Soviet economic growth rates during the postwar period appeared impressive. Between the early 1950s and 1975, the Soviet gross national product (GNP--see Glossary) increased an average of about 5 percent per year, outpacing the average growth of the United States and keeping pace with many West European economies--albeit after having started from a much lower point.

However, these aggregate growth figures hid gross inefficiencies that are typical of centrally planned systems. The Soviet Union was able to attain impressive growth through "extensive investments," that is, by infusing the economy with large inputs of labor, capital, and natural resources. But the state-set prices did not reflect the actual costs of inputs, leading to enormous misallocation and waste of resources. In addition, the heavily bureaucratic economic decision-making system and the strong emphasis on meeting targets discouraged the introduction of new technologies that could improve productivity. Central planning also skewed the distribution of investments throughout the economy.

The aggregate Soviet growth figures also did not reveal either the generally poor quality of Soviet goods and services that resulted from the state monopoly over production or the lack of priority given the consumer sector in the planning process. Eventually, diminishing returns from labor, capital, and other inputs led to a severe slowdown in Soviet economic growth. Furthermore, the availability of inputs, especially capital, labor, and technology, was decreasing. Declining birth rates, particularly in the European republics of the Soviet Union, placed constraints on the labor supply. By the mid-1970s and into the 1980s, average Soviet GNP growth rates had plummeted to about 2 percent, less than half the rates of the immediate postwar period.

Although such rates might have been acceptable in a mature, modern industrialized economy, the Soviet Union still trailed far behind the United States, other Western economies, and Japan, and in the 1980s another challenge arose from the newly industrializing countries of East Asia. Furthermore, the standard of living of the average Russian citizen, which had always been below that of the United States, was declining. In the 1980s, with the advent of modern communications that even Soviet censors found impossible to restrict, Soviet citizens began to recognize their relative position and to question the rationale of their country's economic policies. This was the atmosphere in which the Gorbachev regime undertook serious economic reform in the late 1980s.

Reform and Resistance

During several distinct periods, Soviet leaders attempted to reform the economy to make the Soviet system more efficient. In 1957, for example, Nikita S. Khrushchev (in office 1953-64) tried to decentralize state control by eliminating many national ministries and placing responsibility for implementing plans under the control of newly created regional economic councils. These reforms produced their own inefficiencies. In 1965 Soviet prime minister Aleksey Kosygin (in office 1964-80) introduced a package of reforms that reestablished central government control but reformed prices and established new bonuses and production norms to stimulate economic productivity. Under reforms in the 1970s, Soviet leaders attempted to streamline the decision-making process by combining enterprises into associations, which received some localized decision-making authority.

Because none of these reforms challenged the fundamental notion of state control, the root cause of the inefficiencies remained. Resistance to reform was strong because central planning was heavily embedded in the Soviet economic structure. Its various elements--planned output, state ownership of property, administrative pricing, artificially established wage levels, and currency inconvertibility--were interrelated. Fundamental reforms required changing the whole system rather than one or two elements. Central planning also was heavily entrenched in the Soviet political structure. A huge bureaucracy was in place from the national to the local level in both the party and the government, and officials within that system enjoyed the many privileges of the Soviet elite class. Such vested interests yielded formidable resistance to major changes in the Soviet economic system; the Russian system, in which many of the same figures have prospered, suffers from the same handicap.

Upon assuming power in March 1985, Gorbachev took measures intended to immediately resume the growth rates of earlier decades. The Twelfth Five-Year Plan (1986-90) called for the Soviet national income to increase an average of 4.1 percent annually and labor productivity to increase 4.6 percent annually--rates that the Soviet Union had not achieved since the early 1970s. Gorbachev sought to improve labor productivity by implementing an anti-alcohol campaign that severely restricted the sale of vodka and other spirits and by establishing work attendance requirements to reduce chronic absenteeism. Gorbachev also shifted investment priorities toward the machine-building and metalworking sectors that could make the most significant contribution to retool and modernize existing factories, rather than building new factories. Gorbachev changed Soviet investment strategy from extensive investing to intensive investing that focused on elements most critical to achieving the stated goal.

During his first few years, Gorbachev also restructured the government bureaucracy (see Perestroika , ch. 2). He combined ministries responsible for high-priority economic sectors into bureaus or state committees in order to reduce staff and red tape and to streamline the administration. In addition, Gorbachev established a state organization for quality control to improve the quality of Soviet production.

Data as of July 1996

NOTE: The information regarding Russia on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Russia Reform and Resistance information contained here. All suggestions for corrections of any errors about Russia Reform and Resistance should be addressed to the Library of Congress and the CIA.