The economic and political structure of the Soviet Union, combined with its low level of economic development and social organization, make it a separate and unique phenomenon in the world economy. The decades-long effort to eliminate free markets has resulted in the almost total monopolization of the economy, the destruction of the work ethic, the absence of incentive for capital accumulation, distorted means of economic calculation, and technology so obsolete that the capital stock of many industrial enterprises possesses zero or even negative value.' Most of Soviet enterprises of heavy industries were built during Stalin's industrialization drive in the 1930s and were not seriously remodelled since. Moreover, the system of central planning - from its inception - would not permit the closing down of a single enterprise, no matter how inefficient. So a huge part of Soviet industrial stock appears and is as productive as industrial historical museums. Soviet economist Abel Aganbegyan estimates that only 40% of all Soviet industrial capital has a positive value.

The suppression of individual initiative has led to widespread apathy and the inability of the public to make independent decisions, as well as a complete lack of individual responsibility on behalf of all layers of management. As a result, catastrophes of Chemobyl, " Admiral Nakhimov," the fate of the Aral Sea, and other man-made disasters occurred. Most decisions in the economy were purely of a political nature. The social structures imposed on the Soviet society have discouraged risk taking, punished efficiency, and have failed to minimize production costs. This has resulted in the waste of resources, the frustration of efforts to advance technological progress, and chronic shortages of goods and services. Pollution, in the conditions of a lack of private ownership of the means of production and political totalitarianism, is systematic and growing worse, particularly the misuse and overuse of pesticides and fertilizers, and the release of industrial waste and heavy metals in the water supply. It appears that the economic; collapse of the USSR may have the same effect on Soviet society as military defeats have had on Germany, Italy, and Japan.

The Roots of the Crisis

The economic and political crisis in the Soviet Union is not of recent origin. For many decades all of the economic units in the country were used for the fulfillment of communist political ideas " at any price." Economic management and distribution were totally controlled by governmental institutions. Production costs reflected local or departmental bureaucratic interests. Centrally-planned investment and the official campaigns against " duplication and parallelism" of the 1960s and 1970s resulted in the formation of the huge amalgamations solely responsible for the production of certain commodities and aggravated the situation to the point where competition became nonexistent. The rate of monopolization of production for most commodities is now up to 70-100 percent. As a result, prices were calculated using the bureaucratic method of " cost-accounting" (whatever the " cost" means in a centrally planned economy without competition) and never reflected supply and demand. The price mechanism was further undermined by huge subsidies on the one hand, and heavy indirect " turnover" taxes included in the price of a product on the other.

By creating a highly developed system of redistribution of resources between small firms that were profitable and the vast majority of firms that were unprofitable, the Soviet party-elite suppressed any attempt on the part of enterprises to become economically independent of the state machinery. The system punished enterprise and supported losers. However, ordinary working people bore the brunt of state expenditures, as the price of labor in the Soviet Union was much lower than in the West, on the level of 20 percent of produced surplus value.2

During the 1970s and 1980s, due to inefficient management and over bureaucratization, it was necessary to increase state subsidies to unprofitable enterprises. More than 30 billion rubles of the state budget were allocated to support unprofitable industrial enterprises annually during this period.3 Huge state losses resulting from an inefficient economic system were covered by currency obtained from sales of oil, gas, and other natural resources abroad. Since 1980, over $300 billion was spent in this fashion.4 These hard currency reserves were used by the Soviet Union to purchase goods in the world market in order to make up for domestic production failures.

The lack of modem communication systems is perhaps one of the most significant single structural deficiencies in the Soviet economy. According to estimates of the Academy of Sciences of the USSR the Soviet computer capacity is 10,000 times less than that of the United States. Western investment in computerization and means of communication which allow these systems to be modernized rapidly is a prerequisite for further industrial modernization.

By the mid-to-late 1980s, the deterioration of the Soviet economy reached a veiy critical point. More than 50 percent of state business enterprises were permanently unprofitable and required huge subsidies in order to continue their operation,5 while the agricultural sector required an infusion of more than 100 billion rubles in the years 1986-1988 to support the extremely inefficient collective farm system based on state ownership of land.6 In order to ease the financial situation of the collective and state farms, in 1990, the USSR Council of Ministers decided to write off 40.3 billion rubles worth of debt. In addition, over a period of two months, a further 28 billion rubles were written off for farms that had converted to either partial or full lease-contracting making a total write off of approximately 70 billion rubles.7

It is difficult to overestimate the depth of the current economic and financial crisis in the Soviet Union. According to the estimates of the USSR Academy of Sciences' Institute of Economics, in reality the decline is closer to 11 percent.8 Speaking at the Economic Development Conference in Moscow on July 2, 1991, USSR Prime Minister Valentin Pavlov made an assessment that the slump is stabilizing, with the national income down 11 percent from mid-1990.9 In the first half of 1991, labor productivity declined by 9 percent and agricultural output dropped by 13 percent. The All-Union budget deficit reached 31.1 billion rubles, over four billion more than the total projected deficit for all of 1991, 26.7 rubles.10 According to Soviet official data, after the price increases of March 1991, more than 90 million people, or about 32 percent of the total population of the country have an income of less than 105 rubles per month." More than 100 million people have less living space than the meager " sanitary minimum" of nine square meters, or 97 square feet per person. The U.S. government classifies as " poor" those households with less than 405 square feet per person. Unemployment, unheard of in the Soviet Union before 1990, is growing rapidly and according to recent estimates reached 3.4 million at the beginning of 1991.12

The government is constantly attempting to suppress the activities of non-government companies such as cooperatives, joint ventures, and small enterprises. " Using as a pretext the 'necessity of fighting the mafia,' the government is introducing new draconian measures unheard of in civilized countries: KGB and MVD (Ministry of the Interior) organs are given the right to search and confiscate property of enterprises, firms, and other institutions without any warrants." 13

At the same time, 80 percent of the machine-tool industry is devoted to production for the military-industrial complex, which employs about 8 million people. (In the United States approximately 2.2 million people are employed in defense-related industries.) In comparison with the United States, the Soviet Union annual produces 4.5 times more tanks, 5 times more armored troop carriers, 9 times more artillery guns, 3 times more nuclear submarines, and 2 times more bombers.14 These expenditures for military hardware continue to increase in real terms despite the extremely difficult economic situation and growing budget deficit and " new thinking" on the political side. For example, in 1991, the Soviet Supreme allocated 96.6 billion rubles, or 35 percent of the All-Union budget to military expenditures. According to recent estimates, the Soviet Union currently spends at least 200 billion rubles, or about 20 percent of its GNP for military purposes. Comparable figures for the West range between 6.5 percent of the GNP of the United States and 1 percent for Japan.15 Nevertheless, government analysis of the economic situation did not consider the option of massive privatization combined with the dramatic reductions in military expenditures. Instead, the Soviet government planned to cover budget deficits through the use of administrative price increases and the issuance of an additional 50 billion rubles in 1991.16

In addition, the government's inability to initiate real market reforms means that there will be a decline in productivity as well. According to estimates by the Council of Ministries of the Soviet Union and independent experts, any theoretical possible government program will lead to a decline in the GNP from 10 to 30 percent, while the total volume of industrial production will decline 13 to 30 percent, and consumption levels will be reduced by 15 to 20 percent annually.17 The government is becoming a hostage of the military. Irrespective of the " new thinking" and other propaganda campaigns of the Soviet government, military expenditures are increasing in both absolute and relative terms, in constant and current prices.18

The Soviet Union is now confronted with the urgent necessity of replacing the current system of economic management with one based upon private ownership, competitive markets, entrepreneurial spirit, and consumer satisfaction. Unfortunately, however, privatization is a rather complicated procedure. It involves much more than just a series of administrative steps leading to the automatic transformation of business enterprises from unprofitable to profitable status.

Despite the necessity for real market reforms, endless discussions about the specific characteristics of the " socialist market economy" that must be created in the Soviet Union still continue. Attempts to combine communist ideology with some selected market approaches have led the country into the present condition of economic chaos. To all but the members of the top level of the bureaucracy, it is now absolutely clear that the chief cause of the low standard of living in the Soviet Union is the inefficiency of its government-owned and bureaucratically-managed enterprises that misuse the Soviet Union's skilled workforce, scarce capital, and raw materials.

NOTES

1. In Eastern Europe, for example, some privatization program were stalled by obsolete technology. The " backbone of Polish heavy industry," the Nowa Huta steel mill in Krakow, when put up for sale appeared to be the sources of future losses and environmental hazard. See Washington Post, May 21, 1991.
2. Quetions of Economics, No.5 (1989), p.29; S. Razin, " Prime MinMcr Promises Market," Komsomolskaya Pravda, April 24, 1991, ð.Ç.
3. Ekonomicheskaya gazeta, No. 14 (1988), ð.4.
4. Kommunist, No.14 (1988), p.49.
5. Ekonomicheskaya gazeta. No. 11 (1988), p.4. Narodnoye Khozyaisivo: SSSR v 1988 godu (Moscow, 1989), pp.620-21. The losses experienced by unprofitable enterprises in the industrial sector of the Soviet economy during 1986 totalled approximately 30 billion rubles. These losses were compensated from the state budget.
6. Narodnoye Khozyaistvo: SSSR v 1988 godu, p.435.
7. Ekonomicheskaya gazeta, No.50 (1990), p.5.
8. Moscow News, April 14, 1991, p.7; Ekonomika i zhizni, No.18 1991, p.4.
9. Radio Free Europe/Radio Liberty, Daily Report. July 3, 1991, p.5.
10. Izvestia, April 20, 1991, p.2; Moscow News, April 14, 1991, Ð. 7.
11. Moscow News, April 21, 1991, ð.Þ.
12. Kommersant. No.3 (1991), p.4.
13. Nevsky Kuryer, No.6 (March 1991), p.1.
14. Moscow News, April 21, 1991, p.l3.
15. Moscow News, March 3, 1991, ðð.8-9.
16. Moscow News, April 11, 1991, p.8.
17. Ekonomika i zhizn , No.18 (April 1991), ð.6, Izvestia, April 22, 1991, p.2.
18. Sec SShA.Ekonomika, Politika, Ideologiya. No.5 (1991), 5-13.

Yuri N. Maltsev is a Fellow at the U.S. Institute of Peace unJ è professor of economics at Carthage College in Kenosha, Wisconsin.