The economy of the Soviet Union was based on a system of state ownership, administrative planning, socialist competition and free labour. The Soviet Union created the modern world's first centrally planned economy. The first major project of economic planning was the GOELRO plan, which was introduced in 1920 and basically fulfilled by 1931. It included construction of a network of 30 regional power plants, including ten large hydroelectric power plants, and numerous electric-powered large industrial enterprises. The GOELRO Plan became the prototype for subsequent Soviet five-year plans.
From 1928 to 1991 the entire course of the economy was guided by a series of Five-Year Plans. Within about 50 years, the nation evolved from a mainly agrarian society and became one of the world's three top manufacturers of a large number of capital goods, heavy industrial products and weaponry. However, the USSR lagged far behind in the output of light industrial production and consumer durables, mostly because of inability of Gosplan to predict the demand for such products. Since the dissolution of the Soviet Union in 1991, all 15 former Soviet republics have dismantled their Soviet-style economies (see Transition from economic planning in the former Soviet Union).
Industry was long concentrated after 1928 on the production of capital goods through metallurgy, machine manufacture, and chemical industry. In Soviet terminology, the capital goods were known as group A goods, or means of production. This emphasis was based on the perceived necessity for a very fast industrialization and modernization of the Soviet Union. After the death of Stalin in 1953, consumer goods (group B goods) received more emphasis. For further details see consumer goods in the Soviet Union.
Most information in the Soviet economy flowed from the top down. There were several mechanisms in place for producers and consumers to provide input and information that would help in the drafting of economic plans (as detailed below), but the political climate was such that few people ever provided negative input or criticism of the plan. Thus, Soviet planners had very little reliable feedback which they could use to determine the success of their plans. This meant that economic planning was often done based on faulty or outdated information, particularly in sectors with large numbers of consumers.
As a result of the above, some goods tended to be underproduced, leading to shortages (defitsit, дефицит), while other goods were overproduced and accumulated in storage. Low-level managers often did not report such problems to their superiors, relying instead on each other for support. Some factories developed a system of barter and either exchanged or shared raw materials and parts without the knowledge of the authorities and outside the parameters of the economic plan.
Heavy industry was always the focus of the Soviet economy, even in its later years. The fact that it received special attention from the planners, combined with the fact that industrial production was relatively easy to plan even without minute feedback, led to significant growth in that sector. The Soviet Union became one of the leading industrial nations of the world. Industrial production was disproportionately high in the Soviet Union compared to Western economies. However, the production of consumer goods was disproportionately low. Economic planners made little effort to determine the wishes of household consumers, resulting in severe shortages of many consumer goods. Whenever these consumer goods would become available on the market, consumers routinely had to stand in long lines (queues) to buy them. A black market developed for goods that were particularly sought after but constantly underproduced (such as cigarettes).
Periods covered by the five-year plans coincided with those covered by the gatherings of the CPSU Party Congress. At each CPSU Congress, the party leadership presented the targets for the next five-year plan. Thus, each plan had the approval of the most authoritative body of the country's leading political institution.
After the approval at the congress, the list of priorities for the five-year plan was processed by the Council of Ministers, which constituted the government of the USSR. The Council of Ministers was composed of industrial ministers, chairmen of various state committees, and chairmen of agencies with ministerial status. This committee stood at the apex of the vast economic administration, including the state planning apparatus, the industrial ministries, the trusts (the intermediate level between the ministries and the enterprises), and finally, the state enterprises. The Council of Ministers elaborated on Politburo plan targets and sent them to Gosplan, which gathered data on plan fulfillment.
Combining the broad goals laid out by the Council of Ministers with data supplied by lower administrative levels regarding the current state of the economy, Gosplan worked out, through trial and error, a set of preliminary plan targets. Among more than twenty state committees, Gosplan headed the government's planning apparatus and was by far the most important agency in the economic administration. The task of planners was to balance resources and requirements to ensure that the necessary inputs were provided for the planned output. The planning apparatus alone was a vast organizational arrangement consisting of councils, commissions, governmental officials, specialists, etc. charged with executing and monitoring economic policy.
The state planning agency was subdivided into its own industrial departments, such as coal, iron, and machine building. It also had summary departments such as finance, dealing with issues that crossed functional boundaries. With the exception of a brief experiment with regional planning during the Khrushchev era in the 1950s, Soviet planning was done on a sectoral basis rather than on a regional basis. The departments of the state planning agency aided the agency's development of a full set of plan targets along with input requirements, a process involving bargaining between the ministries and their superiors.
Economic ministries performed key roles in the Soviet organizational structure. When the planning goals had been established by Gosplan, economic ministries drafted plans within their jurisdictions and disseminated planning data to the subordinate enterprises.
The planning data were sent downward through the planning hierarchy for progressively more detailed elaboration. The ministry received its control targets, which were then disaggregated by branches within the ministry, then by lower units, eventually until each enterprise received its own control figures (production targets).
The enterprises' draft plans were then sent back up through the planning ministries for review. This process entailed intensive bargaining, with all parties seeking the target levels and input figures that best suited their interests.
Starting in 1928, the five-year plans began building a heavy industrial base at once in an underdeveloped economy without waiting years for capital to accumulate through the expansion of light industry, and without reliance on external financing. The country now became industrialized at a hitherto unprecedented pace, surpassing Germany's pace of industrialization in the 19th century and Japan's earlier in the 20th century.
After the reconstruction of the economy (in the wake of the destruction caused by the Russian Civil War) was completed, and after the initial plans of further industrialisation were fulfilled, the explosive growth slowed down, but still generally surpassed most of the other countries in terms of total material production (GNP) until the period of Brezhnev stagnation in the 1970s and 1980s.
Led by the creation of NAMI, and by the GAZ copy of the Ford Model A in 1929, industrialization came with the extension of medical services, which improved labor productivity. Campaigns were carried out against typhus, cholera, and malaria; the number of physicians increased as rapidly as facilities and training would permit; and death and infant mortality rates steadily decreased.
In 1961, a new redenominated Soviet ruble was issued. It maintained exchange parity with the Pound Sterling until the dissolution of the USSR in 1991. By 1970, the Soviet economy had reached its zenith and was estimated at about 60 per cent of the size of the USA.
| Comparison between USSR and US economies (1989)|
according to 1990 CIA The World Factbook
|GDP (1989 - millions $)||2,659,500||5,233,300|
|Population (July 1990)||290,938,469||250,410,000|
|GDP Per Capita ($)||9,211||21,082|
|Labor force (1989)||152,300,000||125,557,000|
Growth in output and productivity slowed sharply after 1970. However, the planning ministries had failed to loosen their control of industrial production, storage and distribution in time to stem the prolonged stagnation of the 1970s and 1980s, which showed signs of a chronic problem. By 1990, the Soviet economy had plunged into its nadir and was estimated at about 20 per cent of the size of the USA.
The Soviet planned economy was not tailored at a sufficient pace to the demands of the more complex modern economy it had helped to forge. As the economy grew, the volume of decisions facing planners in Moscow became overwhelming. The cumbersome procedures for bureaucratic administration did not enable the free communication and flexible response required at the enterprise level for dealing with worker alienation, innovation, customers, and suppliers. During 1975-85, corruption and data fiddling became common practice among bureaucracy to report satisfied targets and quotas thus entrenching the crisis.
Calls for greater freedom for managers to deal directly with suppliers and customers were gaining influence among reform-minded Communist cadres during the mid-1970s and 1980s were largely ignored. Economic growth was at a standstill after years of Soviet military buildup at the expense of domestic development.
Following the dissolution of the Soviet Union, all of the former Soviet republics scrapped their Soviet-era systems of centralized planning and state ownership, to varying degrees, with mixed results (see History of post-Soviet Russia).
Agriculture was organized into a system of collective farms (kolkhozes) and state farms (sovkhozes). Organized on a large scale and highly mechanized, the Soviet Union was one of the world's leading producers of cereals, although bad harvests (as in 1972 and 1975) necessitated imports and slowed the economy. The 1976-1980 five-year plan shifted resources to agriculture, and 1978 saw a record harvest followed by another drop in overall production in 1979 and 1980 back to levels attained in 1975. Cotton, sugar beets, potatoes, and flax were also major crops.
However, despite immense land resources, extensive machinery and chemical industries, and a large rural work force, Soviet agriculture was relatively unproductive, hampered in many areas by the climate (only 10 percent of the Soviet Union's land was arable), and poor worker productivity since the collectivization in the 1930s. Lack of transport infrastructure also caused much waste.
In general, fuels, metals, and timber were exported. Machinery, consumer goods, and sometimes grain were imported. In the 1980s trade with the Council for Mutual Economic Assistance (COMECON) member states accounted for about half the country's volume of trade. Although often associated with alcohol production, such as that of vodka, none of these were leading Soviet exports.
The Soviet currency (ruble) was non-convertible after 1932 (when trade in gold-convertible "chervonets", introduced by Lenin in NEP years was suspended) until the late eighties. It was impossible (both for citizens and state-owned businesses) to freely buy or sell foreign currency even though the "exchange rate" was set and published regularly. Buying or selling foreign currency on a black market was a serious crime until the late eighties. Individuals who were paid from abroad (for example writers whose books were published abroad) normally had to spend their currency in a foreign-currency-only chain of state-owned "Beryozka" ("Birch-tree") stores. Once a free conversion of currency was allowed, the exchange rate plummeted from its official values by almost a factor of 10.
Overall, the banking system was highly centralized and fully controlled by a single state-owned Gosbank, responsive to the fulfillment of the government's economic plans. Soviet banks furnished short-term credit to state-owned enterprises.
Land in rural areas was allotted for housing and some sustenance farming, and persons had certain rights to it, but it was not their property in full. In particular, in kolkhozes and sovkhozes there was a practice to rotate individual farming lots with collective lots. This resulted in situations where people would ameliorate, till and cultivate their lots carefully, adapting them to small-scale farming, and in 5-7 years those lots would be swapped for kolkhoz ones, typically with exhausted soil due to intensive, large-scale agriculture. There was an extremely small number of remaining individual farmsteads (khutors хутор), located in isolated rural areas in the Baltic states, Ukraine, Siberia and cossack lands.
The most common forms of cooperative property were housing cooperatives (жилищные кооперативы) in urban areas, consumer cooperatives (потребительская кооперация, потребкооперация), and rural consumer societies (сельские потребительские общества, сельпо).