POL101Y1 Lecture Notes - Lecture 14: Productive Forces, Workforce Productivity, Barter
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POL354 Lecture 14 – Economic Transformation
Thursday, January 19, 2012
The transition itself started with a very clear set of assumptions by the leadership of the country
that any political transition had to be either preconditions/co-conditioned with a major
transformation of the economic structure of the country.
The assumption is that there is a very clear linkage (causal) between the type of economic
regime and the type of political regime that exists in most countries. Socialism is inconsistent
with the construction of a democracy, especially the type of Socialism that existed in the Soviet
Union. What is required for modernization/democratization is the emergence of a capitalist
The Soviet Union had an economy that was inconsistent with democracy. The argument was
that along with the establishment of democracy, the old economic regime had to be dismantled.
Economic and political power had to be separated. Private ownership had to be set up. Need for
a legal framework that would guarantee private rights, etc…
Western democracies that evolved with the emergence of capitalism did so because capitalism
provides certain assets which are critical to democratic governments – Socialism had reached its
capacity in terms of producing and distributing goods. Capitalism generates the
resources/conditions for higher education which is needed to produce a large middle class
which are willing to recognize the legitimacy of a certain regime regardless of if they fully
benefit from that regime. Civil society also comes with capitalism.
A strong democracy requires a level of economic development that is consistent with both a
relatively affluent society as well as a strong enough economy to provide for a state which itself
is strong and which has certain functions assigned to it that it can afford to carry out (social
programs, infrastructure, defence). Much of the power originally exercised by the state is
transferred to the public sector which allows the government to carry out a range of functions
which are society wide.
The Soviet system could not provide this – it was a command-administrative economy. There
was virtually no space for the private productions/consumption of goods and services. Economy
was closely monitored and contained. The entire economy was planned and administered by
the state i.e. Counsel of Ministers. All consumption came from purchase by the state – exclusive
monopoly on the distribution of goods on the retail level – this had to be broken down.
There were no prices in the Soviet Union, instead compliance was insured through a number of
State organizations who monitored there behaviour of administrators and workers.
There were imperfections in the planning system, flow of information, irrational expectations, in
this system. Much of these distortions were due to a large number of informal adjustment
mechanisms that were not counted into the planning of this system. A good deal of corruption
was built into the system – breaking the rules for the sake of the state/personal advantage.
By the early 1980s it was clear that this system was not working. There was a significant
economic slow down in the early 80’s. Growth rates indicated recession/depression like
conditions. Serious management problems became evident, the quality of the goods and
services produced was at a continuing low level, and agriculture was constantly weak – yields
constantly unstable/unpredictable. There was also technological backwardness (despite
Western assumptions) – this was a mechanism that would keep the Soviet Union permanently
behind the West.
Gorbachev describes this as a pre-crisis situation – one which requires dramatic attention. Opts
to try a number of quick fixes on the existing system as a temporary strategy. Tries to reorganize
some of the basic units of the economic system. Attempted to put another level of bureaucracy
in place to monitor lower levels. Called for the conversion of military to civilian production to
expand the base of consumer production and because the Soviet military produced better goods
than the civilian sector.
Gorbachev recognized the importance of foreign trade. First set of options for Gorbachev was to
fix the existing system – very much reminiscent of Khrushev and Brezhnev.
1986 – Gorbachev presents the vision of transformation, puts in place policies that will direct
change of a more radical nature. Takes the 1920s (New Economic Plan) as his model in order to
legitimize what he did – reminds everyone of the true Leninist course to Socialism which was
meant to be State control with some degree of space for private entrepreneurial activity.
Gorbachev scraps the Social contract which provides everyone with the right to a job/security –
but this limited access to high wages. Introduces a new set of laws allowing for larger wage
differentials based on individual –instead of collective – performance. This also created job
insecurity. Gave the right to fire people/reorganize work force based on real needs to managers.
This meant that management was allowed to move in the direction of providing savings for itself
that it could retain and use for other purposes.
Significant change that took place in the labour contract major reform as opposed to a quick
Gorbachev envisions a radical change in the system – introduces new bills that provide
economic space for private enterprises (called collectives). Individuals can now set up
establishments legally to provide a large range of services that consumers need (i.e.
restaurants). Severe restraints – initially only members of a family could set them up, or those
who were ‘un-employable’. This is a radical reform of the socialist command-administrative
system. Gorbachev set up a place in society for private entrepreneurial activity.
This takes off and expands very rapidly, especially in the consumer goods sector. The reform
however encounters enormous resistance. Conservatives have strong vested
interest/ideological commitments to the existing system. They have their own outlets in terms
of the media through which they can challenge the legitimacy of the reform. Gorbachev is put
into the position, for the first time in Soviet history, where a leader is subject to real criticism
while in power.
Tremendous resistance in the system by lower level bureaucrats who feel threatened by the
radical change – happy where they are. Challenged by others who work more effectively and
make take their jobs.
Tremendous amount of public opposition. Instances of violence, discussion amongst the people.
The people feel a large amount of commitment and loyalty to the regime and feel threatened by
the radical changes introduced to the country.
Gorbachev is confronted with a dilemma – debate: move ahead slowly, quickly, or stop? In
general there are two approaches put forward:
Recognizes resistance in opposition and believes the only way to transition is to transition
quickly “500 day plan”. Has to go ahead quickly, and consolidated otherwise it will be
Argues for gradualism, doesn’t reject the concept outright, but warns that transformation needs
to ensure stability.
Gorbachev has to make a fundamental choice by early 1991 and he chooses in favour of Ryzhkov
and gives up on his vision of real, fundamental, economic transition.
While this is taking place:
June of 1990, Boris Yelstin is elected as the Chief Executive of the Russian Republic. He goes on
to become the first elected President of the Russian Republic. Yelstin had a long history of
conflict with Gorbachev. Sharply criticised Gorbachev for his lack of leadership abilities.
A war of laws which was often constructed around the idea of increased sovereignty for the
republics within the Soviet Union. The Baltic republics had asserted their claim to
sovereignty/succession on the grounds that they had been illegally incorporated in the first
August of 1991 there was a coup attempt on Gorbachev. His authority is virtually disappearing.
The authority/legitimacy of the central government has also been severely undermined. Yelstin
begins to consolidate his government.
Yelstin introduces his program through a set of decrees in late October/early November of 1991.
The type of reform he is proposing is fundamental and transformational in nature and can only
be down within the context of a sovereign state. It appears, for political purposes, that Yelstin
has already established, in his mind, that he is going to dismantle the Soviet Union.
As the president, ultimately the responsibility fell on Yelstin’s shoulders. However, what Yelstin
put in place has a much more complex backdrop – Yelstin was ignorant when it came to
economics. He had to make the decision based on the advice/direction given to him by others.
Two other key actors (1) Igor Gaidar and (2) Anatoly Chubais, both heavily influenced by the
Yelstin’s decision was also pushed by outside forces, in particular the American government who
pushed for the dismantling of the Socialist system and the establishment of a capitalist regime.
The American government gave aid to pro-capitalist groups, gave money under the conditions
that Russia under goes a rapid, total transformation from a state-based economy to a capital-
The transition itself started with a very clear set of assumptions by the leadership of the country that any political transition had to be either preconditions/co-conditioned with a major transformation of the economic structure of the country. The assumption is that there is a very clear linkage (causal) between the type of economic regime and the type of political regime that exists in most countries. Socialism is inconsistent with the construction of a democracy, especially the type of socialism that existed in the soviet. What is required for modernization/democratization is the emergence of a capitalist regime. The soviet union had an economy that was inconsistent with democracy. The argument was that along with the establishment of democracy, the old economic regime had to be dismantled. Economic and political power had to be separated. Need for a legal framework that would guarantee private rights, etc .