The Soviet economy: lessons for developing countries

I highly recommend the following paper by Mazat and Serrano on the Soviet Economy, from 1950 to 1991, which shows the relevance of the surplus approach tradition to deal with real economic problems. The paper suggests that the limitations of the Soviet system, that eventually led to its collapse were associated to the exhaustion of the regime of extensive accumulation of capital in the late 1960s early 1970s.

Growth was very rapid at the beginning. The graph (from Kotz and Weir's Russia’s Path from Gorbachev to Putin, 2007) shows the rates of growth of the Soviet Union and the US from 1928 to 1975, and a few sub-periods. With the exception of World-War II the Soviet Union was catching up with the US.

Following Kalecki, they show that there was no problem of effective demand, and that USSR was characterized by resource mobilization towards rapid industrialization. Further, "the extensive Soviet growth model relied on the increase of the surplus thanks to the mobilization of additional resources." As noted by Kotz and Weir (2007, p. 36): "the rapid employment shift from agriculture to industry contributed to GNP growth, since output per worker is much higher in industry than in agriculture." Cheap labor and available resources implied that growth involved incorporating workers into the growing industrial sector, and that implied huge investments in infrastructure and heavy industries.

However, by the 1970s the extensive model of growth had reached its limits. The graph shows the slowdown of Soviet growth.

Note that while it is true that the slowdown in the Soviet economy was parallel with the post-Bretton Woods slowdown in the West, it was more marked. This was, as noted by Mazat and Serrano, the result of the vanishing labor surplus, and the exhaustion of cheap sources of new natural resources. It is worth noticing that:

"The sudden worsening of Soviet economic performance in the 1970s was not limited to economic growth. There is also evidence that the rate of technological innovation slowed down around the 1970s ... Most noticeably, the Soviet Union largely failed to absorb the revolution in communication and information processing brought by electronics and computers, which was rapidly altering Western capitalist economies from the 1970s" (Kotz and Weir, 2007, p. 45).

This inability to keep pace with technological innovation in the West, associated with increasing imports of grain, linked to the severe difficulties of increasing agricultural productivity, and the higher demands for consumer goods that come with higher income per capita, implied increasing external problems for the Soviet economy. In their words:

"The Soviet population also wanted more consumption goods and consumer durables of better quality. But the cold war continued to require massive expenditure of resources in the military sector. At this stage several attempts to reorder priorities and reform the planning system to enable to increase the quantity and the quality of consumer goods, but they all failed. As local production was unable to fulfill entirely this demand, imports of these categories of product were necessary, especially from the West."

Note that these problems are typical of developing countries in the so-called hard phase of Import Substitution Industrialization (ISI). The increase in agricultural, capital and consumer goods imports, was financed with oil and gas exports (in the 1970s positively impacted by the oil shocks, but negatively in the 1980s, with the collapse of terms of trade), which also made the Soviet Union look more like a typical middle income developing country.

In sum, "from the 1970s, the structural external vulnerability became a permanent feature of the USSR, and the very low price of oil from the mid 1980s had an important impact on the final collapse of the Soviet system in the following decade." In other words, an external crisis, not very different than the one that caused the Latin American debt crisis and that led to the imposition of the Washington Consensus was behind the Soviet collapase and the imposition of the disastrous shock therapy. The difficulties of moving from the extensive model of growth to the intensive growth model, discussed in this paper, are very similar to the difficulties faced by industrializing nations in the periphery and are a cautionary tale for all developing countries.