Early Years (1917-1921)
When the Bolshevik Revolution took place in 1917, Russia was not doing successfully in terms of its economic conditions. Despite its pre-war economic and financial success, the Empire had already become a poor one in the period after the war. Compared to other great powers, such as the United States, it had a lower real GDP per capita, though in regards to real output per capita it was an average economy (Harrison, 2017). The inequality level was high, and it was one of the main reasons the nation went against the regime and toppled the Tsar from the throne. In addition to all the problems, the First World War had led to distressed economic conditions in most parts of the world, including Russia. Its effects on the economy of the state lingered even several years after the Bolsheviks took power. Due to the transient but serious effects of World War I, the Civil War, and the revolution, it took about 9 years for the Bolsheviks to bring the economy back to its pre-war level (Dyker, 2002).
In fact, the Bolshevik policies were successful at overcoming the Civil War. Those policies included the nationalization of banks, large factories, and land. Additionally, the state banned private trade among people, made public services such as trolleys free of charge, and rationed some goods (Fischer, 1994). Although the Civil War was almost over thanks to the policies, the Soviet economy was going through a challenging time. Its output level was decreasing significantly, inflation was very high, around 1000% per year, citizens were suffering from famine, and uprisings were taking place. The agriculture sector started producing less over time as the state kept demanding more and more grain.
Moreover, the Bolsheviks had decided to cancel the debts of the former Russian Empire. As a result, the international community had feelings of anger and distrust towards the newly formed Soviet Union. Their reactions were understandable since Russia owed 538-568 million pounds to Great Britain, 3,753 million francs to France, and 147 million dollars to Japan (Oosterlinck, 2016). The attitude towards the Soviet Union made the situation even more challenging for the state because foreign investors were reluctant to provide it with capital. The unwillingness was also caused by the global financial distress that was followed by the war.
New Economic Policy (1921 -1928)
In 1921, the government decided to overcome the economic problems by introducing a new model: New Economic Policy (NEP). Vladimir Lenin, the main person behind the idea, announced that with some exceptions, the economy would be privatized (Moss, 2005). The exceptions included foreign trade, communication, transportation, banking, and others. The plan reduced the role of the government in the economy and liberalized the prices. In other words, private trade became legal. Peasants were allowed to trade with whoever they wanted to. The government stopped requisition of agricultural produces, and imposed taxes, around 5%-17%, instead (Fischer, 1994). The government also endeavored to invite foreign capital, but only an insignificant amount of capital flowed in.
The NEP led to an increase in the output and made economic conditions better for a while. The state bank issued a new paper currency in 1922, the chervonets, but the sovznak was also the main currency. Both were used by the citizens for a while, and currency stabilization took place in 1924. The economy was recovering, the budget was reaching the surplus, and the parity of the Soviet ruble against the dollar was going up. Actually, its national income was now slightly higher than the pre-war level, which was an indicator of the success of the NEP. However, problems arose over time. Firstly, ideological factors became involved in the issue and made it hard for the Soviet Union to apply state capitalism (Fischer, 1994). Secondly, Bolsheviks realized that it could be difficult to use the funds that came from the agriculture sector in the industrial sector under the NEP. Finally, several members of the party opposed the idea of the New Economic Policy. Lenin believed it was necessary to go through state capitalism in order to reach communism, but not everyone agreed with him. However, even Lenin at some point started to think the NEP would be abused by some businessmen (Moss, 2005).
Eventually, the country had to abandon the New Economic Policy after Lenin’s death during the Great Turn of 1928. Under Joseph Stalin’s leadership, the Soviet Union adopted the first five-year plan. It can be said that the new economy was what Communism was intending to reach. The first five-year plan was mainly focused on the development of heavy industry and the collectivization of agriculture (Britannica, 2018). However, as expected, this led to a declining private sector. The first five-year plan, which ended in 1932, was considered a failure because it did not lead to overall significant growth, and it caused the population to decline in a short period. Collectivization and industrialization were the main causes behind the famine of 1932-1933. Nonetheless, the state became a leading industrial nation as a result of the plan. Industrialization was improved considerably, and the state reached its goals in a shorter time than expected. The increased production in industry fulfilled around 94% of the first five-year plan (Riasanovsky, 2011).
The second five-year plan was adopted in 1932 and ended in 1937. It also concentrated on industrialization mainly. Despite the success of the second plan in several sectors, including communications and railways, it was not as successful as the first plan.
The third plan started in 1938 ended early in 1941. As a result of World War II, the state was not able to distribute a sufficient amount of resources for the plan. Still, a moderate increase in industrial production was reported. Although the plan had been intended to focus on consumer goods, the war prevented the state from doing that. In fact, consumption levels decreased over time.
The war had almost a devastating effect on the economy of the USSR. The output level decreased 34% in the first two years of the war, and it took several years to recover. Millions of buildings were destroyed, industries such as farming, transportation, and mining suffered greatly, a third of its capital stock was destroyed, and millions of people died. This led to a decrease in the working population and slowed down the economic growth of the Soviet Union. The state decided to borrow funds from the United States but was rejected.
The USSR officially rejected being a part of the Bretton Woods organizations and the Marshall Plan in order to build its own socialist bloc consisting of its satellite states. China would later join the bloc as well. The Council for Mutual Economic Assistance would be established in 1949 to strengthen the economic relations among those countries.
A month before the end of the World War, the state announced that it will start the fourth five-year plan, and Stalin announced his plans about making the Soviet Union a leading industrial power. The plan focused on heavy industry and the military. It was followed by a similar plan which ended in 1955, two years after Joseph Stalin’s death.
In the 1950s, the economy of the Soviet Union was performing much better. There was an impressive growth in agricultural output, consumption levels, and GNP (Fischer, 1994). The new Soviet leader, Nikita Khrushchev was confident that his country was doing better than the United States. In 1956, he launched the sixth five-year plan. The goals of the plan were too unattainable at the time, and therefore, it came to an end two years later. A year later, the seventh plan was launched, and it was focused on naturals resources and consumer goods (Waller, 2015). During that time, the state announced a new Soviet ruble. The next leader, Leonid Brezhnev, decided to improve the economy by letting firms make money by following profitable ways of production rather than by getting direct orders from the state. It can be said that the USSR was going through one of the best periods of its life in terms of the economy. Its GDP was only twice less than that of the US (CIA, 1989).
The eighth plan was announced in 1966 and lasted until 1970. The main distinguishing features of the plan was that it increased the number of grain exports and led to significant success in the vehicle industry. The eighth plan was successful mainly because its designers set very realistic goals. Moreover, when the plan failed to be approved in the beginning, its targets were lowered even further making it more attainable (Katz, 1972).
The ninth plan was launched the following year, during the time of relaxed political relations between the U.S. and the USSR. The economy benefitted from higher levels of trade as a result of better relations between the two major power. The ninth plan allowed the Soviet Union to improve its computer technology significantly (Beissinger, 1988). Its computer technology had to be improved because command economies require government officials to work with large sums of statistical data. A lot of computers produced both within the Union and outside were being used for that purpose. However, it should be noted that the Soviet Union was behind most of the world’s advanced countries in terms of computerization. Other than the success of the computer industry and a modest increase in real income, the plan did not bring significant achievements. Actually, it was the first time the Soviet Union was facing stagnation.
The tenth five-year plan was also designed by Brezhnev and his administration. The Era of Stagnation had already begun, and it was caused by various events, including the Soviet-Afghan War and the economic measures taken by President Nixon in 1971. It can be said that the events betrayed the weaknesses in the economy of the USSR. The Soviets were spending a large portion of their budget on the military at the expense of consumer goods, and it commanded its satellite states to do the same. As a Polish economist and diplomat, Oskar Lange, observed, the economy of the Soviet Union was more like a “war economy” than socialism (Lange, 1962). As a result of that, its GDP failed to grow and stayed the same for several years. Additionally, the plan was fulfilled only by some regions of the Soviet Union.
The eleventh plan was announced in 1981. The Soviet output was in decline. However, its trade volume was higher than ever. And its trade partners were not only socialist states but the Western states as well. At the time, one of the major obstacles was the low birth rates in the USSR. That was one of the reasons that the plan was unable to fulfill all the targets.
The twelfth five-year plan was a failure. In 1986, the government planned to accelerate the economic development of the Soviet Union under the slogan of uskoreniye (acceleration). It was aimed to shift the economy partially from a command economy to a decentralized one. However, during 1986-1990, the production levels went down substantially, and the state was facing an economic crisis.
The last five-year plan was announced in 1990. However, it failed to be a “five-year plan” because the Soviet Union collapsed a year later. At the time, Mikhail Gorbachev was the president. Gorbachev had been the General Secretary of the Communist Party since 1985. Therefore, he was actively involved in the actions of the state even before he became the president. Since 1985, he had been expressing his sorrow for the stagnation that had happened during Brezhnev’s presidency. Gorbachev believed the economy had to go through changes to become a good one. He proposed several new ideas including perestroika (restructuring) and glasnost (openness) in 1985 and the ideas were officially applied in 1987. Therefore, it can be said that the shift towards decentralization was mainly due to Gorbachev’s ideas. He made a good deal of radical changes in various parts of the economy, including the privatization of businesses, the permission to create cooperative businesses, and the permission for enterprises and organizations to conduct foreign trades. Additionally, Gorbachev made some attempts, such as giving freedom to the press, to make the Soviet Union more open and transparent (Maranzani, 2019). However, the policies backfired. Government spending and inflation levels went up sharply. Gorbachev failed to realize his dream and the Soviet Union collapsed in 1991.
Gorbachev was praised several times by President Bush for his policies and for moving the country in the right direction. Clearly, what he did was more similar to the Western idea of the market economy than any other policies of previous Soviet presidents. However, not everyone was pleased with his policies. Even today, some believe Gorbachev’s policies were the main reasons for the collapse of the Soviet Union. He is blamed for making radical changes in a short time and weakening the Soviet Union. Although it is hard to say whether he was directly responsible for the decline of the USSR, it is understandable that such quick and radical changes in a state like the Soviet Union may have had a damaging effect since no one there was used to them. And it should be remembered that he proposed the new ideas in a time when the Soviet economy was fragile. Although the collapse of the Soviet Union was almost inevitable, it may have been slightly better to introduce them slowly and delay the process. As a Russian proverb goes, the slower you go, the farther you will be.
*Ali Mammadov has earned a Bachelor of Science degree in Economics and Finance at George Washington University. Currently, he is pursuing a Master of Arts in International Relations at Johns Hopkins School of Advanced International Studies. He works as a Visiting Researcher at Economics Research Institute and writes blog posts on his Medium blo
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