from Japan, the other East Asia dynamos, the EU, and the US. And, unlike the Soviet Union, the Chinese economy by the late 1990s and even more into this decade, became increasingly export-driven (with more and more of gross investment in China outside infra-structural and residential construction slated for export-oriented firms).

Major Challenges That Still Face the Chinese CP Leadership: Or Is a Radical Transformation Possible? 

So far, since 1979 when the reform movement began, the CP leaders have followed an easy-to-hard system of reforms: the more difficult ones --- all of which would require a far larger amount of economic authority and decision-making to be decentralized away from the top-heavy and bureaucracy-ridden central government to big and small business and financial organizations operating much more by free-market standards (even if, of course, regulated as in the EU or the US or even in Japan or South Korea).  That's true of the banking system and other financial institutions, including the stock market; true of further reduction in the inefficient state-owned enterprises (despite a considerable reduction since the mid-1990s); and true above all on the restrictions maintained on imports from abroad . . . whether maintained by tariffs, quotas, bureaucratic red-tape, or exchange-rate manipulations.

Note that the latter would require a major shift from export-led production as the main engine --- along with a lot of wasted investment in empty office-buildings and shoddy housing and schools and dangerous infrastructure --- toward domestic consumption.  No need to say more.  The follow-up buggy article that will be published later today (February 5th, 2008) will deal with the prospects of this shift. 

The Major Challenges Beyond All That Are Numerous and Formidable:

  • Tremendous inequalities in income between social classes and across regions.
  • The lack of any effective social-security safety-net: whether for access to health services or unemployment benefits or retirement pensions.
  • Environmental harm on a vast scale, full of health spillovers for the Chinese peoples and, come to that, others.
  • A dedicated and sustained shift in public infrastructure and private construction to far safer dams, irrigation systems, roads, and buildings of all size.
  • Far greater attention to the poverty and backwardness still of agriculture.  It is in small towns and cities and relatively unproductive farms where the great majority of Chinese still live.  The reform movement began in the countryside after 1979.   Since the mid- and late-1980s agriculture has become an increasingly neglected and poverty-ridden sector.
  • An effective and independent legal system, able to protect both private property of the standard sort as well as intellectual property rights like trademarks and patents.  Without the latter protection, innovation by the Chinese will tend to stall. The costs of innovative R&D, plus the risks of entrepreneurial start-ups, are simply too great to absorb if the eventual profits --- assuming they materialize --- aren't sufficient to cover these costs and risks.
  • A legal system as well that can reign in the rampant corruption and cronyism that mar Chinese CP and bureaucratic life at all levels.

         THE CRUX PROBLEM FOR DEALING SUCCESSFULLY WITH THESE HIGH-OCTANE CHALLENGES

Boiled down to its barebones nature, the problem is that a successful policy campaign for making even noticeable progress in tackling these challenges would require --- note carefully --- that the Communist CP leaders at the center and in the regions would have to devolve their huge power, prestige, and money-making so extensively that, in effect, they would be committing hari-kari.  We have no example in history of a dominant elite voluntarily abdicating its vast power and privileges . . . not least in the Soviet Union of Gorbachev, that reformer not setting out to destroy the Soviet Communist Party and empire within the Soviet Union and in East Europe.  And yet that is exactly what happened.

The Chinese CP leadership is fully aware of  such dangers.  Worse, in the process of even half-way devolution --- what with all the social tensions, protests, and conflicts that lurk all across China (not least in the 8% of the population that is non-Han Chinese and yet dominate the far-flung regions along China's 4000 mile border) --- the leaders fear upheavals that could no longer be contained by their remaining controls, whether by use of the police or military.