Comparative Economics

The Socialist economy of the Union of Soviet Social Republic (USSR)

USSR is a very large country a fact important both to its present economic
development. It occupies a land mass of about 22.4 Million sq.kms which is about
1
/6 of the earth’s land surface and natural endowments
USSR existed between 1922 and 1991 as a confederation of Russia, Belarus,
Ukraine and Trans Caucasia (comprised of Georgia, Azerbaijain and Armenia).
Other countries under USSR were Modora, Kazakhstan, the Baltic states of
Estonia, Latvia and Ulthuania.
The central Asian countries that also joined USSR between 1925-1936 were
Kyrgyzstan, Tajkistan, Turkmenistan and Uzbekistan.
The economy has been classified as a centrally planned socialist economic system
with wide spread state ownership and the dominance of a national economic plan
governing resource allocation. The administratively command model is therefore
the economic system that dominated resource allocation in USSR for about 60
years from 1928 to late 1990s; before Mikhail Gorbachev began a serious
attempt to dismantle key features of the system-the administrative command
system was put in place in 1928 with nationalization of means of production, a
system of national economic planning and the collectivization of agriculture. As a
centrally planned economic system. The broad objectives of the communist party
have been implemented through the state planning agency (Gosplan). The
essence of Soviet planning has been the maternal planning system, in which
balances were developed to equate demand and supply of key industrial
commodities, labor inputs and the like. The balance approach stresses
consistency but not optimality and there is only minimal reliance on money and
prices for the allocation of resources. Traditionally, the allocation of resources in
USSR has been conducted primarily through plan. There are short term (1-year),
long term (5-or-7 years) and even 20 years “perspective” plans. The 5-year and
annual plans which direct economic activity are of central interest here.
The centrally planned economy of USSR came to be questioned by the radical
economic reforms as instituted by Mikhail Gorbachev in 1985. The Perestroika
reform was directed at fundamental changes of working arrangements of USSR
and represents also a fundamental departure for Soviet economic policies.
The history of USSR can be traced or discussed in three phases
a. The era of Czars which came to close in 1917.
b. Bolshevik revolution (1917) – the downfall of Alexander Kerensky and the
era of Joseph Stalin, the beginning of Soviet union.
c. Gorbachev era and reforms.
d. The post-Gorbachev era and the Russia Republic.
According to History.com Editors (2009), the Soviet violent revolution of 1917
marked the end of the Romanov dynasty and centuries of Russian imperial
associate with economic hardship, food shortages and government corruption
rule all contributed to disillusionment with Czar Nicholas II. During the Soviet
Revolution, the Bolsheviks (Bolshevik party) led by Leftist Vladimir Lenin, seized
power and destroyed the tradition of Czarist rule. The Russian revolution of 1905
started because of bloody massacre of hundreds of unarmed protesters against
the monarchy. The blood massacre sparked the revolution of 1905. Czar Nicholas
abdicated the throne in March 12, 1917 and Alexander Kerensky a young Russian
lawyer who had been influenced by western styled democracy temporarily took
over after February revolution and established a liberal program of rights such as
freedom of speech, equality before the law, right of unions to organize and strike.
They opposed violent social revolution also, as a minister of war, Kerensky
continued the unpopular Russian war effort World War 1, which exacerbated
Russian food supply problems and hardship. The liberal democracy of Kerensky
failed in USSR because USSR had no history democracy in the country and given
the dire economic and military straits at the time. Such liberal democracy did not
have much change to take root. Until November, 6 and 7, 1917 (or October 24
and 25 in Julian Calender). When October 25 th revolution arises led by Bolshevik
party, leader Vladimir Lenin in a blood less coup overthrew the Alexander
Kerensky government. The fall of Alexander Kerensky was attributed to political
rivalries, economic hardships and unwinnable wars. Lenin called for a Soviet
government that will be ruled directly by councils of Soldiers, peasants and
workers. The Russian civil war broke out in late 1917 after the Bolshevik
revolution. The warring factions included the Red and White armies. Red Army
fought for Lenin’s Bolshevik government while White Army represented a large
group of loosely allied forces including monarchists, capitalists and supporters of
democratic socialism. In July 16, 1918, the Romanovs were executed by the
Bolsheviks. The Russian civil war ended in 1923 and Lenin’s Red Army claimed
victory and establishing the Soviet Union. After many years of violence and
political unrest, the Russian revolution paved way for the rise of Communism and
influential political belief system around the world. It set stage for the rise of
Soviet Union as a world power that would challenge United States in cold war.

Soviet Union (1928-1953)

1928-1953 marked the era of the establishment of Stalinism in USSR, through
victory in Second World War II, to the death of Stalin in 1953.
Joseph Stalin approach power through destroying his enemies and transformation
of Soviet society with central planning – in particular through collectivization of
agriculture and rapid development of heavy industries. Stalin consolidated his
power within the party and the state and fostered an extensive cult of
personality. Soviet secret police and the mass mobilization of communist party
served as Stalin’s major tools in molding Soviet society. Stalin mobilized state
resources to expand the country’s industrial base. From 1928-1932, pig iron
output, necessary for further development of industrial infrastructure had
increased. Coal production, a basic fuel of modern economies and Stalinist
industrialization rose rapidly from 35.4 million to 64 million tons. Other industries
developed by Stalin included; automobile plants, heavy machinery plants, tractor
plants. The rapid development of industries could not raise the workers standard
of living which dropped during the era of industrialization. Stalin’s Laws to tighten
work discipline made the situation worse. With the pace of industrialization, the
soviet government declared that Five Year Industrial Production Plan (1928-1932)
which was fulfilled by 93.3% in only for years, while parts devoted to heavy
industry parts were fulfilled by 108%.
The Second Five Year Plan (1933-1937) which anchored on the huge investment
on the first plan, expanded industrial growth rapidly and nearly reached the plans
target. Despite making a massive leap in industries capacity, workers working
conditions were poor, quotas difficult to fulfill which requires that miners put
upto 16-18 hour work days. Again, the agricultural sector was collectivized. A vast
network of collective farm (Kolkhozy) was created in which more than 90% of the
collectivization of agricultural sector was done after 20 years as Stalin allowed the
continued existence of privately owned agriculture before attempting to place it
under state control. Collectivization of agriculture was as a result of high demand
for food upon joining Kolkhoz (collective farms), peasants had to give up their
private plots of land and property. Every harvest, Kolkhoz production was sold to
the state for a low price set by the state itself.

Natural collectivization was slow and the November 1929 plenum of the central
committee decided to accelerate collectivization through force and by 1936,
about 90% of Soviet agriculture had been collectivized. Many peasants bitterly
opposed often slaughter their animals rather than give it out to a collective farms.
In the longrun, the collectivization of farms led to a catastrophic drop in farm
productivity.

Therefore, Joseph Stalin made two major and important decision/policies at the
end of 1920s.

A. A comprehensive system of centrally economic planning based on

compulsory state and party directives was established. An abrupt end to
the prevailing system of market relations in industry ensued and there was
a sudden shift in industrial production away from consumer goods and
toward producer’s goods.
B. The collectivization of agriculture (Kolkhozy) as discussed above was
established.
The two economic experiments were conducted in the period immediately
following the revolution of 1917: War communism (1917-1920) and the new
economic policy (NEP) (1921-1928). Both responded to the need to consolidate
power and at the same time to marshal resources at a time of crisis.

War communism, implemented by Joseph Lenin during the Russian civil war, saw
introduction of substantial state ownership (nationalization), an attempt to
eliminate market relations in industry and trade, and as gathering of agricultural
products from peasants by forced requisitioning. In a sense, it seemed that Lenin
was attempting to by pass socialism and move directly from a capitalist to a
communist system. On the other hand, the introduction of NEP by Lenin in 1921
signaled a partial return to private ownership, reintroduction of market as a
primary mechanism for resource allocation and implementation of a more viable
tax system on agriculture.

The period of Soviet history 1917 to 1928 provided some important lessons –
lessons that permeated Soviet thinking

(a) It became apparent that, if markets were to be eliminated, some

mechanism for coordination will take place. During war communism, Lenin
nationalized industries and eliminated market, the he did not replace
market with plan or some other substitute mechanism.
(b) As a result of inept state policies, the peasants came to be viewed as
holding considerable power over the pace of industrialization after all the
economy was mostly agricultural, so both product and labor force would
have to come from the rural sector.
 (c) The response to Lenin’s attempt to introduce payment in kind and to
downgrade the importance of money during war communism made it
obvious that whatever the system, material incentives would be crucial to
motivate labor.

In addition to experience of the two important decisions/policies 1920s witnessed

open and important discussions on the roles of industrialization and agriculture in
fostering economic development. And also that the peasants play key roles in
economic development.

The era of Mikhail Gorbachev (1931-2022), marked the starting point of Soviet
reforms in 1985, when he became secretary of the communist party. He was the
8th and the final leader until USSR was dissolved in 1991, He lunched the reforms
of programme of Perestroika (restructuring), democratization and Glasnost
(openness) to jerk the country out of political and economic stagnation. In
October 1990, East and West Germany unite after a six-power negotiations in
which Gorbachev plays a key role. The Soviet parliament approves plan to
abandon communist central planning of the economy in favor of market economy
and Gorbachev was awarded the Nobel peace prize.

Performance of the Soviet Economy

In the early period of Stalin’s regime, the soviet economy recorded and
experience exponential growth and expansion in the industrial sector as a result
of the mobilization of resources by state planning to expand the industrial base
from 1928-1932, from 3.9 million jobs expected per annum to about 7.9 million
jobs created by 1937, and by 1940 it reached 8.3 million. This is as a result of
sharp mobilization of resources used in industrial sector of the economy. This
created need for massive labour and unemployment was reduced nearly to zero.
Wage setting by Soviet planners also contributed to the sharp decrease in
unemployment which dropped in real terms by 50% from 1928 -1940. With wages
artificially depressed, the state could afford to employ far more workers than
would be in financially viable market economy.

Beginning in 1930s, USSR had rapidly evolved from agrarian into a major industrial
power and its transformative capacity meant communism consistently appealed
to the intellectuals of the developing economies. The impressive growth rates
during the first three Five-Year Plans (1928-1940) are particularly notable given
that this period is nearly congruent with the great depressions. During the period
USSR saw rapid industrial growth while other regions were suffering from crisis.
USSR was the second largest economy during the war II period to 1980s. A major
strength of the USSR economy was enormous supply of oil and gas until the
collapse of world oil price in 1980s which negatively affected the Soviet economy.

The USSR economy experienced a high growth rate between 1950s and early
1970s with significant slow down in 1940-1950s due to World War II. Average
growth rate during these periods was 5%.

Graph

During these years USSR growth was mainly driven by heavy investment (capital
formation), industrialization and oil boom. The USSR was forcefully and
consciously mobilizing resources to utilize new technologies to promote
urbanization and industrialization. With its size and strong growth performance,
the USSR became an economic super power.

(NB: Industrial and agricultural sectors, cheap labour, natural resources and
utilization of new technologies aided USSR’s rapid development – lessons to be
learnt by emerging economies)

Note also that despite the growth during this period, there was political
oppression and human sufferings, harsh working conditions especially between
the 1930s and early 1950 during the regime of Joseph Stalin. The suffering was
more intense in agricultural sector due to conversion of private farms into
collective farms to enable direct government control over agricultural output. The
goal was to increase production and make food distribution more efficient.)

The problems in the USSR started to surface in the late 1970s as growth
decelerated causing economic stagnation (see graph above). Key causes of this
stagnation in USSR were:

- A decrease rate of capital accumulation.

- Depletion of natural resources.
- Scarcity of workers.
- Decline in productivity levels.
- Slow down in technological advancement.

Given this dismal economic performance, a radical set of reforms was

commenced by Mikhail Gorbachev. Despite these reforms, the economy of USSR
continued to deteriorate between,1985-1991 (see graph page text book).
China: Socialism, Planning and Development.

China at the time of the 1949 revolution was a classified as a less developed
country (LDC) with low per capita income (PCI). But the development of China has
fascinated the western countries. China started implementing Soviet model with
important and interesting modifications, and the result has been substantial
economic growth and development in a large country of extreme poverty and
population. China occupies a land area of about 3.8 million sq kms and a
population of about 1.4 billion in 2022. And the second largest economy in the
world. Chinese economy is of interest to comparative economists and analysts for
three principal reasons.

a. The characteristics of Chinese industrialization distinguish it from others.

The Chinese applied Soviet models with alterations, in a highly under
developed setting/system.
b. The easing of hostilities between America and China enable the Americans
the opportunity to examine the Chinese system.
c. The post Moa era has seen major changes in Chinese economic system.
These changes are of great interest to comparative economist.

China is a resource based country and these resources must be exploited to

support the objectives of the national development. Coal is the major source of
energy, only recently has China undertaken a major effort to utilize oil riches and
other alternative energy sources. A non systemic feature of China is the unique
historical and cultural experience. China is the oldest existing civilization in the
world, a source of great pride to the Chinese people. The Chinese language
comprises many varying dialects. The rich heritage of the Chinese people is an
important, if not immesurable influence on their attitude toward and
participation in the modernization. Recently through the conficus institute, China
is gradually spreading their influence and language to emerging and African
economies & societies. How could Chinese leaders solve the problem facing the
Chinese economy by adopting the Soviet model despite the difference between
the two systems. China was characterized by a large population, relative poverty
and its primarily rural economy against the relatively developed USSR. To what
extent would Chinese natural resource base support industrial development
especially in view of sharp regional disparities and the likelihood that foreign
trade play a relatively small role? These are the questions that were asked as a
result of adoption of Soviet model by China. The Chinese People Republic was
proclaimed by Moa Zedong in 1949. Two main goals were sought between the
consolidation period of 1949-1952.

i. The redistribution of land to individual households was implemented in

preparation for ultimate collectivization.
ii. Nationalization and consolidation of holdings in the industrial sector
took place in preparation for the development of national economic
planning.

China’s experience concentrated in urbanizing the rural sector with positive

results, compared to Soviet’s collectivization experience which brought a number
of negative consequences. Also state farmers were not introduced in China as it
was in Russia.
In addition to Nationalization of industry, another key policy in China was the
development of a system of national economic planning.

Attempt at Reforms in 1980s, the aging Chinese communist party leadership were
determined to open up the economy and reforms. The introduction of private
incentives in agriculture and the initial influx of foreign investment boosted
economic growth and development and brought about substantial improvement
in the living standards. The liberalism quickly spilled over to political and social
life. When in spring of 1989, opposition groups began demand for more
fundamental changes, an end to communist one party monopoly, free speech and
democratic elections. The communist regime decided to crack down on the
reform movement. The decision culminated in the May 1989 Tiananmen square
massacre and the subsequent introduction of sanction by western government
against Chinese government. The Chinese government retreated to conservatism
in stark contrast to USSR and EE. By start of 1990s communist regime were found
in only China, Cuba, Albania and North Korea.

The Performance of the Chinese Economy

In many aspect, contemporary Chinese economic performance has been very

good especially in agriculture in the years following the introduction of household
contract responsibility system (HCRS). The HCRS stimulates farmers enthusiasm
for production and develops agricultural resources according to local conditions.
It also endows farmers with decision making rights in production. Contractor
households are allowed to plan and decide how to manage produce and allocate
resources with full autonomy. Farmers adopt production and management
models peculiar to local condition. Between 1965-1980, GDP of China grew at
average of 6.4% and between 1980-1988, the rate increased to 10.3%. And this is
attributable to growth in agricultural sector. There was important
sectorial/structural change in Chinese economy during this period. For example,
the production share of agriculture declined form 44% in 1965 to 32% in 1988,
while in same year, the industry share in total output increased from 39% to 46%.
The Chinese foreign sector has been an important area of Chinese economic
development between 1965-1980, Chinese export grew at an average annual rate
of 5.5% and in same period, imports grew at an average annual rate of 7.9%.
However, comparable figure from the period 1980-1988 were 11.9% and 13.1%
for export and import, respectively. During these years, commodity composition
of Chinese foreign trade change quite significantly. On import side the relative
importance of machinery and related imports increased. Manufactured goods
became increasingly important exports.

The reforms made in the past decades in 1970s till date have restored China to
the path of growth, the annual GDP growth averaged 10% between 1978 and
2010, compared to 3% between 1949 and 1978. While there has been a decline in
growth in recent years with annual growth rate of about 7% between 2010 and
2019, China is still the fastest growing economy with the GDP of about 18.1
Trillion US Dollar in 2022 and the second largest economy.

See graph GDP per capita and growth rate in China

The high growth rate in china does not mean that everyone has benefited equally
from the growth. Income inequality have increased in China since 1980s.

Diagram

a. Income earned by the top 10% of the population has increased form 27% to
41% in 2015.
b. Income earned by bottom 50% has declined from 27% to 15%.
c. World Bank Gini-coefficient for China show that the value increased from
32.2% in 1990 to 43.7 in 2010 but declined steadily to 38.5% in 2016.

IMF (2018) attributed income disparities in China to differences in education, skill

premium and structural factors such as urbanization and aging population. These
are the main drivers of inequalities in China.

Again, China performs poorly in terms of environmental outcomes despite the

growth as it ranks 120th out of 180 countries in EPI index. Also, Chinese workers
also face limited freedom in their ability to bargain for a better working
conditions, workers have right to belong to trade union but independent labor
union are illegal and prohibited