The economy of the Soviet Union was a centrally-run system with administrative planning, state ownership of assets and means of production, and collective farming under the communist regime. Throughout most of its history, the USSR had a fast economic growth, and it was able to transform from an agrarian nation to one of the top producers of manufactured goods, industrial products and weaponry. However, the history also showed that the Soviet economy was marred with inefficiencies, widespread corruption and stagnancy.
The communist economy of the Soviet Union had numerous features that characterized it from other economies and that eventually led to its demise. Some of the important features were central planning, “the Big Push”, state-owned enterprises, collective farming, and a shortage economy. These components will be analyzed further.
Instead of demand- and supply-based market economy, the Soviet economy was controlled and planned from authorities in Moscow. The demand was loosely estimated by the center or was replaced by the planners’ preferences. The supply of goods and services was stipulated in the state plans. Normally, there were five-year strategic plans, which were broken down to smaller plans and distributed among the localities and enterprises. Given the fact that a team of people had to plan the production of dozens of thousands goods for over 300-million population, it was a daunting task ripe with subjective estimates. In addition, the central planning resulted in adverse behaviors and information distortion on local levels. For example, in order to get an easier target, an enterprise manager could report false information about his factory’s capacity, or he could bribe other plant managers to get needed materials to meet the target (IMF et al. 1991).
The notion of “the Big Push” implies that the Soviet Union adopted a drastic policy of industrialization to quickly shift away from backward agrarian economy in a very short period of time. The Big Push gain momentum in 1929, when Stalin came to power. The emphasis was on heavy industry with capital-intensive goods, while production of ordinary consumer goods was limited. A strong control over economy was required to put resources into the “heavy industries”; thus, the Communist party took over the leading part, heavily centralizing the economy (Pei 1994).
While all enterprises were owned by the government, the heads of these enterprises were usually closely linked to the Communist Party, which was the main path for a successful career. Usually, the most important incentive for the enterprise managers was meeting production targets, which could bring significant additional financial rewards (bonuses) and reputation. Failing to meet the targets, on the other hand, could lead to loss of income and demotion. This incentive bred inefficiencies and corrupt behavior. While they strived to meet the targets, the companies did not try to exceed it, as it would result in higher targets for the next year (targets for the next year were based on the achievement in the previous year). Moreover, innovations were not welcomed. If an innovative practice failed, it would hamper reaching the target; if the innovation was a success, it would produce higher output, resulting in higher targets for the next year. In addition, enterprise managers had an incentive to expand their enterprises to increase their reputation and status. They would normally request more funds from government for capital expansion then they actually needed. This condition was dubbed as “investment hunger”, and the government would normally approve these funds, seeing the process as a part of the Big Push. When Moscow realized that the state funds are draining fast, it would stop all expansions at the same time. As a result, there were a lot of projects around the country that stayed incomplete for several years. Eventually, the enterprises were becoming large with unnecessarily high amount of labor and capital, making them costlier and harder to manage. Furthermore, even in a case when a factory met a production target with its costs exceeding its revenues, the losses were often compensated by the government through subsidies. This practice discouraged the companies from reducing costs and working efficiently.
The agriculture was collectivized into state farms and collective farms. As with the enterprises, the farms tend to become bigger in size and inefficient. The Soviet agricultural productivity was about 6% of that of the American, and the productivity per machine was almost third of that in the US. Agricultural infrastructure, machinery and its maintenance was poor, crippling the sector (Heller & Nekich 1986).
While the prices were not determined according to demand and supply, the central planning resulted in below-the-market prices, creating widespread shortages around the country. Long lines at shops were common. Huge waiting lines were also common in housing and many other sectors. The shortages led to a shadow economy and black markets.
The slowed economic growth in the 1970s and a negative growth during 1981-1983 was a sign that the Soviet economy is in trouble. During the late 1980s, under Gorbachev, the Soviet Union attempted reforms called “perestroika” (restructuring) in order to liberalize the economy. However, the main features of the communist economy remained unchanged and the reforms produced little results. USSR eventually collapsed in 1991 after a failed coup against the government.