As part of a movement toward a mixed economy, the Soviet parliament approved a property law allowing private ownership of small factories and other businesses for the first time in the Soviet Union since the early 1920’s.
On March 6, 1990, the Soviet parliament approved a property law that gave private citizens in the Soviet Union the right to own small-scale factories and other businesses for the first time since the late 1920’s. The parliament voted 350 to 3 to allow citizens the right to own “means of production,” something ruled out previously by the Soviet constitution. The legislation was considered a major step toward the creation of a mixed economy with different forms of ownership.
The law also contained plans to create worker-owned enterprises and to protect property against confiscation by the state. The property law was a blow to the monopoly of state ownership and the administrative command economy. Some Soviet legislators described the law as a return to Vladimir Ilich Lenin’s
Lenin’s NEP was rejected by Joseph Stalin
Ownership of the means of production in the Soviet Union was formally vested in the people as a whole. In the name of the people, the state exercised the basic rights of enterprise ownership, making production and pricing decisions and determining how the capital stock would be used, maintained, and augmented. All these features reflected the predominance of administrative over economic methods, of centralization over decentralization.
Several efforts to reform the centrally planned economic system took place beginning in the mid-1950’s. All the past efforts, including the reforms introduced in 1957 by Nikita S. Khrushchev
The basic measures of the 1965 Kosygin reforms were an administrative change reinstituting the ministerial system and transformation of the enterprise incentive system. Kosygin’s efforts came to an end by the late 1960’s. The 1970’s were a decade of stagnation in the Soviet economy and society. The Soviet economy compared unfavorably not only with the economies of Western countries but also with those of newly industrialized areas such as South Korea and Taiwan.
When Mikhail Gorbachev came to power in 1985, he found that the Soviet economy and society were in a situation bordering on crisis. One major problem was the decline of economic growth rates. According to one leading Soviet economist, there was no growth in the period 1980-1985. At the Twenty-seventh Congress of the Soviet Communist Party, General Secretary Gorbachev proposed perestroika (restructuring) as a key policy. Perestroika, representing a radicalization of socioeconomic reforms, was linked to a deepening of democracy.
In June, 1987, two central reform documents were adopted, the Law on State Enterprises
In exchange for these new rights, enterprises were told that they would be held responsible for their own profitability and that the state would not bail them out. Enterprises producing 60 percent of industrial output came into this new system on January 1, 1988. At the same time that enterprises were being given more autonomy on paper to follow their economic instincts, however, Gorbachev and Prime Minister Nikolai Ivanovich Ryzhkov were signing decrees ordering enterprises to increase quality and reduce costs.
The law on private ownership was passed in March, 1990. During the summer of 1990, Boris Yeltsin, chairman of the Russian Supreme Soviet, promised to bring order out of economic chaos by instituting a market economy within five hundred days. In August, top advisers of Gorbachev and Yeltsin formed a working group charged with formulating a strategy for introducing a market economy. The leader of the working group was academician Stanislav S. Shatalin. A draft plan produced by the working group, known as the Shatalin plan,
The Shatalin plan was backed by Yeltsin and radical reformers. Gorbachev tended toward support at first, but when the plan met strong resistance from Ryzhkov and some military officers, Gorbachev changed his mind. Implementing the Shatalin plan would have effectively destroyed the economic control of the central government. By denying the center its authority to tax, for example, it would have shifted power to the republics at the expense of the union. Gorbachev abandoned the Shatalin plan and called on his economic adviser Abel Aganbegyan
On October 16, Gorbachev came back to the Soviet Congress of People’s Deputies with a new plan, which was passed three days later. The Gorbachev plan was not so much a plan as a statement of intent so general as to be unobjectionable to the various factions in the debate. It provided no specific timetable. The debate over whether to preserve the Soviet Union itself soon became top priority for Gorbachev and many republican leaders. Dramatic and large-scale market reforms did not begin until the disintegration of the Soviet Union.
The immediate impact of the Soviet parliament’s decision to allow private ownership was a rapid proliferation of laws and decrees regarding the creation of a market economy. Following the law on ownership, Gorbachev used his power as president to issue decrees and propose laws designed to move toward a “regulated” market economy. Key documents included a law legitimating a wide range of property rights, including the right to private property (May, 1990), a law sanctioning virtually all forms of enterprise (June, 1990), a draft of basic legal principles guiding destatization and privatization (February, 1991), and laws on small business and entrepreneurship (April, 1991).
By 1991, regulations and laws mattered less in the Soviet Union than they had before—and they had never mattered much. Gorbachev and his associates did not have the courage and skills needed to implement these fundamental reforms. Gorbachev was not able to prevent the erosion of conditions into socioeconomic crisis. By 1991, the living standard of the Soviet people was lower even than that in 1985. The gap in technological innovation and implementation between the Soviet Union and the advanced market economies had widened rather than narrowed. The Soviet economy entered a depression, with output falling an estimated 10 percent or more. The collapse of the economy hastened what eventually became a process of political disintegration.
Several reasons have been proposed for the failure of Gorbachev’s economic reforms. The command economy was abandoned before market institutions and mechanisms were in place. The Soviet economy had been a command economy for more than half a century, and when central control was removed, the economy lost its direction. Government planners were no longer in control, but producers had little information about supply and demand. Even when they had sufficient information about market trends, entrepreneurs still encountered difficulties in searching for suppliers of raw materials and in finding buyers. The distorted price system constituted a big obstacle for shifting toward a market economy.
During the initial stage of reform, Gorbachev believed in reform within the system rather than reform of the system. Acceleration, or uskorenie, thus became the key theme, emphasizing the speed of change rather than the nature of that change. When the Soviet economy and society began moving in the wrong direction, acceleration only made matters worse. Growth targets were increased in the late 1980’s, an unrealistic change that aggravated imbalances in the economy. The Soviet regime under Gorbachev failed to maintain balance between supply and demand. Widespread shortages of basic goods and the lack of market mechanisms resulted in the prevalence of “seller’s markets” and consequent severe inflation, as sellers found themselves with the ability to raise prices almost at will.
Although Gorbachev and other reformers realized the significance of a legal framework and worked to establish one that would support free enterprise, it is extremely difficult to build a legal system in a society, like that of the Soviet Union, without a tradition of the rule of law. The Soviet transition to the market was further complicated by weak links with the global economy. Soviet products were generally of low quality and could not be sold on the world market at competitive prices. The Soviet Union was not a member of key international economic organizations and agreements, such as the International Monetary Fund and the 1947 General Agreement on Tariffs and Trade. The Soviet Union did not enjoy most-favored-nation trading status with the United States; the West had not lifted many trading barriers created during the Cold War. The country thus faced obstacles to entering world markets as a “normal” trading partner.
Radical reformers considered privatization to be a key for marketization. There was no consensus, however, regarding the speed and scope of privatization. A widespread phenomenon was so-called nomenklatura privatization. Nomenklatura refers to the Soviet official personnel system. As one example, it was reported in 1992 that a state research institute had spun off a private company, installed its own president, and then sold the firm more than one hundred personal computers at ridiculously low, state-subsidized prices. The company then began selling the computers at market prices, up to one hundred times the purchase price. Many government organs took over the property of the former Communist Party. The state distribution network spawned thousands of “commercial organizations.”
Dramatic developments during and after the August coup in 1991 demonstrated that perestroika and glasnost (openness) had changed the nature of the Soviet state. Radical reforms undermined traditional authority. The breakup of the Soviet Union could not be seen, however, as a guarantee of successful reforms in the successor states.
The de facto property rights of managers depend on their expertise and connections. In the future, managers in the former Soviet Union might formally report to shareholders, including foreign shareholders, but in the chaotic post-Soviet environment of the early 1990’s, management held the upper hand against interfering outsiders.
Small enterprises found a niche in the gaps left by the industrial behemoths. By mid-1991, the Soviet Union already had 260,000 private cooperatives employing about 4.5 million people on a full-time basis and nearly 2 million working part-time. Another half million citizens were self-employed.
In 1992, the Russian government under Yeltsin accelerated the privatization process by issuing vouchers to private citizens.
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Aganbegyan, Abel. The Economic Challenge of Perestroika. Bloomington: Indiana University Press, 1988. An economic adviser to Mikhail Gorbachev presents unique perspectives on the difficulties of reforming the Soviet economy. -
Aslund, Anders. Gorbachev’s Struggle for Economic Reform. Ithaca, N.Y.: Cornell University Press, 1991. Provides insightful analysis based on the author’s observations and extensive interviews with Soviet economists and top officials during three years spent in the Soviet Union after Gorbachev came to power. Argues that the Soviet leadership faced a bleak choice between a radical overhaul of their system and continued decline. -
Barnes, Andrew. Owning Russia: The Struggle over Factories, Farms, and Power. Ithaca, N.Y.: Cornell University Press, 2006. Discusses the evolution of property ownership in Russia during and after the breakup of the Soviet Union. -
Hewett, Edward A. Reforming the Soviet Economy: Equality Versus Efficiency. Washington, D.C.: Brookings Institution, 1988. Analyzes the strengths and weaknesses of Soviet economic performance during the 1970’s and 1980’s. Explains how the egalitarian bias is institutionalized and how this in turn contributes to weakness in economic performance. Essential reading for understanding the Soviet reforms. -
Hewett, Edward A., and Victor H. Winston, eds. Milestones in Glasnost and Perestroika: The Economy. Washington, D.C.: Brookings Institution, 1991. Collection of influential articles from Soviet Economy provides authoritative statements by leading Western and Soviet scholars with richly diverse viewpoints and backgrounds. -
International Monetary Fund. The Economy of the USSR. Washington, D.C.: World Bank, 1990. Major work by leading Western economists assesses the structures, processes, and prospects of the Soviet economy. -
Jones, Anthony, and William Moskoff, eds. The Great Market Debate in Soviet Economics: An Anthology. Armonk, N.Y.: M. E. Sharpe, 1991. Selected documents dealing with critical issues including property and the market, price reform, money and banking, and constraints and consequences of market transition. Contains three important market transition plans, by Ryzhkov, Shatalin, and Gorbachev. -
Kotz, David, with Fred Weir. Revolution from Above: The Demise of the Soviet System. New York: Routledge, 1997. Draws on interviews with individuals involved in both old and new regimes to examine the factors behind the collapse of the Soviet Union. Includes discussion of changes in the Soviet economy.
Détente with the Soviet Union
Gorbachev Initiates a Policy of Glasnost
Soviet Farmers Gain Control of Land and Crop Selection
Soviet Troops Withdraw from Czechoslovakia
Lithuania Declares Independence from the Soviet Union
Dissolution of the Soviet Union