Death of the empire. Part III.

6 Political economy of external shocks

6.1 USSR and the falling oil prices. The gist of the choice.

Insufficiently competitive machine building industry left no chances to change the structure of export trade. Cutting grain import might lead to the social crisis. Good harvests in 1986-87 allowed to soften the consequences of the falling oil prices, but in 1988 the crisis became even more threatening. The dependence of wheat harvests on the weather, caused by the developing of virgin lands in the 1950s and the low oil prices made the situation catastrophic. This was the reason of the fall of the Soviet economic system.

Possible strategies were:

• large scale raising of prices, comparable to what was done in the 1930s;
• introduction of rationing;
• lowering the production of the processing and building industries and raising the export of raw materials;
• cut capital expenditures and decrease the volume of import of machines and tools from the West.

The first option was a violation of the contract between the society and the power, formed in late 50s-early 60s and confirmed in 1962 in Novocherkassk. Besides, increased prices wouldn't solve the problem due to large forced savings of the people. The rationing opposed the existing hierarchy of distribution, even though the idea was popular (in 1991 60% of Soviet people supported this idea, while only 16% preferred growing prices). Decrease of military spendings led to the conflict with the army and the military industry. Similarly, decrease of capital expenditures led to the conflict with the regional elite and with the industrial ministries and could end with a quiet coup, like it was with Khrushchev. It was impossible to cut the industrial production in the cities, where only one factory gave jobs to the majority of the population. Cuts of the oil export to the Eastern Europe become regular. Capital expenditures and import of machinery continued to grow. A large part of the imported tools were never used, however.

The new leaders did not understand that attempts to avoid conflicts with the people or with the industrial/agricultural elite only increased the chances of the conflict with both. Traditional Soviet style of management was oriented on the natural criteria, not the financial ones. The problems of kettle farming were discussed by the government more often than the budget problems. Finances were seen as a dull accounting. Moreover, the real state of the budget was available to a very limited circle of the top officials. Gorbachev recalled: "Andropov asked me and Ryzhkov to analyse possible decisions and to report to him. Trying to get to the gist, we asked for a chance to understand the state of the budget. Andropov laughed: 'You want too much. I won't let you see it.'" Andropov himself admitted, though, that he knew next to nothing about economy.

Deintellectualization: from a protocol of the Central Committee of the CPSU: "On comrade Zasyadko: they say he has quit drinking. Send him as a minister to Ukraine." Zero economic education of the leaders.

6.2 Chain of mistakes

By 1985, the Soviet leaders did not yet understand how deep the crisis was, but they noticed the decrease of the oil production. For the 1986-1990 the plans of the capital expenditures in the oil and gas industries were by almost 1/3 larger than they had been in 1981-1985 and 3 times larger than in 1971-1975. The share of the oil and gas industries in the total amount of capital expenditures grew from 14% in the 9th five-year plan (1971-1975) to 23% in the 12th five-year plan (1986-1990). The growth of the industry was smaller than the growth of the capital expenditures.

The government did not understand that the crisis was financial and prepared two blows on the financial system: the anti-alcohol campaign and the program of the acceleration of the economic development.

In 1985, it was planned that the income from sales of alcohol should be 60 billion rubles. In 1986, the income was 38 billion rubles, in 1987 -- 35 billion rubles, in 1988 -- slightly more than 40 billion rubles.

In 1986-1988 the budget gains decreased by 31 billion rubles and the spendings grew by 36 billion rubles.

Monetary emission:

Year	Emission, billions of rubles	Emission growth, % of the previous year
1986	3.9	8.3
1987	5.9	51.3
1988	11.8	100
1989	18.3	55.1

By 1989, the government was worried by the financial situation. In January 1989 Gorbachev announced 14.2% cuts of the military spendings and 19.2% cuts of the weapons production.

The government finally understands the seriousness of the situation and decides that the conflict with the administrative elite is the lesser of the evils. However, the decisions are late and the scale of taken steps is incomparable with the scale of the crisis.

6.3 Growing problems of the Soviet economy

The oil production began to decrease again. From time to time various goods disappear from the shops: sugar, toothpaste, soap, washing powder, school copybooks, batteries, not to mention meat, shoes, etc. The 1987 program of economic reforms was buried. The control over the monetary mass and the people's incomes was lost.

Incomes of the citizens grow by 12.9% instead of the planned 1.2% and they grow 1.4 times faster than the expenses. In the beginning of 1990 the unsatisfied demand was 110 billion rubles against 60 billion rubles in 1986. The Central Bank issues more and more credits to the state budget.

Grain production falls and the prices on the world market grow. It's getting difficult to buy meat, butter, sweets, sugar, tea, flour, cereals, fruits and vegetables, fish, cigarettes. The supply of fabrics, shoes, children's stockings, school copybooks, wood, construction materials, matches is sharply decreasing.

By the end of 1989 the Soviet leaders are fully aware of the problems. Western banks are worried by the growth of the USSR's debt. Soviet Union cannot pay for the imported goods and the shipments stop. The credits issued earlier by the USSR to the satellite states are hopeless.

Especially dangerous was the situation with the medicine. The Soviet industry could provide only 40-45% of the necessary drugs. Supplies from abroad are stopping.

6.4 Currency crisis

Western banks refuse to issue new credits. In 1988, the income from the exported goods was only 54% of the planned amount. In 1986-88, more than one million complaints about poor quality of the exported goods were received. The debt is two times as large as the income from the export. Even in the trade with the socialist countries import exceeds export. All income from the export is spent on the debt payments.

Foreign banks refer to their governments. The Western countries tie new credits with the economic reforms and the delimitation of the authority of the central governments and the republics.

6.5 Economical and political liberalization against the background of financial problems

The first known official document where the necessity and possibility of keeping the political system was questioned is the letter of Alexander Yakovlev to Gorbachev written in December of 1985: "Today the problem is not in the economy. The political system is the key. Hence the necessity of full and consistent democratism. Democracy is, first of all, freedom of choice. We have no choice, only centralization. Now, we don't understand the ongoing historically inevitable transformation of the time when there was no choice to the time when successful development is impossible without the democratic process of choice which would involve every citizen."

On September 25, 1986, chairman of KGB Chebrikov offers to set free one third of the Soviet political prisoners and then extends the proposal to one half. Magazines begin publishing banned texts.

The liberalization per se canot quell financial crises. And yet, the liberalization started in 1987 heavily influenced the collapse of the Soviet economy.

Ways to modernize Soviet economy were discussed since 1960s. However, the ideas of its radical reconstruction were under ban till mid-80s. The phrase "market economy" (even "socialist market economy") were never applied to the USSR. The word "reform" was not used since early 70s till Gorbachev first uttered it in 1986.

Free prices are a necessary requisite of the market economy, even the socialist one. Market mechanisms do not work without free prices, as the Polish experience of 70s-80s had demonstrated: autonomy of the enterprises gives no stimuli to the effective production under fixed prices.

On November 11, 1986 the law on individual labour was adopted. On May 1, 1987 individual farming was legalized. Unfortunately, unlike in China, these measures gave no results in 1988 because of lack of trust to the government: the Soviet people were sure that the announced reforms will never be realized.

Enterprises demanded for more autonomy, but insist on the guaranteed supply of tools and materials from the state.

The idea of the workers' participation in the management of the enterprise was discussed in the early XX century, before the revolution of 1917, and the Soviet leaders did not reject it completely. In 1962, Khrushchev said: "Probably, we should have some kind of a council at the enterprises, and the director will make a report at the council monthly or quarterly. I can imagine that the council will elect the director from a number of candidates."

Autonomous enterprises raise salary for the workers. Labour discipline suffers.

In May 1988, the law on cooperation is adopted. Cooperatives buy products for fixed prices, process them (or not) and sell for fre prices. 80% of cooperatives were organized on the state enterprises. Average salary in the cooperatives is 2 times higher than on the state enterprises.

Decrees of July 6 and August 4 allow the VLKSM (communist youth league) to go to business, giving a chance to the elite to use the comsomol resources for commerce.

A large number of commercial banks are organized. Many of them violate the laws and regulations on banking. Soviet leaders do not understand that the liberalization of banking should be one of the last, but not the first stage of the economy transformation.

In 1989 miners' strikes begin. They demand for better food supply. The government promises to increase the supplies, but cannot fulfil the promises. Salary is payed regularly, but the money get devalued fast.

7 Developing crisis of the socialist economical and political systems