Lesson 12: Russia and the Post-Communist Transition

# Lesson 12: Russia and the Post-Communist Transition
## ECON 317 · Economics of Development · Fall 2019
### Ryan Safner Assistant Professor of Economics <a href="mailto:safner@hood.edu"> safner@hood.edu</a> <a href="https://github.com/ryansafner/devf19"> ryansafner/devf19</a> <a href="https://devF19.classes.ryansafner.com"> devF19.classes.ryansafner.com</a>

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### [A History of Russia and the Soviet Union (1900-1991)](#4)
### [How Did Soviet "Central Planning" Work?](#40)
### [The Troubled Transition from Communism](#63)

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# Socialism Across the World

.source[Source: [Wikipedia](https://en.wikipedia.org/wiki/List_of_socialist_states#/media/File:Socialist_states_by_duration.png)]

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# A History of Russia and the Soviet Union (1900-1991)

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# Czarist Russia I

*A Peasant Leaving His Landlord on Yuriev Day*, Sergei V. Ivanov, (1908)
]
]

- Serfdom in Russia like European feudalism
  - Serfs were bonded to land, sold only when land is sold to other landowners

- Serfdom only abolished in 1861 by Emperor Alexander II

]

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# Czarist Russia II

Source: Acemoglu and Robinson (2012: 109).
]

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# Czarist Russia III

.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/fbv689295o5k7wr/czarnicholasii.jpg?raw=1)

Czar Nicholas II

1868-1917
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]

- Russian Empire ruled by the Romanovs

- A feudal, agrarian society

- Nobody, not even Marx, expected socialism in Russia
  - Marxian dialectic: must pass through capitalism first!
  - No bourgeoisie or middle class!

]

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# Czarist Russia IV

.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/6wbf2i2bk88pabs/Gapon_crowd_1905.jpg?raw=1)

Protestors facing soldiers at the Narva Gate, St. Petersburg
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]

- Russian Revolution of 1905
  - Lenin: "the great dress rehearsal" for 1917 revolution
  - Uprising of peasants, worker strikes, military mutinies
  - Czarist troops remain loyal, open fire on citizens

]

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# Czarist Russia V

Czar Nicholas II addresses the Duma
]
]

- October Manifesto:
  1. Grant people "inviolable personal rights" including freedom of conscience, speech, and assembly
  2. Give people participation in the newly formed Duma
  3. Ensure no law would be passed without the consent of the Duma

- Forced Russian Constitution of 1906
 - Creation of the Imperial Duma (legislature)
 - only convened 4 times in 20th century before the Revolution

]

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# Czarist Russia VI

]
]

- Entry into WWI (1914-1918)
  - indecisive, about 9-10 million Russian casualties (cf. 1-2 million for other countries)

- Germans authorized Vladimir Lenin (in exile in Geneva) to return back to Russia to foment revolution

]

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# Czarist Russia VII

.pull-left[
.center[
![:scale 70%](https://www.dropbox.com/s/q6wwhjatf7vxzyb/Map_Treaty_of_Brest-Litovsk-en.jpg?raw=1)
]
]

- Humilating 1918 Treaty of Brest-Livotsk (concluded by Bolsheviks)

- Russia exits WWI

- Gives Baltic states to Germany, recognizes independent Ukraine

- Abandons its alliances with France and Britain

]

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# The February Revolution, 1917

.pull-right[
- **February Revolution** in the capital (Petrograd/St. Petersberg)
  - protests against food rationing (mostly women!)
  - the army mutanies and sides with protestors

- Czar Nicholas II abdicates the throne

- Duma siezes control of the country, forms the **Provisional Government**
  - dominated by landowners, aristocracy
  - consolidated under Alexandr Kerensky
  - lasts 8 months

]

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# The Provisional Government, 1917 I

.left-column[
.center[
![:scale 100%](https://www.dropbox.com/s/th1ymf86plvewv0/provisionalgovt.png?raw=1)

![:scale 80%](https://www.dropbox.com/s/wl4h0miqvoff7om/provisionalgovt.jpg?raw=1)

The Provisional Government
]
]

- Kadet party: Western-liberal intellectuals
  - the original opposition to the Czar
  - most members of Provisional Government
  - became "the new conservatives" as the country moves to the left:

- .onfire[Socialist Revolutionary Party]: *rural* countryside socialists
  - supporters of the Provisional Government, focus on land reform
  - overwhelmingly supported by masses (peasants)

- .onfire[Mensheviks]: *urban* socialists
  - supporters of the Provisional Government (a step towards Communism)
  - a **majority** of socialists
  - wanted larger scale, working class, democratic, more gradual "revolution"

]

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# The Provisional Government, 1917 II

.left-column[
.center[
![:scale 100%](https://www.dropbox.com/s/c0vm4s3aznaxh8y/bolsheviks.jpeg?raw=1)

]
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- .onfire[Bolsheviks]: radical socialists under Lenin
  - violently opposed Provisional Government
  - a **minority** of socialists

- Lenin's idea of a **vanguard** of professional revolutionaries that must seize power to establish Marx's dictatorship of the proletariat

- "Telescope through history" from feudalism past (nonexistant in Russia) bourgeois capitalist straight to socialism
]

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# The Provisional Government, 1917 III

Aleksandr Kerensky

]
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- Provisional government had *de jure* control over Russia
  - Declared a Republic (no longer Empire)
  - Granted independence to Poland, Lithuania, Ukraine

- Progressive legislation (in contrast to Czar)
  - separation of church and state
  - freedom of speech, press, assembly
  - economic redistribution of land

- Still in WWI
  - failed offensives
  - growing to be a massively unpopular war

]

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# The Provisional Government, 1917 IV

- Most communities and urban centers were creating their own workers **soviets** (councils)
  - Provisional Government encouraged "bottom-up" rule
  - controlled their own militias
  - constant criticism and tension with Provisional Government

- The *de facto* power was the **Petrograd Soviet** in the capital

> "We (the Provisional Government) do not have authority, but only the appearance of authority; the real power lies with the Soviet" - Minister of War Alexander Guchkov

]

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# The October Revolution, 1917

]
]

- Bolsheviks violently seize control of the Petrograd Soviet and Provisional Government

- Slogan: "all power to the soviets"

- Capture and shoot the entire Romanov family

- Conclude Brest-Livotsk treaty to end the war

- Establish the Cheka (secret police) to weed out "enemies of the people"

]

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# The Russian Civil War, 1917-1921

.left-column[
.center[
![:scale 100%](https://www.dropbox.com/s/7i50gbpxdl6l7ig/800px-Russian_civil_war_west.svg.png?raw=1)
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- Civil war amongs the "**Reds**" (Bolsheviks) and:
  - "**Whites**" (anti-Communists, czarists, liberals, Provisional Gov't supporters)
  - "**Greens**" (peasant armies that resisted both)
  - "**Blacks**" anarchists & Ukrainian independence movement
  - Intervention from WWI allies (U.S., Britain, France)

- Bolsheviks win by 1921 and create the **Union of Soviet Socialist Republics (USSR/CCCP)**

]

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# War Communism I

.pull-left[
.center[
![:scale 75%](https://www.dropbox.com/s/pceweuk3lkv2juz/sovietpolicies.png?raw=1)

Boettke (2001: 129)
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]

.pull-right[
- Usher in **War Communism**: pure Marxian socialism
  - use local soviets to centrally plan cities and countryside
  - abolish private property in land, capital, money
  - collectivize agriculture
  - suppress and execute *"kulaks"*
]

Roberts, Paul Craig, 1970, "War Communism: A Reexamination," *Slavic Review* 29(2): 238-261]

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# War Communism II

.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/f37soi535e1dqlp/leninshangingorder.png?raw=1)

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.font80[
> "Comrades! The insurrection of five kulak districts should be pitilessly suppressed. The interests of the whole revolution require this because 'the last decisive battle' with the kulaks is now under way everywhere. An example must be demonstrated."

> Hang (absolutely hang, in full view of the people) no fewer than one hundred known kulaks, filthy rich men, bloodsuckers.

> Publish their names.

> Seize all grain from them.

> Designate hostages - in accordance with yesterday's telegram.

> Do it in such a fashion, that for hundreds of verst around the people see, tremble, know, shout: "strangling (is done) and will continue for the bloodsucking kulaks".

> Telegraph the receipt and the implementation. Yours, Lenin.

> "P.S. Find more reliable people"
]

]

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# War Communism III

Vladimir Lenin

(1870-1924)

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.right-column[
.font90[
> "[H]ave councils of workers and servants been formed in the difference sections of the city; have the workers been armed; have the bourgeoisie been disarmed...have the capitalist factories and wealth in Munich and the capitalist farms in its environs been confiscated; have mortgage and rent payments by small peasants been canceled; have the wages of farm labourers and unskilled workers been doubled or trebeled; have all paper stocks and all printing-presses been confiscated so as to enable popular leaflets and newspapers to be printed for the masses; has the six-hour working day with two or three-hour instruction in state administration been introduced; have the bourgeoisie in Munich been made to give up surplus housing so that workers may be immediately moved into comfortable flats; have you taken over all the banks; have you taken hostages from the ranks of the bourgeoisie...have all the workers been mobilised for defence and for ideological propaganda in the neighboring villages?"
]

]

.source[Lenin, Vladimir, 1977, ["Message of Greetings to the Bavarian Soviet Republic"](http://www.marxists.org/archive/lenin/works/1919/apr/27.htm), *Collected Works*, Vol. 4]

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# War Communism IV

Vladimir Lenin

(1870-1924)

]
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> "The dictatorship of the proletariat, i.e. the organization of the vanguard of the oppressed as the ruling class for the purpose of suppressing the oppressors, cannot result merely in an expansion of democracy. Simultaneously, with an immense expansion of democracy, which, for the first time, becomes democracy for the poor, democracy for the people, and not democracy for the money-bags, the dictatorship of the proletariat imposes a series of restrictions on the freedom of the oppressors, the exploiters, the capitalists. We must suppress them in order to free humanity from wage slavery,their resistance must be crushed by force; it is clear that there is no freedom and no democracy where there is suppression and where there is violence," (pp.62-65).

]

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# The Failure of Pure Socialism I

.pull-left[
.center[
![:scale 70%](https://www.dropbox.com/s/n3htv3p2q0ozk58/sovietfarm.png?raw=1)
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- Moscow depopulated by 50%, Petrograd by 60%

- National income falls by 60% from 1913-level

- Industrial output falls by 80% from 1913-level

- Millions of peasants die from famine (collective agriculture)

- 1921 Kronstadt rebellion of workers against Bolsheviks
]

Roberts, Paul Craig, 1970, "War Communism: A Reexamination," *Slavic Review* 29(2): 238-261]

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# The Failure of Pure Socialism II

Vladimir Lenin

(1870-1924)

]
]

> "We made the mistake of deciding to go over directly to communist production and distribution...We expected---or perhaps it would be truer to say that we presumed without having given it adequate consideration---to be able to organize the state production and the state distribution of products on communist lines in a small peasant country directly as ordered by the proletarian state. Experience has proved that we were wrong," (p.58).

]

.source[Lenin, Vladimir, 1921, "The Fourth Anniversary of the October Revolution," *Pravda* (October 18, 1921) p.58]

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# The Failure of Pure Socialism III

Vladimir Lenin

(1870-1924)

]
]

> "We followed for more than three years, up to the spring of 1921...a revolutionary approach to the problem---to break up the social-economic system completely at one stroke and to substitute a new one for it. [We have been adopting] a reformist type of method [in order] to revive trade, petty proprietorship, capitalism.  [C]ompared with the previous, revolutionary approach, it is a reformist approach...If, after trying revolutionary methods, you find they have failed and adopt reformist methods, does it not prove that you are declaring the revolution to have been a mistake in general?," (p.110).

]

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# The New Economic Policy, 1923

- Restores private property and money

- Citizens allowed to keep economic surplus and exchange for profit

- Limited free trade

- "Socialism" in name only

- Lenin dies in 1924, what did he really want for the USSR?
]

Roberts, Paul Craig, 1970, "War Communism: A Reexamination," *Slavic Review* 29(2): 238-261]

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# Stalinism I

"The kindness of Stalin illuminates the future for children"
]
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- "Socialism in One Country" vs. international proletarian revolution

- Period of "classical socialism" (1924-1953)

- Five-Year Plans under GOSPLAN begin in 1928

- Russification, forced deportations/genocides of ethnic minorities
]

.source[Gregory, Paul and Mark Harrison, 2005, "Allocation under Dictatorship: Research in Stalin's Archives," *American Economic Review* 43(3): 721-761]

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# Stalinism II

.pull-left[
.center[
![:scale 80%](https://www.dropbox.com/s/7ey86uhhyrht2yf/Holodomor-Chicago.jpg?raw=1)
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- Forced collectivization of agriculture
  - All peasants forcibly resettled into communes
  - Had to produce grain quotas
  - Confiscated by the State
  - Redistributed to urban centers, or sold on international markets (to earn money for industrialization)

- Collapse of agricultural output

- Holodomor in Ukraine: 7-10 million die of (intentional) famine
]

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# Stalinism III

"The disappearing comrade" Nikolai Yehzov (head of NKVD)
]
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- The Great Terror and Great Purge 1936-1938
  - Between 0.6-1.2 million killed

- Purges and show trials of prominent Bolsheviks

- GULAG sustem of forced labor camps in Siberia
  - Estimated 1-10 million deaths

- KBG and self-policing, political violence against "counterrevolutionary behavior"

- Personality cult

]

.source[Gregory, Paul and Mark Harrison, 2005, "Allocation under Dictatorship: Research in Stalin's Archives," *American Economic Review* 43(3): 721-761]

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# Stalinism IV, or, How to Destroy Civil Society

.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/7ogvfgjkoj8asxf/Pavel_Morozov.jpg?raw=1)

"Official Soviet portrait" of Pavel Morozov
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- The [story of Pavlik Morozov](https://en.wikipedia.org/wiki/Pavlik_Morozov) emblematic of a self-policing society

- No organization or organizing possible outside of Party-approved organs
  - perpetual fear of informants, NKVD, KGB, Gulags

.center[
![:scale 50%](https://www.dropbox.com/s/b6xygv4ilg6y6kp/%E2%80%9CStrengthen_working_discipline_in_collective_farms%E2%80%9D_%E2%80%93_Uzbek%2C_Tashkent%2C_1933_%28Mardjani%29.jpg?raw=1)

"Strengthen working discipline in collective farms"

]
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# De-Stalinization, 1953

Nikita Khruschev

1894-1971
]
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- Denunciation of Stalin's personality cult & de-Stalinization, less repression

]

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# "We Will Bury You"

- Textbooks showed vast Soviet growth outstripping United States

- Khruschev aimed at reforms to improve the lives of Soviet citizens, routinely botched

- Deposed in 1964 `$\rightarrow$` Brezhnev `$\rightarrow$` Andropov `$\rightarrow$` Chernenko `$\rightarrow$` Gorbachev

- "Economic growth" *stops* in 1970s
]

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# Mismanagement (Example)

- The Aral Sea (formerly the 4th largest lake in the world), 1989 vs. 2014

> "It was part of the five-year plans, approved by the council of ministers and the Politburo. Nobody on a lower level would dare to say a word contradicting those plans, even if it was the fate of the Aral Sea."

]

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# Height of the Cold War

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# Attempts at Reform, 1980s

Mikhail Gorbachev

1931-
]
]

- **"Glasnost** ("openness") to open up press and speech

- **"Perestroika"** ("restructuring") relaxes central planning, allows some property rights, market competition, and trade

- Nationalist risings, dissolution of Soviet Union in 1991

"Perestroika is a reliance on the living creativity of the masses"
]
]

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# Collapse 1989-1991

Boris Yeltsen denouncing the attempted coup atop a tank
]
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- Gorbachev's "Sinatra Doctrine" allowed other Soviet satellite states to determine their own affairs

- The "Fall of Nations" and Fall of the Berlin Wall 1989

- Tension between gov'ts of individual Soviet Republics (including Russia, led by President Boris Yeltsen) and the Soviet government in Moscow

- Hardline communists attempt a coup against Gorbachev in August 1991, nonviolent resistance by Yeltsen

- Gorbachev resigns as the President of the USSR

- Dissolved in 1991 into 15 countries

]

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# Transition to Independent Nations

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# The Grocery Store I

> "Yeltsin, then 58, "roamed the aisles of Randall's nodding his head in amazement," wrote Asin. He told his fellow Russians in his entourage that if their people, who often must wait in line for most goods, saw the conditions of U.S. supermarkets, "there would be a revolution."

> "Yeltsin asked customers about what they were buying and how much it cost, later asking the store manager if one needed a special education to manage a store. In the Chronicle photos, you can see him marveling at the produce section, the fresh fish market, and the checkout counter. He looked especially excited about frozen pudding pops."

]

.source[Source: [Houston Chronicle](https://www.chron.com/neighborhood/bayarea/news/article/When-Boris-Yeltsin-went-grocery-shopping-in-Clear-5759129.php#item-85307-tbla-10)]

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# The Grocery Store II

> "Even the Politburo doesn't have this choice. Not even Mr. Gorbachev," he said. When he was told through his interpreter that there were thousands of items in the store for sale he didn't believe it. He had even thought that the store was staged, a show for him. Little did he know there countless stores just like it all over the country, some with even more things than the Randall's he visited.

> "The fact that stores like these were on nearly every street corner in America amazed him. They even offered him free cheese samples."

]

.source[Source: [Houston Chronicle](https://www.chron.com/neighborhood/bayarea/news/article/When-Boris-Yeltsin-went-grocery-shopping-in-Clear-5759129.php#item-85307-tbla-10)]

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# How Did Soviet "Central Planning" Work?

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# How Did Soviet "Central Planning" Work? I

"The captain of the Council of Soviets guides us from victory to victory!"

]
]

- Recall the **socialist calculation debate** ([Lesson 3](/class/03-class/))

- Mises (1920) argued that rational allocation of resources under socialism was impossible

- But the Soviet Union lasted for about 70 years!

- How did "socialism" and "central-planning" work in the Soviet economy?
]

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# How Did Soviet "Central Planning" Work? II

![](https://www.dropbox.com/s/r4ml33fs6k04709/gosplan2.png?raw=1)

]
]

- No private property, collective ownership of production

- GOSPLAN would supposedly create a central plan for the economy
  - "Five Year Plans" beginning in 1928

- Individuals lived in collective apartments (in cities) or on collective farms (in countryside)

- Directed by GOSPLAN about where to work, what to produce, how much to produce (output quotas)

- Threats to noncompliance

- Goods sold at State-owned stores at controlled prices

]

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# Planning under Stalinism I

.left-column[
.center[
![:scale 80%](https://www.dropbox.com/s/me5hr7tokeutiq6/fiveyearplan.jpg?raw=1)

"Komsomol [Communist Youth] is the shock brigade of the 5-year plan"
]
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- Selectorate theory: Stalin had extremely high loyalty norm
  - small winning coalition (Politburo) relative to selectorate
  - with constant purges and paranoia of betrayal

- Stalin had enormous discretionary power over how resources are used
  - Obsession with industrialization
  - collectivized agriculture, confiscate output of farms to sell grain on international markets, buy resources to build factories

]

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# Planning under Stalinism II

.pull-left[
.center[
![:scale 65%](https://www.dropbox.com/s/ssd28cnspfiifai/sovietspaceprogram.png?raw=1)
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- Soviets could have world-leading heavy industry, military, and space programs

- Massive gains in industrial output and "economic growth" by coercively militarizing labor, forced savings, and creating capital
  - brought out of inefficient feudal agriculture

]

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# Planning under Stalinism III

.pull-left[
.center[
![:scale 100%](https://www.dropbox.com/s/mn8dyk57terjyru/sovietbreadline.png?raw=1)
]
]

- Yet the country can still have shortages of food and clothing for their citizens
  - wait in line to get items sold at State-owned stores
  - Soviet jokes

- People turned to **black markets**, privileges, bribes, bartering favors, in order to acquire basic goods and services

> ""We pretend to work, and you pretend to pay us!"

]

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# Soviet Socialism as a Distorted Mercantilism I

Peter Boettke

]
]

- the government is headed by an autocrat;
- this autocratic state extensively intervenes in the private economy and sponsors a large variety of monopolies and cartel arrangements;
- positions of monopoly status as well as various other restrictions on competitive entry are sold by the autocrat as a means of raising revenue and
- the autocrat employs a specialized bureaucracy whose function is to monitor the various monopolist-franchisees to ensure that they do not behave "competitively" in relation to one another, and also to enforce barriers designed to deter outside entrants (p.144).
]

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# Soviet Socialism as a Distorted Mercantilism II

- Loyal supporters have a stake in the system, residual claim ion the incomes of their offices

- NWW natural state logic: ensure elites' marginal benefits of rents `$>$` possibility of resistance

- Monitor each other to prevent competitive erosion of rents

- No *secure* property rights in rent flows
  - political opportunism and uncertainty at all levels

- Network of informations to protect existing rent flows
]

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# Soviet Socialism as a Distorted Mercantilism III

- "Central planning" board set output quotas
  - These were not *minimums*, but *maximums*!

- Plans were set more by *political connections* than *economic needs*
  - Stalin wanted to maximize his discretion to reward loyalists and punish suspected betrayers

- Gosplan did not give specifics, intentionally vague and changeable, always "a draft" never finalized

- Network of *"apparatchniks"*, petty dictatorships managing their own planning fiefdoms
]

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# Bad Incentives I

> "Who needs this nail?"

> "Don't worry about it! The main thing is that we immediately fulfilled the plan for nails!

]

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# Bad Incentives II

> "Output targets were usually based on previous production levels. This created a huge incentive never to expand output, since this only meant having to produce more in the future, since future targets would be "ratcheted up." Underachievement was always the best way to meet targets and get the bonus," (Acemoglu and Robinson 2011, p.130).

> "When the plan was formulated in tons of steel sheet, the sheet was made too heavy. When it was formulated in terms of area of steel sheet, the sheet was made too thin. When the plan for chandeliers was made in tons, they were so heavy, they could hardly hang from cielings." (p.130).

]

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# Bad Incentives III

> "A whole set of laws created criminal offenses for workers that were perceived to be shirking...[A] law made absenteeism, defined as twenty minutes unauthorized absence or even idling on the job, a criminal offense that could be punished by six months' hard labor...between 1940 and 1955, 36 million people, about one-third of the adult population, were found guilty of such offenses. Of these, 15 million were sent to prison, and 25,000 were shot. In any year, there would be 1 million adults in prison for labor violations; this is not to mention the 2.5 million people Stalin exiled to the gulags of Siberia," (p.131).

> "As for Gosplan, its main role was to provide Stalin with information so he could better monitor his friends and enemies. It actually tried to avoid making decisions. If you made a decision that turned out badly, you might get shot. Better to avoid all responsibility," (Acemoglu and Robinson 2011: 129).

]

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# The Economics of a Shortage Society I

- Consider a market with a market-clearing price of `$P_q$` where `$Q_1$` will be exchanged
]

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# The Economics of a Shortage (Society) I

- Consider a market with a market-clearing price of `$P_1$` where `$Q_1$` will be exchanged

- Government sets a **price ceiling** at `$\bar{P}$`, legal maximum price allowed

- `$Q_d>Q_s$`: .shout[excess demand], a .shout[shortage]!

- Sellers will not supply more than `$Q_s$`

]

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# The Economics of a Shortage (Society) I

- Consider a market with a market-clearing price of `$P_1$` where `$Q_1$` will be exchanged

- Government sets a **price ceiling** at `$\bar{P}$`, legal maximum price allowed

- `$Q_d>Q_s$`: .shout[excess demand], a .shout[shortage]!

- Sellers will not supply more than `$Q_s$`

- For `$Q_s$` units, buyers are willing to pay `$P^b$`!

]

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# The Economics of a Shortage (Society) II

- .onfire[If prices were allowed to adjust]: buyers would bid higher prices to get the scarce `$Q_s$` goods

- Sellers would respond to rising willingness to pay, and produce and sell more

- Until we return to `$P_1$` where `$Q_d=Q_s$` in equilibrium

- .onfire[But the price is not allowed to rise above `\$\bar{P}\$`]!

]

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# The Economics of a Shortage (Society) III

- Official price is `$\bar{P}$`, sellers gain .green[monetary revenues]

]

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# The Economics of a Shortage (Society) III

- Official price is `$\bar{P}$`, sellers gain .green[monetary revenues]

- Competition exists between buyers to obtain scarce `$Q_s$` goods
  - Buyers willing to pay `$P^b$` *unofficially*

- Goods are distributed by non-market means:
  - Queuing
  - Black markets
  - Political connections, favors, corruption

- **Rents** to those who can distribute the scarce goods
]

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# Economics of a Shortage Society IV

A typical grocery store in Vilnius, Soviet-controlled Lithuania, 1990
]

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# Economics of a Shortage Society V

> "[G]oods shortages became endemic in the Soviet economy...A worker from the Urals wrote that to get bread in his town you had to stand in line from 1 or 2 o'clock at night, sometimes earlier, and wait for almost 12 hours...Bread was not the only thing in short supply. The situation was no better with other basic foodstuffs like meat, milk, butter, and vegetables, not to mention necessities like salt, soap, kerosene, and matches. Fish disappeared too, even from regions with substantial fishing industries...Clothing, shoes, and all kinds of consumer goods were in even shorter supply than basic foodstuffs, often being completely unobtainable...Meanwhile, people lived in communal apartments, usually one family to a room...even the best connections and official status often failed to secure a separate apartment.

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# Economics of a Shortage Society VI

> "The list of scarce items is practically endless. They are not permanently out of stock, but their appearance is unpredictable...Leningrad can be overstocked with cross-country skis and yet go several months without soap for washing dishes. In the Armenian capital of Yerevan, I found an ample supply of accordians but local people complained that they had gone for weeks without ordinary kitchen spoons or tea samovars. I knew a Moscow family that spent a frantic month hunting for a child's potty while radios were a glut on the market..."

> "In an economy of chronic shortages and carefully parceled-out privileges, **blat** is an essential lubricant of life. The more rank and power one has, the more *blat* one normally has...each has access to things or services that are hard to get and that other people want or need."

---

# The Economics of a Shortage Society VII

]
]

- Not in the interest of shopkeepers or Soviet officials to allow (higher) market clearing prices!

- Setting prices low to shortage levels `$\bar{P}$` creates a **_de facto_ property right** to allocate scarce desired goods
  - Have *control rights*: can exclude others' access
  - Don't have *cash flow rights*: not officially-protected ability to sell or exchange for value

- .onfire[Incentive: convert control rights into cash flow rights as soon as possible]
  - Buy/steal from your own store to barter with others, or sell on black market
  
- Trade favor of *your* access to goods for favors from other people, to otherwise inaccessible goods

]

Levy, David, 1990, "The Bias in Centrally Planned Prices," *Public Choice* 63(3): 213-226]

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# The Economics of a Shortage Society VIII

]
]

> "Dear customer, in the leather goods department of our store, a shipment of 500 imported womens' purses has been recieved. Four hundred and fifty of them have been bought by employees of the store. Fourty-nine are under the counter and have been ordered in advance for friends. One purse is in the display window. We invite you to visit the leather department to buy this purse!" (p.38).

]

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# The Troubled Transition from Communism

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# The Troubled Transition from Communism

.pull-left[
.center[
.center[
![](https://www.dropbox.com/s/x535dh8b04jy01y/russiantransition.jpg?raw=1)
]
]
]

- Boris Yeltsen first president of Russian Federation

- Transition to a market economy:
  - privatize State-owned enterprises
  - liberalize trade
  - deregulate prices
  - combat inflation

- **"Shock therapy"** recommended by United States and IMF
  - radical transformation all at once

]

---

# Again: The Washington Consensus

.center[
![:scale 75%](https://www.dropbox.com/s/rfrylpbf5ia55q1/washingtonconsensustable.png?raw=1)
]

.source[Rodrik, Dani, 2006, "Goodbye Washington Consensus, Hello Washington Confusion?" *Journal of Economic Literature* 44(4): 973-987]

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# Russia's GDP per Capita 1988-2018

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# Russia's GDP Growth Rate 1988-2018

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# Russia's Unemployment Rate 1988-2018

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# Russia's Inflation Rate 1988-2018

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# Post-Communist Countries: GDP per Capita

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# Post-Communist Countries: GDP per Capita Growth Rate

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# Post-Communist Countries: Unemployment Rate

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# Post-Communist Countries: Inflation Rate

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# Overview of the Transition

> "During the last 15 years [2005], Russia has undergone an extraordinary transformation. It has changed from a communist dictatorship to a multiparty democracy in which officials are chosen in regular elections. Its centrally planned economy has been reshaped into a capitalist order based on markets and private property. Its army has withdrawn peacefully from both eastern Europe and the other former Soviet republics, allowing the latter to become independentt countries," (p.20).

> "Russia has come to be viewed as a disastrous failure
and the 1990s as a decade of catastrophe for its people. Journalists, politicians, and academics have described Russia not as a middle-income country struggling to overcome its communist past and find its place in the world, but as a collapsed state inhabited by criminals and threatening other countries with multiple contagions," (p.20).

.source[Shleifer, Andrei and Daniel Treisman, 2004, "A Normal Country," *Foreign Affairs*: April 2004]

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# A Normal Country? I

> "Russia's economic and political systems remain far from perfect. But their defects are typical of countries at a similar level of economic development. Russia was in 1990, and is today [2005], a middle-income country, with GDP per capita around $8,000 [in 2005] (at purchasing power parity) according to the UN - comparable to Argentina in 1991 and Mexico in 1999. Almost all democracies in this income range are rough around the edges: their governments suffer from corruption, their judiciaries are policized, and their press is almost never entirely free. They have high income inequality, concentrated corporate ownership, and turbulent macroeconomic performance. In all of these regards, Russia is quite normal. Nor are the common flaws of middle-income capitalist democracies incompatible with further economic and political progress - if they were, western Europe and the United States would never have left the nineteenth century," (p.21).

.source[Shleifer, Andrei and Daniel Treisman, 2004, "A Normal Country," *Foreign Affairs*: April 2004]

---

# A Normal Country? II

> "To say that Russia has become a "normal" middle-income country is not to overlook the messiness of its politics and economics, nor to excuse the failures of its leaders.The average middle-income country is not a secure or socially just place to live. Nor is it to say that all middle-income countries are exactly alike. No other such country has Russia's nuclear arms or its pivotal role in international affairs. Yet other countries around Russia's level of income-from Mexico and Brazil to Malaysia and Croatia-face a common set of economic problems and political challenges, from similarly precarious vantagepoints. Russia's struggles to meet such challenges strikingly resemble the experiences of many of its peers," (p.21).

.source[Shleifer, Andrei and Daniel Treisman, 2004, "A Normal Country," *Foreign Affairs*: April 2004]

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# The Post-Communist Blues I

> "Officially measured output fell in all the post-communist economies of Eastern Europe and the former Soviet Union. It declined in new democracies, such as Russia and Poland; in continuing dictatorships, such as Belarus and Tajikistan; in rapid reformers, such as the Czech Republic and Hungary; and in very slow reformers, such as Ukraine and Uzbekistan...Officially measured output began to recover almost everywhere after a few years," (p.25).

.source[Shleifer, Andrei and Daniel Treisman, 2004, "A Normal Country," *Foreign Affairs*: April 2004]

---

# The Post-Communist Blues II

.pull-left[
- Russia and post-Soviet states experienced sharp recessions in 1990s after transition out of communism

- Recall: permanent shortage economy under Soviet socialism!
  - prices were set artificially below market-clearing levels
  - liberalizing prices `$\implies$` almost all of them will go up
    - inflation, cost of living, etc
]

---

# The Post-Communist Blues II

- Under Soviet socialism, no private property, all organizations were owned by the State

- Privatization, auction of State-owned enterprises to private hands

- Rise of the **"oligarchs"**

]

# Privatization and the Oligarchs

> "A popular theory holds that Russia's economic decline was caused by certain misguided government policies pursued in the 1990s. Particularly damaging, so the argument goes, were Yeltsin's privatization programs and his "loans for shares" scheme. The privatization program, implemented between 1993 and 1994, transferred shares in most firms from the government to managers, workers, and the public. This meant that by 1994, almost 70% of the Russian economy was in private hands. The loans for shares scheme,inaugurated in 1995, provided for the transfer of shares in a few state-owned natural resource enterprises to major businessmen in exchange for loans to the government. It accelerated the consolidation of a few large financial groups, led by the so-called oligarchs, whose subsequently enjoyed great political and economic influence."

> "However...the effects of privatization and loans for shares could not have caused Russia's economic contraction. Most of the fall of [GDP] occured prior to 1994, before the significant part of the mass privatization program was completed and the loans for shares program was even contemplated. After 1994-when the effects of privatization could be felt- Russia's economic decline actually slowed, with rapid growth starting in 1999."

.source[Shleifer, Andrei and Daniel Treisman, 2004, "A Normal Country," *Foreign Affairs*: April 2004]

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# Shock Therapy vs. Gradualism

> "Some argue the excessively speedy reform exacerbated the decline and compare the "gradualism" of China's economic policies favorably with the "shock therapy" of Russia's. In fact, there is no obvious relationship between the speed of reform and change in official output among the east European and former Soviet countries. The group of countries that contracted least, according to the official figures, includes both rapid reformers (such as Estonia, Poland, and the Czech Republic) and slow or nonreformers (such as Belarus and Uzbekistan). Those with the largest declines also include both the nonreformers (Tajikistan, Turkmenistan) and some that tried to reform (Moldova).

> "Comparing Russia and Ukraine is particularly instructive. Ukraine had a large population (about 52 million in 1991), an industrial economy, significant natural resources, and a political culture similar to Russia's prior to transition. Unlike Russia, it retained the old communist leadership, albeit renamed, and pursued more cautious reforms, keeping a much larger share of the economy in state hands. Yet its official GDP per capita dropped 45 percent between 1991 and 2001--almost twice as much as Russia's," (p.25-26)

.source[Shleifer, Andrei and Daniel Treisman, 2004, "A Normal Country," *Foreign Affairs*: April 2004]