Capitalism Communism in Russia USSR Bob Allen Nuffield

Capitalism & Communism in Russia/USSR Bob Allen Nuffield College 2008

This book undertakes a reassessment of Soviet economic history: • • What institutions and policies worked? Which failed? Why? What lessons does Soviet history have to teach?

The reassessment is based on three axes: • Repositioning the debate on Soviet performance in a world historical context. • Recalculation of national income from 1928 to 1940 including, in particular, the growth in consumption. • The use of simulation models to explore historical and policy counter factual trajectories – What was the effect of investment strategy and collectivization on industrialization and living standards in the 1930 s? – What was the effect of famine, world war, and fertility on population growth?

This inquiry leads to a more favourable assessment of Soviet performance than is usually reached. It is not an unqualified endorsement of the Soviet system: • Dictatorship was a political model to be avoided • Collectivization and political repression were human catastrophes that brought meagre economic returns. • The strength of central planning also contained the seeds of its undoing, for it required a planner. When plan objectives were misguided, as in the Brezhnev period, the system stagnated.

I will examine the following issues: • • • Soviet growth in a world historical context Growth in the late imperial economy The standard of living, 1928 -40 Causes of rapid growth, 1928 -40 Soviet demographic history The Soviet growth slowdown

Part I Soviet Growth in World-Historical Perspective

The main facts about economic growth include: • Income per head has gone up in almost all countries. • Among the rich countries of the OECD, there has been a convergence of income as poor countries have grown faster than rich countries. • The reverse, however, is generally true: The countries that were poor in 1800, 1900, or whenever, have grown less rapidly than the rich countries. • As a result, incomes have diverged around the world.

By many indicators, 19 th century Russia was among the poor countries. • • • Income per head Share of the labour force in agriculture High fertility demographic system Capriciousness of the law Authoritarianism of the state. If the normal pattern applied, Russia would have remained poor throughout the twentieth century.

The remarkable feature of the Soviet period is that Russia bucked the trend. • Japan was the most successful economy—one of the few poor countries that became rich. • The USSR was the second most successful poor country. • More recently, South Korea and Taiwan have joined the club. • But these few are exceptions to the general pattern.

USSR did better than most countries that were poor in 1928 and beat the OECD catch-up regression line.

Question: Why did the USSR perform so much better than so many poor countries? This is not the usual question about the Soviet economy!

Part II The late Imperial economy, 1870 -1917

Per capita income rose in many countries 18701913 including Russia. Key questions: • What caused the economic growth? • Would it have continued in the twentieth century and closed the gap with the West? • Did the pattern of growth play a role in the revolutions of 1905 and 1917?

Agricultural expansion was the main cause of growth in the late Imperial economy. After 1896, wheat prices rose world-wide and wheat exports fuelled growth in Canada, Australia, Argentina, India, and Russia.

Without industrial tariffs, Russia would have become more agricultural. State promotion of industry was a secondary cause of growth.

Would Russian growth have continued in 20 th century and closed the gap with the West? • Only one country—Japan—did that. • Russian growth would have had to be at the top of the world league table. • The causes of Imperial expansion did not continue – World wheat price collapsed in 1920 s – No more railroads to build (and they wouldn’t have been profitable) – Other wheat exporters stagnated or declined for half a century. • Only by changing the bases of growth could the economy have continued to develop. Would Tsarist Russia have had the institutional revolution of Japan?

Russian economic growth was not fast enough to benefit all Russians. • Real wages stagnated. • Extra income accrued to capital and land. • In western Europe, growth was fast enough to raise wages giving workers a stake in the system. This underlay their conversion to social democracy. • In Russia and other peripheral parts of Europe (e. g. Spain), growth was not rapid enough to benefit workers, and the polity cracked.

Russian growth was not fast enough to create a high wage economy. • Output per worker in industry rose by a factor of 2. 4, • while real wages were constant:

In the countryside, peasant incomes rose as grain prices and productivity increased.

Real wages were again constant. • The rise in income accrued to land. • Rising land values were common on the wheat frontier around the world. • Land ownership, therefore, was the dominant economic issue in the countryside. • Increasing returns to scale in agriculture meant that the society of small farmers was not in equilibrium and explains the appeal of the equal division of the (increasingly valuable) land.

The character of Tsarist development: • A one-off natural resource boom souped up with some tariff induced industrialization. • The wheat boom would not have continued through the twentieth century. • Further growth required ‘doing a Japan’. Was the Tsar flexible enough to restructure the whole society? • Growth was feeble enough so that labour markets were slack, and the gains did not trickle down to the working class. • Rising inequality and disputes about the ownership of land, an asset increasing in value, underpinned radical politics and political instability.

Part III Standard of Living, 1928 -40

GDP grew rapidly 1928 -40. Investment soared. Did the standard of living rise? Four indicators: • • Food consumption per head anthropometrics Consumption person Real wages These indicators show that the standard of living increased.

Calorie consumption per head

Anthropometrics • Life expectancy of men increased by 3 years and women by 5 years in the 1930 s. • Army recruitment data indicate that the average heights of men in the late 1940 s (172 cm) were considerably higher than their counterparts in 1910 (165 cm).

Consumption per head rose

Real earnings rose for those who moved from the country to the city. That’s most city residents in the late 1930 s.

Conclusion: Soviet growth 1928 -40 included rising consumption as well as soaring investment. This was a remarkable achievement. How was it accomplished?

Part IV Causes of rapid growth and rising living standards, 1928 -39

Explaining Soviet growth must begin with agriculture, which was the largest sector of the economy in the 1920 s. Detailed comparisons of European Russia with the Canadian prairies and US northern plains shows: • Little difference in biological efficiency (crop and animal yields). • Great difference in efficiency in employment and labour productivity.

There was a great difference in employment and labour productivity. • The average north American farm was 84 hectares, while the average Russian farm was 11 hectares. • Differences in mechanization played a big role. • Even without mechanization, the Russian farm labour force was larger than necessary for cultivation. Russia was a classic labour surplus economy. The development problem was increasing the capital stock to provide jobs for everyone.

Increasing employment was the secret to raising investment and consumption concurrently.

How is this diagram related to history? Movement from D to E to F involved: • The concentration of investment on heavy industry to rapidly increase the industrial capital stock and provide industrial jobs. • The collectivization of agriculture to feed the industrial workers, to provide them with raw materials, and to push them out of the countryside. • Plan targets and soft-budget constraints to guide business output and to ensure full employment. The movement of labour from farm to factory was the motor of Soviet growth, and these were the processes that accelerated that movement.

I use a multi-sector simulation model to measure the importance of these factors. • Model tracks population and accumulates capital from one year to the next. • 50 equations describe the main sectors of the economy, and they can be altered to explore counterfactuals.

$Counterfactual thought experiment: What explains the rise in GDP? e is the fraction of$

Counterfactual thought experiment: What explains the rise in GDP? e is the fraction of producer goods output reinvested in that sector.

Causes of growth in GDP • Raising e from. 07 to. 23 added 50 billion rubles to 1939 GDP. • Soft budgets instead of hard budgets added 60 billion rubles. • Collectivizing agriculture only added 20 billion rubles.

Similar conclusions hold if we analyze consumption per head:

Causes of growth in consumption per head • Raising e from. 07 to. 23 added 100 rubles to 1939 consumption person. • Soft budgets instead of hard budgets added 200 rubles. • Collectivizing agriculture added 80 rubles.

This graph contrasts the effects of institutions on industrialization: Note: e =. 23 in all simulations.

Overall conclusions: • Expanding heavy industry and industrial employment via soft budgets were the keys to rapid growth. • Collectivization made a positive—but small—contribution to economic growth. • Most of the output gains of Soviet industrialization could have been achieved by the planned management of industry within the framework of the NEP.

Part V Soviet Demographic History

There are two ways to raise GDP per head: • Increasing GDP • Reducing the number of heads Was the rise in GDP per head due to high mortality from Stalinist repression, collectivization, and the Second World War?

A slowly growing population was a significant feature of Soviet history. • On constant territory, the Soviet population grew 70% between 1928 and 1989. • Over the same period, populations in developing countries grew three to five times. • In the 1920 s, the USSR had a high fertility population like those in less developed countries. • Why did the USSR not experience a similar population explosion? Why did the population not reach 1 billion?

The impact of collectivization and World War II was studied with a simulation model. • Both events increased mortality and also reduced fertility by changing the age and sex distribution of the population. • Both events caused permanent and persistent reductions in the size of the population. • Neither of these reductions was large enough to explain why the USSR did not have a population explosion.

The reason that the USSR did not have a population explosion was the rapid fall in the fertility rate.

If fertility had remained high, the Soviet population would have approached 1 billion.

Why did the fertility rate fall? • Fertility model estimated from Russian/Soviet censuses of 1897, 1939, and 1959. • Results very similar to models estimated for third world countries in late twentieth century. • The key variables explaining fertility decline were the education of women and higher incomes. • Educating women and higher living standards were important features of Soviet policy, and they had a major demographic pay-off.

Part VI The Soviet growth slowdown: If the system was so good, why did it fail?

The Soviet economy grew rapidly until the 1970 s when growth slowed:

The growth slowdown was concurrent with the end of ‘surplus labour’. Weitzman has offered an elegant analysis linking the two:

The Soviet isoquant was close to a right angle, and the economy turned the corner in the 1960 s:

A simple macro model simulates Soviet growth slowdown. • CES production function – Y = A(h. K-ρ + (1 -h)L-ρ)-1/ρ – Elasticity of substitution = 0. 4 • 1941 -47 left out, so 1948 followed 1940. • Population L grows exogenously – Interpolated 1930 -48 • Investment: It = s. Yt – historical series for s. • Capital stock K accumulated by perpetual inventory – Kt = Kt-1 + It + δ Kt-1 • No technical progress

Simulations of this growth model replicate Soviet history:

The Soviet economy acted ‘as if’ investment suddenly ran into diminishing returns when full employment was reached, but the appearance is illusory. • The real problem was two changes in investment policy: – Modernization of old factories rather than the construction of new ones. – Depletion of old oil fields and mining districts led to massive redirection of investment from Europe to Siberia. • It was ‘as if’ the USA tried to rebuild the rust belt and supply it with Canadian raw materials rather than shutting it down and reconstructing the economy. • The accumulation of unproductive capital created the statistical illusion of an almost right angle isoquant.

The Cold War also reduced the growth of the Soviet economy. • The allocation of R&D resources to the military in the 1970 s and 1980 s cut innovation in the civilian economy. • Half of the decline in the growth rate was a decline in productivity growth. • This decrease provides an upper bound to the impact of the arms race with the United States.

This interpretation of the Soviet decline is the reverse of those that emphasize incentives. • Planning worked well in its own terms: Shifting the energy base from coal to oil to gas was an impressive achievement. • The problem was that this was not the best approach to energy problems. • The problem was not that managers failed to follow the plan. • The problem was that the plans did not make sense. The early strength of the Soviet system became its great weakness as the economy stopped growing because of the failure of imagination at the top.

For more Buy the Book!