Transcript Soviet Communist Economic System

Soviet Communist Economic
System
Gia Jandieri
Seoul, Korea
July 14th, 2016
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Soviet Union 1922-1991
• Soviet Union was created by Russian Bols
hevik government from soviet Russia and
forcefully incorporated nations:
– Georgia, Armenia, Azerbaijan, Ukraine (partia
lly), etc, - from 1922
– Estonia, Latvia, Lithuania, Bessarabia (Moldov
a) and part of Ukraine – from 1940
• SU was Recognized only in the late 1930
s
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Soviet Economy
• Based on the central planning
• No private property
• Collective farms and government ownership of t
he production factors
• Closed behind the “Iron Curtain” – very restricte
d
• No formal unemployment
• Championing in many directions of production:
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Still
Natural Gas
Coal
Cement
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Theoretic Problems of Socialism
• Impossibility of calculation of costs (opport
unity costs)
• Inappropriate information for decision-maki
ng
• Planning as commands not voluntary decisi
ons
• Missing demands and supplies
• Inexistence of price system – or command
prices.
• No incentives for good allocation of resourc
es without correct information
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Mang thanks and my apologies!

• [email protected]
• Http://giajandieri.blogspot.com
5
No Private Property
• Private property was abolished in 1920-30s
• It needed more than 20 years and up to 15
million victims to finish this process (8 milli
ons only in Ukraine, civil war 1917-1921)
• Extermination of the property owners was t
he major task for Bolsheviks as these peopl
e were the strongest opponents to the gov
ernment.
• Central planning is impossible with private
ownership.
• Repressions of inteligentsia happened in lat
e 1930s, to exterminate all the people who
could voice a protest.
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Planning from Above
• Central government in Moscow had to d
ecide:
– What should be produced and consumed
– How many, what quality the production sho
uld be
– What should be the prices, profits
– Where should be the goods produced sold,
who need to be customers and where
– Any trade, transportation, communication or
other services were fully controlled by the st
ate;
– Foreign trade was decided by the top leader
ship – “politbureau”.
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Central Planning in Force
• All the orders were made in Moscow, by political and
government bureaucracy, sent to local producers and s
ellers.
• Only central authorities had a power to choose the pr
oducers or consumers of production good, even if it w
as several times proven not working
• These orders were containing full information about:
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Quantity
Quality
Forms, Sizes, Color, Fashion, other characteristics of goods
List of suppliers for production goods/supplies
List of receivers of the goods produced by a factory/farm
• This scheme worked in any sector of the economy, incl
uding of education, health care, etc. Everything was pu
blicly provided.
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Producers
• Had no incentives but also rights to mak
e any changes in the production plans wi
thout permissions from “above” (not god
of course)
• Producers would be satisfied with just ful
fillment of the quantity plans
• Storage and transportation capacities we
re also limited and any delay was becomi
ng a catastrophe
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Outputs
• Biggest numbers of produced goods, includ
ing of still, coal, cement, gas, petroleum, bo
oks, dresses, etc
• Highest per hectare harvests
• Highest employment rates
• Highest numbers of hospital beds, doctors
• Highest level of literacy
• Highest sq metre space of apartments...
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Outcomes
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Total Deficits
Waste and Theft
Mismanagement
Subsidies
Devaluations (fake money)
Systemic Corruption
Underground Economy
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What were the major characteristi
cs of the Soviet Economy
Mismanagement
Miscommunication
Wasting and stealing of resources
Bad, wrong, impossible quality of goods
Corruption and elite privileges
Deficits of the quality/demanded goods
Oversupply of the bad quality non-demand
ed goods - full warehouses.
• Politicized, several times devaluated Ruble
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Quality problems and reasons
• No motivation to produce any better -the mana
gers could have lower official incomes than the f
actory workers
• Tragedy of Commons everywhere, enhansed by
radical elimination of the private property ethical
fundamentS
• No competition, with whom, why...
• List Innovation
• Producing for producing numbers, fulfilling the p
lans: only 1/5 of reported produced tea was qual
ity
• Production statistics were simply fake..
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The Major Reasons for the Proble
ms
• Incentives (didn’t) matter (James Gwartne
y, Common Sense Economics)
• Information was inappropriate
• Prices damaged/distorted
• Resources were wrongly allocated
• State fully controlled monetary system
• Artificial non-demanded Production
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Attempts to Improve: Creating Inc
entives
• Socialist competitions/tournaments – wh
o gets more iron, coal, corn, tea...
• Awarding a status of “rationalizator-creat
or”, a prise and a medal
• Awarding a Revolutionarya Red flag to th
e winning collective
• Awarding the best scientists a better qua
lity apartment...
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Dealing with Informational Proble
ms
• Creating huge “Computing Centers” busy wi
th collecting the data about the demanded,
produced and supplied goods
• Delivering the imprinted lists to the Central
planning authorities
• The central planners would work on the ana
lysis of the data, report to “above” what co
uld be included in the Five-Years plans of pr
oduction, storage, transportation, etc
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Price planning
• State Price Committee was the only power to mz
ke decisions about the prices, needed costs, rati
o of profit and investment (although profit also
belonged to the owner – state)
• The costs were not a business of the producers
– they had no right or incentive to reduce. In fac
t they had the opposite incentive – to lobby hig
her levels to steal then an extra part.
• Stolen or wrongly used raw materials would in fa
ct mean bad quality, unsafe, unuseful goods
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Total deficits
• SU had deficits of almost everything – toys, plat
es, rooms, cars, toilet papers, napkins, books, sh
oes, jeans trousers, food, juces, TVs, cassette pla
yers, guitars, window glass, etc.
• To get one, you needed to have a special privile
ge – “blat”, unofficial permission or support from
“above” or alternatively, to lay a bribe, an extra p
rice, paid to a shop or a warehouse.
• Simultaneously the storage buildings were could
be full of the unused, undemanded produced go
ods, as the consumers rejected to buy.
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Iron Curtain
• Closed doors, protectionist economy
• No rights for Iactories to export directly even wit
h the socialist commonwealth nations (Warsaw A
greement)
• No rights for the EU republics to import directly
from abroad
• The foreign trade was simply not allowed, only l
ater SU started selling natural resources to Europ
e – when the country got into financial troubles
– the foreign debt reached $50 b - $100 b after
inflation.
• Ordinary people would have a little access to im
ported dresses and shoes, through bribery. The
elite though had some better access, through pri
vileges, special shops and lists, etc
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Underground Economy
• Though this was of different scales in differ
ent places underground economy flourishe
d
• Alternative payment system for medical trea
tment
• Unofficial shops for foreign scarce medicine
s
• Private tutors
• Parrallel Production of demanded goods in
unofficial factories s.c. Tsekhs (the producer
s – “Tsekhovik”, using stolen raw materials a
nd goods.
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Artificial Economic System
• Planners would connect very distanced f
actories to each-other, no matter how co
stly the transportation costs could be.
• Due to the closed character of the econo
my it needed to satisfy almost whole int
ernal demand, so, but no matter what co
uld be a quality of the goods, fruits, wine
s, books – the numbers should be satisfa
ctory.
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Fake money, inflations, subsidizin
g
• Soviets devaluated the ruble twice – end of 1940
s and beginning of 1960s
• the real hard currency in the EU was “chervonet
s” – the ten ruble note, which was accepted by e
verybody in the world as it was the only note w
hich could be accepted to buy mineral resources
in the SU, backed by those resources and gold; a
ll other notes were accepted as much as they co
uld be exchanged into the Chervonets.
• Supported by natural resources which could be
bought by the ruble it became another mechani
sm for subsidising the places with no big minera
l resources by others
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Georgia‘s Economy
• 900 industrial factories – only very few survived
after returning back to the Global competitive m
arkets
• All the production needed for internal use.
• Production of tea, wines, citruses, apples, etc red
uced to 1/10-1/20 levels. Compare to new oppor
tunities appeared – nuts, kiwi, new revival of Geo
rgian wine production
• Georgia was one of the most corrupted but th
e most successful underground parts of the EU.
Almost nothing I Georgia could work without p
ayment.
• Communist party attempted to fight corruption
and underground Economy without a success. 23
Major economic activities of Geor
gia of the times of the SU
• Lobbying in Moscow
• Bribing Moscow bureaucracy to get resourc
es, projects (like film production)
• Falsifying statistics and reports about produ
ction outputs (to get again Red Flag – mea
ning following financial support)
• Falsifying produced food staff, selling the re
mains in the warehouses unuseful goods to
other republics, in exchange of big briberies
, sometimes selling air, etc.
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Georgian Film (ქართული ფილმი)
• State company very successfully lobbyists
• 1 out of 5 films could be good, the other
s were just to compensate production of
the one – good.
• It was always the top class in the SU
• Strangely enough, after the SU collapsed
the Filmmakers opposed to privatisation
of the film making facilities.
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Georgian wines
• Around 70% of consumed wine was Georgi
an in the SU
• By wide recognition Georgia was the first pl
ace wine was produced 8 th years ago
• Championship for production quantities m
ade producers of wine interested to produc
e more at the expense of the quality
• Important note: Georgians even up to now
prefer home made white wines
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Soviet economic collapse
• Political pressure and crisis in the soviets m
ade possible the Perestroika
• Government wanted reforms but not radical
, not dissolution of the EUE
• Although it allowed some freedom of activit
ies to enhance competition and motivation
• In fact this created a funnel for larger scale
throwing out of the resources, channeling h
ard currency incomes out of the country in
front of all corrupted inspections and contr
ollers
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Fall of Soviet Evil Empire
• Inflation of the late 1980s made soviet E onomic
collapse irreversible
• Official rate USD/Ruble 0.6, black market 3
• Interconnected suppliers stopped cooperation
• Everybody rushed to sell as much production an
d properties (mostly as a scrap) abroad
• Rebel against Gorbachev in 1991 finished unsucc
essfully
• Soviet government understood it was unable to
continue offered new version of the EU
• Georgia became independent
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Independence and Full Economic
Collapsed
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Russian energy blockade
No trade partners abroad
No skills ready for global markets
Bad quality of production goods
Fall of the GDP by around 80%
Unemployment reaching 80%
BUT INDEPENDENCE
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Reforms of 2000s
Decresed number of taxes from 22 to 6
Decreased tax rates
Internetisation of the tax system
Simplifying the sreporting and invoicing
The Economic Liberty Act: no new taxes or i
ncrease of tax rates without referendum
• 30% government spending, 60% public deb
t, 3% deficit to GDP ceilings restricted by th
e constitution.
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Achievements:
• Doing Business 24th in the world
• Fraser Institute Economic Freedom 12th
• Heritage Foundation Index of Economic I
ndex 23rd
• Global Competitiveness Index 66th
• TI, Corruption Perception – 49th(?)
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Free Market Works
Free market is only what can work
Incentives matter
Only commodity can be real money
Artificial political unions will always become A barrie
r to economy, creating parasitism
• Central planning can’t work, - impossible to collect p
roper needed information in one place
• Elimination of property can only happen with massmurder
• Elimination of property means losing of ethics, effici
ency, wrongly allocated resources, wasted and stolen
energy, raw materials, supplies, investments
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Thank you for your attention!
• [email protected]
• Http://gjandieri.blogspot.com
33
Discussion
Soviet Communist Economic
System
Gia Jandieri
Shin Joongsop
( [email protected])