thor gylfason, a professor emeritus of economics at the University of Iceland, is a research associate at the Center for Economic Studies at the University of Munich.
Published September 28, 2022
Few saw the collapse of the Soviet Union coming. But with hindsight many considered it inevitable, because the Soviet economy was like the wreckage of a ghost ship that was bound to sink. So how different is Russia three decades later?
Start with 1989 (the beginning of the end) to 1991 (the end of the end). The statistics available back then wildly exaggerated the size of the Soviet economy. But as the dust settled, Russia’s per capita GDP in terms of purchasing power appeared to be just one-quarter that of the United States. Subsequent World Bank revisions suggest that number was really more like half the U.S. per capita GDP, but thereafter the creaky, corrupt economy nosedived. And it took 16 years for per capita GDP to regain the very modest heights achieved by the USSR.
Lest you doubt, consider how economic failure was (and still is) reflected in public health statistics. At the nadir, Russian newborns had a life expectancy 12 years shorter than their counterparts in the United States. The gap has since narrowed to three years — but in part because U.S. life expectancy has stagnated even as life expectancy kept on rising in the European Union and around the world.
Why the Collapse?
Again, with hindsight, this was a no-brainer. First, no country has ever managed to achieve a high standard of living with an economy tightly directed from the top along with state ownership of most of the productive assets. In Russia, as elsewhere, central planning and isolation from world markets led to massive overinvestment in capacity to make shoddy, often obsolete goods. To this day, Russian firms produce hardly anything foreigners want to buy except fossil fuels, hard-rock minerals, fertilizer, weapons and grain. Indeed, having failed to diversify, Russia is virtually a petro-state like Saudi Arabia. Manufactures accounted for 21 percent of Russia’s goods exports in 2020 compared with 69 percent in the OECD countries.
Consider, too, that in its last decades the Soviet economy was still haunted by the specter of Leninist-Stalinist ideology. Ignoring the realities of modern economics, the Kremlin remained focused on the production needed to survive in a hostile world. Services, the source of most growth in advanced economies, accounted for less than a third of Russia’s GDP compared with 60 to 70 percent in OECD countries. Even today, services like medical care that are the backbone of the good life account for a mere half of Russia’s GDP today compared with 80 percent in the United States and two-thirds in the world at large.
In the top-down world of central planning in which no markets existed to determine relative value, “the more, the better” was the order of the day. Moreover, the Soviets considered it best to build gigantic enterprises that monopolized production because this made it easier to keep them under control. Scale economies — if there were scale economies — were buried under the weight of all the inefficiency and sluggish response to changing demand created by monopoly. Governance was permeated by ignorance, deceit and corruption as well as flat-out theft.
When the disaster of the Soviet economy became apparent, the apparachiks had no idea how to fix it. Mikhail Gorbachev, who rose to power on the strength of the resulting panic, was cut from the same cloth as Nikita Khrushchev who believed he could engineer economic and civil reforms without allowing competition with the communist party. Gorbachev prescribed glasnost and perestroika — “opening” and “transition” — without much forethought about where they would lead.
The Soviet system was the gift that kept on giving. In light of its more than ample endowment of natural resources and its much-admired higher education system, Russia might have been expected to make the transition to a market economy fairly quickly.
But a comparison between Russia and newly independent Poland is telling.
Putin’s adventure in Ukraine and Russia’s subsequent economic and political isolation from the West virtually guarantee that the economy’s already limited capacity to grow won’t improve.
In 1990, per capita GDP in Russia (in terms of purchasing power) was almost double that of Poland. But the Poles have managed steady and rapid economic growth in the years since, growing three times as fast and easily surpassing Russia’s per capita GDP in the past decade.
The growth differential between Poland and Russia is due, among other things, to different initial conditions. Though still in the Soviet orbit, Poles were able to spend the 1980s preparing for better times. Millions of them travelled to other countries and many learned English, German and other languages. The Poles, moreover, had competent non-ideological economists to guide the transition.
After Solidarity, the backbone of the Polish labor movement, successfully crushed the Communist Party in the partly free general election in 1989, the new Polish government decided that rapid reform — aka, shock therapy — would be more likely to succeed than gradual reform. The idea was that the best way to cross the divide was in one leap, thereby denying interest groups with a lot to lose a chance to organize resistance. The government succeeded with significant help from the United States and the EU. Jeffrey Sachs, then a Harvard professor, was in Warsaw in an advisory capacity and described the transition from the inside in his 1993 book Poland’s Jump to the Market Economy.
Sachs was also on deck in Moscow a little later to advise the government of Boris Yeltsin, the first president of Russia. His advice fell on rockier soil in Russia, though, partly because Russia offered more temptations to insiders who went all out to enrich themselves by grabbing state enterprises at fire sale prices. The Poles had no comparable opportunities in which the assets could be exploited without Western technology and expertise.
Sachs and others called on the U.S. government to support Russia’s reforms, but their pleas evoked too little response, too late. Even the IMF, which should have been the first to show up, took quite some time before extending its help to a government widely condemned as corrupt. The U.S. government was suspected of having withheld assistance at this crucial juncture to keep Russia weak.
If so, the U.S. government and its European allies made a fateful mistake. While the bet would hardly have been a sure thing, they threw away an opportunity to lift Russia out of the ashes even as they used the leverage gained through financial aid to sustain democracy and prevent the giveaway of trillions in assets.
From Hope to Kleptocracy
Before stepping down from the presidency in 1999 after almost a decade in office, Yeltsin anointed Vladimir Putin, a sober, no-nonsense type with the skills to restore order. Putin did deliver, but used the political capital he accumulated in the process to tighten his grip on power and to bend the corrupt elite to his will rather than to destroy it. Meanwhile Europe, seduced by its inside track on a lucrative new market for industrial goods and access to cheap Russian natural gas, made only pro forma protests.
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So, what does Putin’s Russia have that Soviet Russia didn’t have? Living standards are higher than in Brezhnev’s times, but the gains haven’t kept up with improvements in much of post-Soviet Eastern Europe and the economy remains yoked to the vagaries of the fossil fuel markets.
Nor can Russians hope for a better material quality of life anytime soon. Putin’s adventure in Ukraine and Russia’s subsequent economic and political isolation from the West virtually guarantee that the economy’s already limited capacity to grow won’t improve. Thanks to its nuclear arsenal, contemporary Russia is absolutely, positively secure in its homeland — but Brezhnev could have said the same. And thanks to Putin’s imperial ambitions, the relatively gentle hand of repression at home is likely to grow a lot less gentle.
The more Russia changes, it seems, the more it remains the same.