The collapse of the Soviet Union

Reading time: 6 minutes

Context

For many decades, the USSR was regarded as an economic powerhouse. It achieved rapid industrialisation through central planning, despite an enormous human cost. In the 1950s and 1960s, it grew rapidly, and many observers in the West considered it possible that the USSR would surpass the US as the biggest economy in the world. Furthermore, it also achieved full employment, stable low prices for basic items, and free social services to its population. It seemed that the system worked, attaining both growth and material well-being for the population. 

However, by the 1970s and 1980s, there were many signs of economic problems. Growth rates were declining, as well as consumption, with many people having to recur to black markets. In technological terms, the USSR was lagging behind the capitalist world, with lower quality and quantities of industrial production. This implied that the country was not able to compete in international markets for manufactured goods. From industrial power, the USSR turned into a mere exporter of raw materials. Moreover, some indicators of life quality like infant mortality or life expectancy were declining. 

The very nature of the Soviet regime prevented it from dealing successfully with the economic and social challenges it faced in the 1970s and 1980s. Reforming a socialist regime, whit state ownership of the economy and firm control of the Communist Party was not an easy endeavour. However, the regime was not doomed to collapse like it did in 1991. Many frail and inefficient regimes subsist despite serious troubles. The story and the impact of the collapse can only be understood when looking at the attempts at reform, and the events and decisions of the agents at the time. 

Gorbachev’s reforms 

The most important actor was Mikhail Gorbachev, who served as the General Secretary of the Communist Party of the Soviet Union from March 1985 to August 1991, which was the most influential position in the Soviet State.  Contrary to what some might believe, he did not act as a sole visionary, but rather he represented a faction inside the Communist Party that defended the need for reforms deviating from orthodox Marxist thought to overcome the problems of the USSR. 

A political overhaul of the Soviet Union began during this period. The period is named for Perestroika policies. The term means restructuring, which encompassed economic, social, and political reforms. Regarding the economic activity of the USSR, two important laws deeply changed the functioning of the Union: 

  • The 1987 law on State Enterprises, which decentralized economic controls: removed restrictions concerning workers’ wages and companies’ chosen output production, allowing them to keep a share of their profits and reinvest them. Besides, factory and farm managers were to be elected directly by the company workers, rather than through the Party. 
  • The 1988 law on Cooperatives, that permitted the creation of privately owned businesses in the services, manufacturing, and foreign-trade sectors. The size of these cooperatives was not limited by law and they could participate in any legal economic activity, being able to form joint ventures with foreign companies as well. Effectively, they were indistinguishable from capitalist enterprises. 

Furthermore, another concept deeply related to the Perestroika, was the Glasnost, meaning transparency. Gorbachev wished to increase the openness of state affairs to the public, which was pursued by increasing media freedom. This provided ideological opponents of Marxism-Leninism, from Nationalists to Liberals, new platforms to express their dissatisfaction. However, this was also a period of tension and unrest. 

Returning to the cooperatives, numerous administrators and managers, especially in the foreign trade sector, were able to enrich themselves through lucrative deals with foreign investors. This culminated in Artem Tarasov, a founder of one of these cooperatives, proclaiming to the media that he was the first soviet millionaire in history. To the soviet population, who were taught from early the importance of economic equality and economic democracy, this was outrageous, at best. Riots ensued. 

The fact is the whole Perestroika proved to be a failure: in 1989-90 the USSR experienced significant inflation, allowing speculators to purchase goods at state-owned stores, which had fixed prices, and resell them at exorbitant rates. This led to state-wide shortages which further fueled the wrath of the population, increasing public unrest. The moderate 2.3% real economic growth in 1985 had turned into a -11% recession in 1991. 

Pressured by nationalist and pro-independence movements across the different republics, the Soviet regime organized a referendum in March 1991, where it was asked to the Soviet citizens if they wished to remain in a renewed Soviet Union. With a turnout of 80% of its population, over 76% voted that they wished to preserve the USSR, despite the hardships. 

However, this was not enough to prevent the dissolution of the USSR. Boris Yeltsin, who had been elected the president of the Russian section of the USSR in June of 1991, albeit initially claiming to be a pro-USSR reformer, would deal the decisive blow. His signature of the Belavezha Accords with the leaders of the Ukrainian and Belarussian republics in December 1991 marked the effective end of the USSR. 

The aftermath 

After the dissolution of the USSR, Russia was turned upside down, with enormous changes in the economy, society, and politics.  

Firstly, there was an opening of the Russian economy to the world, promoting the relations with foreign countries, especially with the U.S, as the dissolution of the Soviet Union also marks the end of the Cold War, followed by liberalization of the economy with Boris Yeltsin’s radical reforms.  

This shock therapy included the sale of the Russian state assets, privatization of some industries, and the liberalization of the economy. Although, these reforms did not happen the way Yeltsin predicted. During this process, the state assets were sold at a lower price than what they valued, and there was hyperinflation reaching 2 000% during 1992. The government, in an attempt to control it, implemented tight monetary and fiscal measures (such as taxes and interest rate increases and subsidy cuts). Nevertheless, this led to a shortage of goods because the producers began slowing down their production.   

In these circumstances, Russia lost most of its power and could no longer achieve global supremacy. It moved from a country that fought for global supremacy to a broken and corrupt country with an uncompetitive economy. Its economy suffered from the loss of some of its states. Another factor to take into consideration is that its Cold War economy was targeted to the military sector and it faced some difficulties in being competitive when they enter the global market. Consequently, there was a major decrease in real GDP per capita. 

A comparison of the real GDP per capita of the USSR with the USA and the world GDP per capita shows the dramatic crises around the time of the collapse that lasted for many years. 

This breakdown of the economy had an extensive effect on the living conditions of the population. Life expectancy decreased from 70 years to 64, only between 1988 and 1994, and by 1992 about a third of the population lived in poverty. There was also an extensive gap between rich and poor, worsened by the high corruption within the regime, revealed by the Gini Index that reached 48,4 in 1993. Besides that, the liberalisation of prices made an entire class of people with fixed income (such as pensioners) suffering a drop in living standards. Furthermore, there was an increase in criminality (in 1990 were registered 1. 84 million crimes, and in 1995, 2.76) since the regime lessened its force in an effort of democratisation, allowing the growth of the Russian mafia. 

Cartoon from 1992, regarding Yeltsin’s reforms. 

As the market barriers disappeared, western companies entered Russia. But other barriers disappeared as well. Western products, trends, and tastes became widely accepted and disseminated. These contacts with the West were not only an economic shock, but a cultural one as well. 

The collapse of the USSR created economic, geopolitical and cultural shocks and problems that are somewhat present today and may help to understand 2021 Russia. 


Sources: American Enterprise Institute for Pulbic Policy Research; BBC; Brookings Papers on Economic Activity; Financial Times; Gapminder; History.com; International Labour Office; Investopedia; Irénées; Journal of Eurasian Studies; Macrotrends; National Bureau of Economic Research; Norwich University; Pew Research Center; Russia Beyond; Statista; The Atlantic; The Conversation; The Guardian; US News; VOXEU; Wilson Center; World Bank. Robert W. Strayer, Why Did the Soviet Union Collapse?: Understanding Historical Change. 


Further reading recommendations

Ukraine: 21st Century Cold War

Reading time: 6 minutes The War in Donbass More than six year have gone by, around five thousand people have died and more than twelve hundred have been wounded. The conflict in the Donbass region has yet to subside. As of July 27th, the 29th attempt at a “full and comprehensive” ceasefire came into effect,…

Keep reading

Belarus: rigged elections and a struggle for national identity

Looking at footage from the recent protests in Belarus, following the August 9th presidential elections, one observes a wavy sea of red and white flags, instead of the official red and green flag. Understanding this discrepancy in symbols is essential to acknowledge what is happening in Belarus because it illustrates a major factor behind the…

Keep reading

The team

Rui Ramalhão

André Rodrigues

Mariana Gomes

The Po(o)rtuguese Problem: Portuguese Economic Growth Backwardness

Reading time: 6 minutes

Introduction

The Industrial Revolution in 18th century Britain was a turning point in History. With industrialization countries were able to have sustained economic growth for long periods. Successive waves of industrialization, occurred in Europe during the 19th century, bringing a period of great economic expansion. However, some countries, like Portugal, grew but not as much as the European leaders. This trend continued for most of the 20th century, with some exceptions. Today Portugal still lags in many indicators from its European counterparts.

            Our goal with this article is to understand a part of the historical dynamics that prevented Portugal from reaching sustained economic growth. We will use the “four golden rules to achieve lasting economic growth” as explained by a group of our colleagues (https://theawarenessnews.com/2021/03/08/four-golden-rules-to-achieve-lasting-economic-growth/) and explain how they evolved during Portugal’s contemporary history.

Economic Diversification

One of the main drivers for real economic growth is economic diversification. Succinctly, if an economy is well-diversified, then its performance will not be as crippled if one of its sectors faces adversities, thus being easier to deal with shocks and facilitating long-term economic growth.  

Concerning Portugal, it would be valuable to analyze the impact of its different economic sectors on its GDP to discover whether the country ever was dependent on a specific area of its economy.  

Table 1 – Percentual impact of each sector on Portugal’s GDP; Source: Bank of Portugal (1954-95) and INE (1995-2010)

From the table presented above, we see that Portugal’s Agricultural and Industrial sectors have lost significant influence over this period, going from a combined 55% of Portugal’s GDP in 1954 to a mere 14,5% in 2011. Consequently, a gradual increase in the services industry has been observed, overtaking the previous two as the main sector in Portugal’s economy.

One must ask then if this evolution is different than the one experienced in most Western countries. The answer is negative. This information is reflective of the contemporary deindustrialization phenomena that have led to a gradual shifting of industries that were once established in the Global North to the Global South, particularly to South East Asia. Likewise, the development of the services industry, mainly propelled by developments in technology, has been observed throughout most developed economies.

Besides, Portugal has never even been a country with the possibility of being dependent on a certain commodity which could have swayed Portugal’s past leaders to fully focus on the development of a certain facet of its economy.

Therefore, we do not believe that a lack of economic diversification could explain Portugal’s economic shortcomings.

Productivity

Another factor that is usually employed to explain long-term economic growth is the level of productivity of an economy. Productivity measures the efficiency of production, meaning that a productivity improvement would be an increase in the output produced by each worker or each machine in an economy. It is expected that higher levels of productivity would lead to greater profits for businesses and income for individuals.

Regarding Portugal, throughout its history, there have been many periods where productivity growth was observed. From the late 19th century to the First World War, when the fires of industrialization were first ignited in Portugal, to the periods of 1951-1973 and 1985-2000 there have been plenty of years where productivity in Portugal grew.

However, these levels of productivity have always been worse than the ones experienced in most of western Europe. When in the mid-19th century countries in central Europe started to benefit from the industrial revolution, Portugal’s main economic activities were still related to the primary sector, with the exportation of cork and wine, for example. It seems as if, throughout its most recent history, Portugal has always been trailing behind the rest of Europe in this field.

Figure 2 – Labour productivity per hour worked in Portugal; Source: Pordata

This trend has not stopped for the past two centuries, resulting in Portugal today being the 7th least productive country in the European Union, having only 65,9% of the EU average levels of productivity in 2017.

Could lower levels of productivity explain the economic flaws of Portugal? Perhaps. The problem with productivity is that many other variables can influence it, such as geography or the a country’s institutions. For example, it would be nonsensical to claim that the main reason why the Bedouin tribes of Mauritania are not as wealthy as the Portuguese is a reduced level of productivity when the hardships of the Sahara Desert and the historical phenomena of the region are vastly different from the Portuguese’s.

Openess to trade

It is a well-known result in economics that openness to trade is highly correlated with long-term economic growth. As the economic historian Jaime Reis pointed in his investigation of the phenomenon of Portuguese economic backwardness, peripherical economies in Europe seemed to benefit from integration in international trade in the 19th century. However, for the Portuguese case, the data indicates that there were not many developed exporting sectors in the country that could have lead to an industrial take-off. Even more, Portugal was not fully open to international trade, nor able to exploit all opportunities trade gave to development.

Analysis for other periods gives even more evidence of the important correlation between a higher degree of openness to trade and economic growth. A study by Óscar Afonso and Álvaro Aguiar concludes that the acceleration of trading relations relates to the improvement of the economy’s productivity from the 1950s and 1960s onwards and the convergence with the most developed European countries. The integration in the European Economic Community in the 1980s was also an important driver of economic growth and convergence.

In conclusion, it does seem that openness to trade is correlated with the historical growth of the Portuguese economy, but there is not much evidence to support the idea that this is the most important factor to explain the country’s problems.

Institutions

Lack of “inclusive institutions” might be the factor. This term first appeared in Why Nations Fail and reinforces the importance of respecting property rights and having an effective justice to achieve continuous prosperity. The concept is defined in opposition to the concept of “extractive institutions”, ones that extract resources from the economy to the benefit of a small group, thus preventing sustained growth.

Portugal’s contemporary history is a pendulum that swings between more inclusive to more extractive institutions, and back to more inclusive institutions. The 19th century starts with the end of absolutism and the instauration of the liberal monarchy. However, the monarchy was not always a fully liberal regime, with periods of instability and authoritarian rule. In 1910 came the Republic, another period of instability that ended in the corporativist dictatorship of the Estado Novo, an obvious example of “extractive institutions”. Only in the 1970s did Portugal come to be a modern democracy.

We see that overall, the period is marked by instability, lack of liberal and democratic institutions, and by regimes and elites that prevented the development of growth-friendly institutions and reforms.

The weight of history can be seen in the institutional problems Portugal faces today. The 2020 Corruption Perceptions Index places Portugal in 33rd place, behind several developing countries. This value suggests Portugal is not among the most efficient economies, as corruption is expected to result in lower levels of capital productivity.

In the 2020 Economic Freedom Index, Portugal has an overall score of 67, making it the 52nd freest economy in the world and 29th in Europe. The index identifies the government’s longstanding record of overspending and the continuing need for labor market reforms to reduce the number of workers who are forced to take temporary or part-time positions as the two major impediments to a greater economic freedom. While the business and monetary freedom are considered attractive from a regulatory point of view, labor reform packages in recent years have not been able to succeed in raising labor productivity.

The institutional factor may be the reason why Portugal is not achieving strong prosperity and still lags behind the most developed countries.

Sources: Análise Social; Banco de Portugal; Conselho para a Produtividade; ECO; Francisco Manuel dos Santos; Jornal de Negócios; Jornal I; Instituto de Ciências Sociais; Instituto Nacional de Estatística; Pordata; Público; Sábado; Transparency International; The Heritage Foundation


André Rodrigues

Madalena Andrade

Rui Ramalhão

The Spanish Flu and Covid-19: Parallel Crisis?

Reading time: 6 minutes

The world in 1918 was completely different from what it was a few years before. Four years of the most devastating war ever seen up until then destroyed not only millions of lives, but also countries, cities, economies, and even beliefs and faiths. Decades of liberal optimism, faith in progress, and economic development came to a sudden stop.

There was hardly a worse time for a pandemic to devastate the world. The Spanish flu was provoked by an influenza A virus known as H1N1. Its origin is from an animal virus, with which human immune systems were not capable of fighting. The first reported cases were in the United States in February 1918, among soldiers training for deployment in Europe. The name “Spanish” comes from the fact that the Spanish press was able to cover the disease since the country was neutral in WWI.

The data about the pandemic is elusive and the estimates may be somewhat vague. Nonetheless, there are some established facts. No region of the world was left untouched by the pandemic. The estimates of total deaths vary from less than 20 to 100 million. The lowest estimation points to the death of around 1% of the world’s population at the time, and some say a third of the world population may have been infected. It affected particularly young and healthy adults, from 20 to 40 years of age. This pandemic was the last time there was a decline in population worldwide. The reasons for such mortality are easy to point: global movements of troops and standing armies in the first waves, the medical science was not ready to face the virus, healthcare was precarious even in rich countries, populations were generally poor, and governments were not able to impose lockdowns or treat adequately most people.

This brief enumeration shows how much the world changed for the better in only 100 years. Our article will build from it and show how the Spanish flu impacted the world of 1918 both in economic and socio-cultural terms. At the same time, we will compare those changes to what our world in 2021 is experiencing due to the covid-19 pandemic. Can History tell us something about what we will live as soon as the pandemic ends?

Economic impacts

Gauging the economic effects of the Spanish flu is not an easy endeavor. On one hand, the proximity of WWI makes it complicated to separate the economic effects of the pandemic from those caused by the war. In addition, economic information was not as thoroughly recorded in those times as it is nowadays, making analysis even harder.

The available macroeconomic data was sufficient to create a statistical model that separates the pandemic-related impacts from the war-related ones. One study concluded, through a regression analysis, that, on average, the Spanish Flu was estimated to have reduced real GDP per capita by 6.2 percent. Although this number was not as high as the expected 8.4 percent decline resulting from World War I, it still represents a considerable decline.

Many workers in the secondary sector remained unaffected by the flu

Likewise, concerning asset prices, the same study concludes that, on average, for a death rate of 2.1 percent due to the virus, the real stock returns would be lower by 28 percentage points, these stocks being based on broad market indexes. Similarly, short-term government bills (analogous to today’s US Treasury Bills) on average, for a death rate of 2.1 percent due to the virus decreased by 14 percentage points. This decrease can be seen partly as a decline in the “safe” expected real interest rate, as people’s expectations on economic performance were surely affected by the climate of uncertainty surrounding the pandemic.

It might be tempting to establish a connection between the current Covid-19 pandemic and the Spanish Flu, as both pandemics have severely disrupted society.  However, the way western economies are structured today is vastly different from those of the past: in 1918, less than half of the population worked in the services industry, whereas today more than three-quarters work in this sector. As such, western economies 100 years ago were not as dependent on customer traffic, meaning that they could absorb better a decrease in the confidence of the general populace.

Another significant difference, for western countries at least, is that global supply chains were nowhere near as prevalent as they are today, resulting in countries in the past being able to deal with supply shortages more easily, as they would become a regional issue, rather than a global one. Lastly, businesses are more highly leveraged today than they were 100 years ago. This higher debt combined with the economic shock of covid-19 will likely cause a higher blow to the current economy in comparison to 1918.

The fact is that despite the pandemic having negative implications for the economies, the following decade was one of unprecedented economic growth, particularly in the United States. For the Weimar Republic and the other defeated countries, not so much. Although it is early to affirm this with certainty, when comparing the Spanish Flu with our current pandemic, likely the economic impacts of the latter will be more significant than the former. We are not sure about the future growth of our economy. However, we have to control the restart of the economy and society in order to contain any possible risks that may lead to another “Great Depression” as in the 1920s.

Newspaper carriers wearing surgical masks to protect themselves from the Spanish Flu.

Social Impacts

There is no doubt that a pandemic has a tremendous effect in social dynamics as well as in the economy. A study made by Bocconi University Research states that the Spanish Flu caused a permanent impact on individual behaviour relative to social trust. Social trust is the confidence and reliability that we perceive in others as honest individuals. Immigrants in the USA who lived through Influenza show much less levels of trust, and this was passed on to the next generation. Such attitudes may have come from the lack of efficiency of healthcare institutions. Weakening the social trust of individuals also has important consequences on economic activity.

A man disinfects the top of a bus. London, 1920.

With respect to the ongoing Coronavirus pandemic, thanks to advancements in public healthcare, this reaction is attenuated. Furthermore, although still early to draw any definite conclusions, a panel study developed in Sweden shows a considerable increase in social trust with the implementation of lockdown measures. There is also a big emphasis on the importance of political trust, since it may relate to the actual compliance with the law and with the policies made by the government. As this pandemic continues to unfold, it will be crucial to analyze if this specific crisis will add to or alter the conclusions of most scientific work.

Another curious aspect to explore is the post-pandemic behaviour that happened in the 1920s and may occur also after the covid-19 pandemic. After WWI and the pandemic, the world (and particularly the United States) entered the Roaring 20’s. People celebrated their newfound freedom from violence and disease and were willing to spend more than what they were used to, to compensate for the time lost. Many social conventions, particularly regarding women were shaken. Art and Entertainment also blossomed during this period, with many new developments.

Soldiers from the US Expeditionary Force who contracted the flu in an Army Hospital. France, 1918.

Nowadays many hope for the same thing to happen after the current pandemic ends. Many believe a new Roaring 20ss awaits us. According to Yale Professor and social epidemiologist Nicholas Christakis, in his book Appolo’s Arrow: The Profound and Enduring Impact of Corona Virus on the Way We Live, once an health crisis comes to an end there is often a period where people look extensively for new social interactions.

We cannot predict what will happen after covid-19 ends, but the study of the spanish flu gives us some clues about what can happen to our economy, society and personal lives.


Sources: Bloomberg; Bocconi University Research; Centers for Disease Control and Prevention; CNBC; Diário de Notícias; HISTORY; Jornal de Negócios; National Bureau of Economic Research; National Geographic; NPR; Our World in Data; Political Studies Review; Público; Sociedade Portuguesa de Medicina Interna; Times of India; VOX

André Rodrigues

Rui Ramalhão

Benedita Elias