TransitionRecession  

Difficult Transition

by
Susan Bohlen, May 2000

When Mikhail Gorbachev came through as the 'last hope' for the liberation of the Soviet Union and helped along the breakdown of the totalitarian system, the world rejoiced. All could take a sigh of relief with the end of the Cold War, and citizens of the Soviet Union could finally claim a stake in the workings of their country. Privatization was to occur, with the turnover of public ownership of countless companies, factories, and stores to the hands of private citizens, thus boosting the incentives of the working class and making a more efficiently run economy. Many wonder why the Soviet Union lasted as long as it did, for it had a political system that would ultimately self-destruct, and an economic system that was fundamentally unworkable (Barner-Barry, Hody, 1995,p.10).

As in the political system, the economic system was driven by force. The Soviet people could own no property except for their personal possessions. In theory everything was the property of the entire Soviet people. All economic decision making was done by the state, that is, the Communist party, and implemented by the government (Barner-Barry, Hody, 1995, p.4). This command economy was run with the notion that everyone had to follow and fulfill what was planned for him or her. However, that economy and Communism are now dead, leaving us on the international scene with fifteen separate successor states, carved out of a country with over 100 different ethnic groups.  

 To many, the transition was to be fairly smooth. There was no apparent resistance by the communist party and at the time of disintegration all of the republics claimed to want to become democratic (Barner- Barry, Hody, 1995, p.5). The economy was to be converted into one of a capitalist market nature, and Privatization was to occur giving the workers ownership in their businesses, factories, farms etc. Notions of private property and minimal governmental intervention excited all involved.

 People were indulging in the euphoria of freedom: travelling more, consuming more, etc. And when they traveled more, they saw the higher standards of living in the West. Indeed, this they attributed to their efficient market system, and so the rational thing for these Soviets to assume was that soon they too would enjoy an economy of such proportions (Kyn web page). Given that allocation of resources was to be more efficient, and prices were to be reached more efficiently, then standards of living should increase.

However, restructuring of the economy is costly, and that's what needed to occur. The system of a command economy that was a factor in the fall of the Soviet Union left behind major economic problems for the fifteen successor states. Their survival hinges on their leaders' abilities to get them out of this economic mess left behind for them (Barner - Barry, Hody, 1995, p.5).  When Gorbachev became General Secretary of the CPSU he took on the leadership of a political-economic system in disrepair and decay (Barner - Barry, Hody, 1995, p. 174). At the time, economic stagnation was at the root of all of Soviet Union's problems. So, Gorbachev thought if the stagnation problem were remedied then all other problems would disappear as well. But he failed to realize that the stagnation was more a symptom of a much larger problem, and by attacking the symptom through his programs like perestroika, he inadvertently worsened deterioration and hastened the collapse of the Soviet Union. He tried to reform an unreformable economic system (Barner-Barry, Hody, 1995, p. 174).

 The challenges of transforming from a command to a market economy can be broken down into restructuring and stabilization. This entails breaking down the component already existing elements of the command economy, and replacing them with those of a market economy. This meant making decision making decentralized, eliminating the system of fixed prices, and creating an incentive system based on competition. Stabilizing entailed establishing an economic environment conducive to market functioning, and most importantly getting inflation under control, for with it would be extremely difficult. This also involved instituting a banking system that can facilitate exchange as well as savings and investment.

Given all of these priorities to fulfill, two years after the breakup of the Soviet Union, NONE of its former republics had achieved positive economic growth. The drop in GDP for 1992 ranged from -50% Armenia, -5% in Turkmenistan, -30% in Azerbaijan, -30% in Georgia, and -31% in Tajikistan. In Armenia, Azerbaijan, Georgia, and Tajikistan, the poor economic performances were largely a result of ongoing violence (Barner - Barry, Hody, 1995, p. 196).

 Even though the world had expected it to make the transition to a market economy with ease, Ukraine too deteriorated badly (-14%), as well as the other expected success story of Lithuania (-35%). Ukraine hadn't been plagued by ethnic strife, it was relatively homogeneous, and had a diversified economy with a sizable industrial and agricultural base. However, neither Ukraine nor Lithuania successfully moved to privatize their economies. The state owned sector continued to dominate both economies, thus running up high budget deficits, contributing to high inflation rates. Ukraine also had major problems of dependence on Russia for energy. Although they had energy sources during the Soviet period, central economic planners favored cheaper, more abundant sources of energy from Russia, Turkmenistan and Azerbaijan. With that, Ukraine's production of natural gas and oil dwindled sharply in the 70's and 80's.

The road to a smooth transition clearly was and still is a bumpy one both economically and politically. Have these 'successor countries' even achieved legitimate statehood? To be regarded as a state, it must have external sovereignty and be regarded by the international community as an independent state with clearly defined borders. For the most part, yes, this has been extended to all of the former soviet republics. But to be regarded as a state it must also have internal sovereignty, and of the fifteen states, each differs on whether they have met that criterion (Barner - Barry, Hody, 1995, p.343).  

WORKS CITED  

Barner-Barry, Carol and Hody, Cynthia A. The Politics of Change: The Transformation Of the Former Soviet Union, St. Martin's Press: New York, 1995.  

Professor Oldrich Kyn's EC396/Spring 2000 Web Site: <http://econc10.bu.edu/okyn>

     

 

          

 

OK Economics was designed and it is maintained by Oldrich Kyn.
To send me a message, please use one of the following addresses:

okyn@bu.edu --- okyn@verizon.net

This website contains the following sections:

General  Economics:

http://econc10.bu.edu/GENEC/Default.htm

Economic Systems:  

http://econc10.bu.edu/economic_systems/economics_system_frame.htm

Money and Banking:

http://econc10.bu.edu/Ec341_money/ec341_frame.htm

Past students:

http://econc10.bu.edu/okyn/OKpers/okyn_pub_frame.htm

Czech Republic

http://econc10.bu.edu/Czech_rep/czech_rep.htm

Kyn’s Publications

http://econc10.bu.edu/okyn/OKpers/okyn_pub_frame.htm

 American education

http://econc10.bu.edu/DECAMEDU/Decline/decline.htm

free hit counters
Nutrisystem Diet Coupons