The Soviet Union became the first country to adopt a planned economy, whereby production and distribution of goods were centralized and directed by the government. The first Bolshevik experience with a command economy was the policy of War Communism, which involved nationalization of industry, centralized distribution of output, coercive requisition of agricultural production, and attempts to eliminate the circulation of money, as well as private enterprises and free trade. As it had suffered a severe economic collapse caused by the war, in 1921, Lenin replaced War Communism with the New Economic Policy (NEP), legalizing free trade and private ownership of smaller businesses. The economy quickly recovered.
Following a lengthy debate among the members of Politburo over the course of economic development, by 1928–1929, upon gaining control of the country, Joseph Stalin abandoned the NEP and pushed for full central planning, starting forced collectivization of agriculture and enacting draconian labor legislation. Resources were mobilized for rapid industrialization, which greatly expanded Soviet capacity in heavy industry and capital goods during the 1930s. Preparation for war was one of the main driving forces behind industrialization, mostly due to distrust of the outside capitalistic world. As a result, the USSR was transformed from a largely agrarian economy into a great industrial power, leading the way for its emergence as a superpower after World War II. During the war, the Soviet economy and infrastructure suffered massive devastation and required extensive reconstruction.
By the early 1940s, the Soviet economy had become relatively self-sufficient; for most of the period until the creation of Comecon, only a very small share of domestic products was traded internationally. After the creation of the Eastern Bloc, external trade rose rapidly. Still the influence of the world economy on the USSR was limited by fixed domestic prices and a state monopoly on foreign trade. Grain and sophisticated consumer manufactures became major import articles from around the 1960s. During the arms race of the Cold War, the Soviet economy was burdened by military expenditures, heavily lobbied for by a powerful bureaucracy dependent on the arms industry. At the same time, the Soviet Union became the largest arms exporter to the Third World. Significant amounts of Soviet resources during the Cold War were allocated in aid to the other socialist states.
From the 1930s until its collapse in the late 1980s, the way the Soviet economy operated remained essentially unchanged. The economy was formally directed by central planning, carried out by Gosplan and organized in five-year plans. In practice, however, the plans were highly aggregated and provisional, subject to ad hoc intervention by superiors. All key economic decisions were taken by the political leadership. Allocated resources and plan targets were normally denominated in rubles rather than in physical goods. Credit was discouraged, but widespread. Final allocation of output was achieved through relatively decentralized, unplanned contracting. Although in theory prices were legally set from above, in practice the actual prices were often negotiated, and informal horizontal links (between producer factories etc.) were widespread.
A number of basic services were state-funded, such as education and healthcare. In the manufacturing sector, heavy industry and defense were assigned higher priority than the production of consumer goods. Consumer goods, particularly outside large cities, were often scarce, of poor quality and limited choice. Under command economy, consumers had almost no influence over production, so the changing demands of a population with growing incomes could not be satisfied by supplies at rigidly fixed prices. A massive unplanned second economy grew up alongside the planned one at low levels, providing some of the goods and services that the planners could not. Legalization of some elements of the decentralized economy was attempted with the reform of 1965.
Although statistics of the Soviet economy are notoriously unreliable and its economic growth difficult to estimate precisely, by most accounts, the economy continued to expand until the mid 1980s. During the 1950s and 1960s, the Soviet economy experienced comparatively high growth and was catching up to the West. However, after 1970, the growth, while still positive, steadily declined much more quickly and consistently than in other countries despite a rapid increase in the capital stock (the rate of increase in capital was only surpassed by Japan).
Overall, between 1960 and 1989, the growth rate of per capita income in the Soviet Union was slightly above the world average (based on 102 countries). According to Stanley Fischer and William Easterly, growth could have been faster. By their calculation, per capita income of Soviet Union in 1989 should have been twice as high as it was considering the amount of investment, education and population. The authors attribute this poor performance to low productivity of capital in the Soviet Union. Steven Rosenfielde states that the standard of living actually declined as a result of Stalin's despotism, and while there was a brief improvement following his death, lapsed into stagnation.
In 1987, Mikhail Gorbachev tried to reform and revitalize the economy with his program of perestroika. His policies relaxed state control over enterprises, but did not yet allow it to be replaced by market incentives, ultimately resulting in a sharp decline in production output. The economy, already suffering from reduced petroleum export revenues, started to collapse. Prices were still fixed, and property was still largely state-owned until after the dissolution of the Soviet Union. For most of the period after World War II up to its collapse, the Soviet economy was the second largest in the world by GDP (PPP), though in per capita terms the Soviet GDP was behind that of the First World countries.
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