Why the USSR Collapsed Economically

For much of the 20^th Century, the Soviet Union rivaled the United States in political, military and economic strength. While the central command economy of the Soviet Union was diametrically opposed to the market liberalism of Western nations, the rapid economic development that the Soviets posted in the middle decades of the century made their system appear to be a viable economic alternative.

But after growth tapered off and various reforms were instituted to revive the stagnating economy, the Soviet Union eventually collapsed, along with its promise of an alternative to Western capitalism. Where centralized economic planning helped spur its mid-century growth, the Soviet Union’s piecemeal reforms to decentralize economic power ultimately undermined its economy.

Beginnings of the Soviet Command Economy

The year 1917 saw the Russian czar overthrown by groups of revolutionaries including the Bolsheviks, who fought and won a subsequent civil war to create a socialist state within the borders of the former Russian empire. Five years later, the Union of Soviet Socialist Republics (USSR) was established, bringing together a confederation of states under the rule of the Communist Party. Starting in 1924, with Joseph Stalin’s rise to power, a command economy characterized by totalitarian control over political, social, and economic life would define the Soviet Union for most of the remaining 20^th Century.

The Soviet command economy coordinated economic activity through the issuance of directives, by setting social and economic targets, and by instituting regulations. Soviet leaders decided on the state’s overarching social and economic goals. In order to achieve these goals, Communist Party officials assumed control over all of the country’s social and economic activities.

The Communist Party legitimized its control by claiming it had the knowledge to direct a society that would rival and overtake any Western market economy. Officials managed the significant amounts of information necessary for centralizing the planning of both production and distribution. Hierarchical structures were instituted at all levels of economic activity, with superiors having absolute control over the norms and parameters of planning assignments, as well as setting regular performance evaluations and rewards. (To read more, see: What’s the Difference Between a Market Economy and a Command Economy?)

Initial Period of Rapid Growth

At first, the Soviet Union experienced rapid economic growth. While the lack of open markets providing price signals and incentives to direct economic activity led to waste and economic inefficiencies, the Soviet economy posted an estimated average annual growth rate in gross national product (GNP) of 5.8% from 1928 to 1940, 5.7% from 1950 to 1960, and 5.2% from 1960 to 1970. (There was a dip to a 2.2% rate between 1940 to 1950.)

The impressive performance was largely due to the fact that, as an underdeveloped economy, the Soviet Union could adopt Western technology while forcibly mobilizing resources to implement and utilize such technology. An intense focus on industrialization and urbanization at the expense of personal consumption gave the Soviet Union a period of rapid modernization. However, once the country began to catch up with the West, its ability to borrow ever-newer technologies, and the productivity effects that came with it, soon diminished.

Slowing Growth and the Beginning of Reforms

The Soviet economy became increasingly complex just as it began running out of development models to imitate. With average GNP growth slowing to an annual 3.7% rate between 1970 and 1975, and further to 2.6% between 1975 and 1980, the command economy’s stagnation became obvious to Soviet leaders.

The Soviets had been aware since the 1950s of such long-term problems as command economy inefficiencies and how adopting the knowledge and technology of developed economies could come at the expense of fostering an innovative domestic economy. Piecemeal reforms like those of the Sovnarkhoz implemented by Nikita Khrushchev in the late 1950s attempted to begin decentralizing economic control, allowing for a “second economy” to deal with the increasing complexity of economic affairs.

These reforms, however, tore at the root of the command economy’s institutions and Khrushchev was forced to “re-reform” back to centralized control and coordination in the early 1960s. But with economic growth declining and inefficiencies becoming increasingly more apparent, partial reforms to allow for more decentralized market interactions were reintroduced in the early 1970s. The quandary for Soviet leadership was to create a more liberal market system in a society whose core foundations were characterized by centralized control.

Perestroika and Collapse

These early reforms failed to revive the increasingly-stagnant Soviet economy, with productivity growth falling below zero by the early 1980s. This ongoing poor economic performance led to a more radical set of reforms under the leadership of Mikhail Gorbachev. While attempting to maintain socialist ideals and central control over primary societal goals, Gorbachev aimed to decentralize economic activity and open the economy up to foreign trade.

This restructuring, referred to as perestroika, encouraged individual private incentive, creating greater openness. Perestroika was in direct opposition to the previously hierarchical nature of the command economy. But having greater access to information helped foster critiques of Soviet control, not just of the economy, but also of social life. When the Soviet leadership relaxed control in order to save the faltering economic system, they helped create conditions that would lead to the country’s dissolution.

While perestroika initially appeared to be a success, as Soviet firms took advantage of new freedoms and new investment opportunities, optimism soon faded. A severe economic contraction characterized the late 1980s and early 1990s, which would be the last years of the Soviet Union.

Soviet leaders no longer had power to intervene amidst the growing economic chaos. Newly-empowered local leaders demanded greater autonomy from central authority, shaking the foundations of the command economy, while more localized cultural identities and priorities took precedence over national concerns. With its economy and political unity in tatters, the Soviet Union collapsed in late 1991, fragmenting into fifteen separate states. (To read more, see: Pros and Cons of Capitalist vs Socialist Economies).

The Bottom Line

The early strength of the Soviet command economy was its ability to rapidly mobilize resources and direct them in productive activities that emulated those of advanced economies. Yet by adopting existing technologies rather than developing their own, the Soviet Union failed to foster the type of environment that leads to further technological innovation.

After experiencing a catch-up period with attendant high growth rates, the command economy began to stagnate in the 1970s. At this point, the flaws and inefficiencies of the Soviet system had become apparent. Rather than saving the economy, various piecemeal reforms instead only undermined the economy’s core institutions. Gorbachev’s radical economic liberalization was the final nail in the coffin, with localized interests soon unraveling the fabric of a system founded on centralized control.