Excerpt from

The USSR Before the Fall:
How Poor and Why ?


Abram Bergson
Journal of Economic Perspectives,
Vol. 5., No. 4, Fall 1991

 

It may be well to refer here to an initial statistical difficulty: the omission, from available data on Soviet consumption and output of diverse 'second economy’ or private activities, which though sometimes illegal could usually be considered as properly covered by such measures. Taking retrospective emigre budgets for 1972-74 as a basis. Gur Ofer and Aaron Vinokur (1980) conclude that the resultant underreporting among urban households at that time may have come to 6-7 percent of aggregate household (urban and rural) income, and 3-4 percent of the GNP. Those figures do not reflect various private rural activities. A similar inquiry conducted by Gregory Grossman and Vladimir Treml indicate, even for urban households, a distinctly larger volume of unreported activity than Ofer and Vinokur found (letter of January 5, 1981. from Treml).

 

Comparative Consumption Levels

 

Mikhail Gorbachev came to power in the USSR as general secretary of the Party on March 11, 1985. In that year, per capita consumption in the USSR, at 28.6 percent of that in the United States, was somewhat below that of Portugal. Except for Turkey, Portugal enjoyed in 1985 the lowest consumption standard of any OECD country. The Soviet consumption level, though, was appreciably above Turkey's. Thus, with U.S. consumption per capita amounting to $11,800, the corresponding Soviet figure was but $3,375. Or so available calculations appear to indicate. Of course, those findings require explanation.

 

The figures for OECD countries cited in Table I are the result of the well-known International Comparison Project (ICP), initiated some years ago by Irving B, Kravis and others under the sponsorship of the World Bank and United Nations. …The figure given for the USSR in Table 1 follows from a study done for the CIA and the Joint Economic Committee by Gertrude Schroeder and Imogene Edwards (1981), where the authors expressly sought to obtain a measure for the USSR methodologically comparable to those of ICP. After classifying spend­ing in similar categories and calculating a relevant purchasing power parity exchange rate for each category, they found that 1976 Soviet per capita consumption was 34,4 percent of that in the United States.

 

Table 1.
Comparative Consumption per Capita,
USSR and Selected OECD Countries,  1985

(USA =100)

 Country

per-capita
consumption

   Country per-capita
consumption

USSR    

 28.6

  USA 

100.0

Germany,West

69.3

  France 

68.1

Japan    

65.7

  United Kingdom

65.5

Italy          

 64.6

  Finland

 61.7

Austria           

59.0

  Spain  46.1

Ireland          

 37.2

  Greece

37.0

Portugal          

32.3

  Turkey

20.0

Sources: Figures for Europe and USA  from Eurostat (1988, pp. 80-81);
United Nations StatisticaI Commision and
Economic commission for Europe  (1988).
While inter-European relationships are final. the comparison of all levels
with that of the USA is apparently preliminary. The figure for Soviet Union
 based on Schroeder and Edwards (1981),  as explained in text.

 

As Schroeder and Edwards point out, their calculation could well overstate comparative Soviet consumption. Such a bias apparently would result chiefly from a failure to conform to two basic desiderata of ICP: equivalence, in terms of relevant product characteristics, …
. Schroeder and Edwards went to considerable effort to compare goods directly; in the case or processed foods and non-food products. Numerous Soviet commodities were specially imported to the United States for expert appraisal. However, there seems little doubt that the purchasing power parity exchange rates eventually derived tend not to allow fully for proverbial qualitative deficiencies in Soviet products

 

As explained by Schroeder in a forthcoming study, allowance for biases such as the foregoing might require discounting their original index of comparative USSR-USA per capita consumption in 1976 by roughly 10 percent. For Soviet per capita consumption in 1985, shown in Table 1, I have applied a discount of that magnitude; that is, 28.6 is 90 percent of 31.8, which in turn is the 1985 CIA counterpart of the Schroeder/Edwards index for 1976.2

… alternative indexes newly released by the Soviet State Committee on Statistics (Goskomstat) are properly viewed as more or less corroborative of the CIA's…Goskomstat has com piled comparative measures of Soviet and U.S. consumption by linking two sorts of measures: (i) ICP indexes of relative Hungarian-USA and Polish-USA consumption (Hungary and Poland have been participating in ICP for some time), and (ii) Soviet-Hungarian and Soviet-Polish indexes… results of this sort of linkage, shown in Table 2, can be hazardous. Indeed, the CIA and Goskomstat numbers are in close accord for 1980, but diverge markedly for 1985.

 

Table 2 Comparative per Capita Consumption and GDP,
USSR and USA, 1980 and 1985

(USA= 100)

 

Consumption per capita

GDP per capita

 

1980

1985

 1980

1985

CIA, discounted

31

20

44

42

Goskomstat

 

 

 

 

via Hungary

30

26

 40

36

via Poland

 33 

22

41

37

Sources; On CIA consumption, discounted see Table 1; on CIA GDP discounted 
derived from CIA (1990). as explained in text; on Goskomstat data, V. Martynov (1990).

 

Why should this be? …In periodically updating its calculations, ICP has progressively applied increasingly large discounts for quality to Hungarian and Polish goods. …
There has been no lack of criticism of the CIA estimates from the media and from  academics. In one case, such questioning has taken the form of a
substantial recomputation. Considering the Schroeder/Edwards treatment of product quality to be generally too favorable to the USSR, Igor Birman (1989) adjusts their purchasing power parity exchange rates as he deems appropriate.
Curiously, while the adjustments tend to be adverse to the purchasing power of the ruble, sometimes markedly so Birman arrives at an overall adjustment that is much the same as that proposed by Schroeder: 12 percent ….

 

In appraising the Soviet consumption level, Anders Aslund (1990), the noted Swedish student of Soviet affairs, also focuses on the quality of Soviet goods and service. Aslund considers that Soviet product quality is poor indeed: "Virtually all Soviet ready-made clothes and shoes - - Soviet canteen services, half of all Soviet cars (Volga. Moskvich and Zaperozhets, but not Lada), and much else might be counted as close to worthless." Such appraisals, however, are indicated by “Western market value” and are admittedly "too radical because these commodities still offer considerable consumer satisfaction, and have some value on less-competitive markets." Aslund apparently feels that even Birman is, if anything. too favorable to the USSR, but he does not provide an alternate set of empirical estimates.

 

The Soviet economist, A. S. Zaichenko (1988). also believes that Schroeder and Edwards "do not fully appreciate the relatively inferior quality of con­sumed goods and services" in the USSR. But while he compiles a good deal of comparative data on components of Soviet and U.S. consumption, he also does not arrive at any final summary measure on that matter.

 

Consumption and Welfare

 

…. There are possible sources of further bias both in the Schroeder/Edwards index and in the recalculations themselves. This section will consider three such sources.' Shortages, trade services and consumer durables.
For appraising economic welfare, the economic primers prescribe that prices must be at the level which limits demand to available supplies. Prices in the USSR, however, are notoriously otherwise. It is common for supplies again and again to be short of demand, and these widespread shortages clearly add a possibility of bias to welfare calculations, …
… the usual supposition that distortions from shortages tend to inflate the Schroeder/ Edwards index is plausible ... Persistent shortages affect the Soviet standard of living in another way, too, through the cost of time spent searching for goods or in queues, and the related frustration. …While difficult to quantify, such costs certainly diminish whatever welfare is created by measured Soviet consumption.

 

Trade services offer an especially difficult problem of measurement for a cross-country study like the ICP. In practice, in the calculation or comparative consumption volume, whatever the prices at which goods are finally valued, the valuation is the same in different countries no matter what services trade outlets provide in delivering the goods to final users. To quote the conventional aphorism, “a potato is a potato" whether it is sold in a market stall or an air-conditioned shop. …For purposes of welfare appraisal, though, the omission of trade services could he a significant defi­ciency. …
Of more concern in the present context, however, is the fact that Schroeder and Edwards also bundle together trade services with goods. Hence, in their Comparison of Soviet with U.S. consumption, they make no allowance for any difference between the two Countries in trade services. Since U.S. services are in fact far superior to those in the USSR, will this not lead to an egregious distortion? …

 

The treatment of consumer durables presents yet another problem in measuring consumer welfare, and another possible source of a bias favorable to the USSR. Both the ICP and Schroeder/Edwards findings generally conform to UN methodological standards. This leads to a well known inconsistency where housing is measured with both capital and service accounting, but consumer durables are not. Such accounting is conceptually appropriate, par­ticularly if the concern is with welfare appraisal, although it is practically difficult.
Meager data available on stocks of consumer durables in the Soviet Union seem to indicate that, relative to consumption generally, such inventories vary widely in the USSR. Data for cars radios, and televisions are presented in Table 3. While Soviet consumption is notably low in the case of autos, it compares very favorably with those in other lower-consumption OECD countries in respect of radios and TV receivers. ….

 

Table 3 Inventories of selected Durables
Specified Countries and Years

(
per 1000 persons)

 

Passenger
cars,

Radio
receivers

TV
receivers

 

1983

1987

1987

USSR

36

685

314

USA    

552

2,119

811

Germany

412

954

385

France

380

893

396

Japan

226

863

587

U.K.

805

1,145

434

Italy

376

786

423

Finland

315

991

481

Austria

335

573

480

Spain

241

295

368

Ireland

202

580

290

Greece

127

411

175

Portugal

 151

212

159

Turkey

19

160

 172

Sources: Passenger cars Total cars. United Nations Statistical Office (1988) population, OECD (legob) and Stryhen Rapavey and W. W. Kingkade (3988) 7~J; ~ in use: Unesco (1989); for Austra, extrapolated from 3980 by referencc to receivers licensed. TV mains's in we: Unesco (1989); for Prance, Italy, Finland and Ireland, extrapolated from 1980 by retercncc to receivers licensed; for Germany, Greece and Portugal, receivers licensed.

 

…Soviet consumption overall, compared with that in the United Stares, could be appreciably depressed if purchases were superseded by service flows in the calculation of consumption. ...
… The measures compiled here might be viewed as defective in other well-known ways, with biases that could be consequential. In particular. environmental disruption has been extreme in the Soviet Union. After Chernobyl. no one has to be told that this is sometimes quite consequential for Soviet consumers, …

 

From GDP Per Worker to
Per Capita
Consumption

 

How much an OECD country consumes per capita tends to correspond to its productivity, as represented by its GDP per worker. But the relation between the two aspects varies in interesting ways, as becomes evident when we consider also consumption per worker. As shown in Table 4, that is understood not as goods and services actually consumed by workers, but as the relation of aggregate consumption of the entire population to total employment. Since consumption per worker represents the reward in terms of consumables for the entire population for work done, it might be viewed as a kind of proxy for real wages, though it is, of course, not the same thing. (it differs from real wages to the extent that non-labor incomes and household savings and taxes vary relative to labor earnings.)
Not all production is consumed; thus, the relation between productivity and consumption varies across countries. Non-consumption expenditures, con­sisting largely of investment and defense, tend to be lower in the United States than in other OECD countries as a share of GDP, so consumption per worker in other OECD countries is usually somewhat depressed relative to productivity. …

 

For the USSR, productivity as measured by GDP per worker is quite low, at about the level of Portugal and Turkey at the bottom of the OECD economic scale. Since non-consumption is notably high in the USSR, consumption per worker is greatly depressed relative to productivity, and lower than in all OECD nations. However, the relatively high rate of labor participation consti­tutes a partial offset, so consumption per capita is not reduced nearly as much as it would be otherwise relative to productivity. The margin of consumption per capita for the USSR over Turkey is due in good part to the relatively high Soviet and relatively low Turkish labor participation.

 

Table 4
Output per Worker,
Consumption per Worker
and Consumption per Capita,

USSR and Selected OECD Countries, 1985

(USA = 100)

 

GDP per
worker

Consumption
per worker

Consumption
per capita

USSR

36.7

25.0

28.6

USA

100.0

100.0

100.0

Germany

80.6

75.7

69.5

France

81.4

80.0

68.1

Japan

67.9

62.4

65.7

U.K.

69.8

69.3

65.6

Italy

81.0

79.8

64.6

Finland

63.5

56.4

61.7

Austria

70.5

63.0

59.0

Spain

73.7

73.9

46.1

Ireland

61.5

55.9

37.2

Greece

44.9

46.8

37.0

Portugal

37.9

36.3

32.3

Turkey

ES

29.0

20.0

Sources:
For OECD countries,
GDP per capita as for consumption per capita Table I;
employment and population, from OECD (1990B),
consumption per capita, as in Table 1.
For the USSR,
GDP per capita, CIA (1990), adjusted as explained in text;
for employment and population, Kapawy and Kingkade (1988);
consumption per capita as in Table I.

 

As before, the CIA calculations do have their critics, and we must again take note of much-publicized alternative estimates projecting a distinctly less favorable view of the Soviet economy than the CIA’s. However, here again media notice is in no way an indicator of creditability. It may suffice to note several of the better-known calculations.
According to Birman (1989, p. 174), Soviet GDP, relative to that of the United States, is some 45
percent below that of the CIA estimates. This is apparently little more than a judgmental extrapolation from Birman’s findings on consumption, which as we saw are themselves flawed.
Aslund (1990, p. 56+) considers, rather more favorably to the USSR, that the CIA estimate must be discounted by 50 percent
Richard Ericson (1990, p. 88) finds Soviet output per capita in 1985 to be but 28 percent of that of the United States, or 59 percent below the CIA’s measure.

 

Seemingly damaging indeed for the CIA, however, is still another another estimate given in a widely noticed report of a consortium of international agencies (international Monetary Fund et al. 1990, p. 51): Soviet per capita output in 1989 amounted to but $1,780, or 8.5 percent of that in the United States. Apparently this astonishing figure was derived by a foreign exchange rate conversion at a rate reflecting a fresh two-thirds devaluation, a procedure which testifies more to the vagaries of such a calculation for an inconvertible currency country than to the level of output itself. The cited study itself makes no claim for its GDP figure from the latter standpoint.
The last word on the CIA estimates of Soviet output remains to be said. Even with the discount applied here, the estimates could still be too high. Despite all the media notice that alternative figures have received, however, the evidence advanced for a radical reduction such as they entail seems lacking in substance.

 

Conclusions

 

In 1985, when Mikhail Gorbachev became general secretary, the Commu­nist Party had been in power in the USSR nearly seven decades. That year also marked the conclusion of the eleventh of the series of five-year plans that the government had initiated in 1928. Especially under the earlier plans, the government sought above all to expand the USSR’s military-economic poten­tial, but an avowed principal concern throughout has been to raise Soviet living standards. Indeed, according to one widely-heralded projection sponsored by Khrushchev, the USSR was already to have achieved 10 years ago the “abundance of’ material and cultural goods for the whole population” that would allow the government finally to usher in the long-promised higher phase of Marx.

 

Things have turned out rather differently. By the mid-1980s, consumption in the USSR was at the lowest levels experienced in OECD nations. Consumption in the USSR has been depressed by notably large allocations of the GDP to investment and defense. The comparatively high Soviet rate of labor participa­tion, however, has constituted a sizable offset to those expenditures. In the upshot, if per capita consumption in the USSR is low, that is due largely to the fact that productivity there is also low. Output per worker in the USSR barely matches Portugal, and is only a little above that of Turkey. While estimates of consumption and output for the USSR are notably inexact, even these low estimates seem more likely to overstate than understate Soviet attainments.

 

For the principal reason of such underperformance, according to voluminous western research, one need look little further than the Soviet system of central planning, with its daunting tasks for superior agencies and its deeply flawed incentive arrangements. Communist ideological and political constraints on economic thought and practice have also limited economic performance in other ways.

 

 

 

 

 

 

 

 

 

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