IB History Economic Policies and Perestroika Notes

Perestroika Restructured the Economy but Deepened the Crisis

The economic crisis Gorbachev inherited

1. Gorbachev became General Secretary in March 1985 after years of slowing growth. The planned economy still produced vast output but used labor, energy, and materials inefficiently.
2. Oil revenue had helped the Brezhnev leadership import grain and technology. Falling world oil prices during the 1980s reduced hard currency at the moment reform costs increased.
3. Defense spending remained high because of the arms race, Afghanistan, and global commitments. Military industry absorbed skilled labor and advanced technology that civilian production lacked.
4. Central ministries issued detailed targets while enterprises bargained for easy plans and guaranteed supplies. Managers had little reason to cut costs or introduce risky innovations.
5. Official prices concealed scarcity and surplus. Shortages appeared in shops while unwanted goods accumulated because production targets did not follow consumer demand.
6. Agriculture required large subsidies and grain imports despite heavy investment. Storage, transport, machinery, incentives, and management all limited output.
7. The shadow economy supplied goods and services outside official channels. It solved some shortages but weakened tax collection and encouraged corruption.
8. Gorbachev first called for acceleration rather than a market transition. He expected discipline, technology, and better management to revive socialism.
9. The inherited problems limited every later choice. Reform had to change incentives without causing unemployment, inflation, political revolt, or loss of central control.

Acceleration and the anti-alcohol campaign

1. The policy of uskorenie aimed to accelerate economic growth through investment in machinery, science, and management. It assumed the system needed modernization more than redesign.
2. Investment concentrated on machine building so factories could update equipment. Resources moved toward new projects before planners solved existing supply and construction delays.
3. Gorbachev promoted labor discipline and replaced some senior officials. Campaigns against corruption and poor attendance continued methods associated with Andropov.
4. The anti-alcohol campaign began in May 1985. The state reduced sales, raised prices, closed outlets, limited production, and destroyed some vineyards.
5. Alcohol consumption fell for a period, and health indicators improved. Fewer accidents and alcohol related deaths produced real social benefits.
6. Illegal distilling and black market sales expanded as legal supply contracted. Households diverted sugar into home production and officials lost control over distribution.
7. Alcohol taxes had supplied major budget revenue. Their decline widened the state deficit before broader market reforms disrupted income further.
8. Public resentment grew because restrictions affected daily life and appeared moralizing. The campaign became an early example of reform producing mixed outcomes.
9. Acceleration failed to reverse productivity decline. By 1986 Gorbachev increasingly argued that institutions and incentives required perestroika.

The Law on State Enterprise

1. The 1987 Law on State Enterprise aimed to replace detailed commands with economic accountability. Enterprises were expected to cover costs from sales revenue.
2. Managers gained more authority over output, wages, investment, and contracts. Workers could formally participate in choosing enterprise directors.
3. State orders still claimed a large share of production. Ministries retained power over prices, supplies, investment, and appointments.
4. Enterprises raised wages to satisfy workers and managers. Productivity did not rise at the same rate, so purchasing power expanded faster than available goods.
5. Official prices remained fixed for many products. Excess money could not raise recorded prices openly and instead intensified queues, rationing, and hidden inflation.
6. Managers preferred profitable goods and resisted unprofitable social obligations. The state continued to rescue important enterprises rather than allow bankruptcy.
7. Suppliers could not respond freely because materials remained administratively allocated. Contract autonomy meant little when enterprises lacked alternative sources.
8. Worker election of managers weakened when party and ministerial officials intervened. Political control remained stronger than enterprise accountability.
9. The law reduced the coherence of command planning without creating competitive markets. This institutional gap became a central cause of economic disruption.

Cooperatives and private activity

1. The 1988 Law on Cooperatives legalized private businesses in services, restaurants, manufacturing, and other activities. It marked the largest legal opening for private enterprise since the New Economic Policy.
2. Cooperatives could set many prices and hire workers. Their flexibility allowed them to supply goods and services state enterprises ignored.
3. Entrepreneurs often purchased inputs at controlled state prices and sold finished goods at much higher market prices. The difference created rapid profits and public anger.
4. State enterprises formed cooperatives to move production outside plan controls. Managers could use them for genuine innovation, insider enrichment, or diversion of scarce materials.
5. High and changing taxes reflected official suspicion of private income. Uncertain rules encouraged concealment, bribery, and short term behavior.
6. Organized crime and corrupt officials sought protection payments or shares in successful firms. Weak commercial law made property and contracts insecure.
7. Cooperative restaurants and shops made inequality more visible. Consumers who faced shortages in state outlets saw goods available at prices many could not afford.
8. Private activity created skills, jobs, and supply channels needed for a market economy. It also exposed how far official prices and wages differed from real scarcity.
9. The reform succeeded in permitting enterprise but failed to create a stable legal and financial framework. Its benefits and abuses appeared together.

Budget deficits, shortages, and monetary imbalance

1. The state budget weakened as alcohol revenue fell, subsidies remained high, and enterprises retained more income. Officials covered deficits through monetary expansion.
2. Household savings and wages increased faster than retail supply. Money accumulated because citizens could not buy the goods they wanted at official prices.
3. Shortages spread from durable goods to basic food and household products. Local authorities introduced ration cards and purchase restrictions.
4. Republics and regions tried to protect supplies for their own populations. Barriers to interregional trade weakened the union wide distribution system.
5. Enterprises preferred barter when money and contracts became unreliable. Direct exchange kept production moving but reduced fiscal transparency.
6. Foreign debt and hard currency pressure limited imports. Export earnings fell while demand for grain, machinery, and consumer goods remained strong.
7. Statistics became politically contested as glasnost exposed hidden problems. Citizens lost confidence in official claims that recovery remained close.
8. Inflation appeared through queues, black markets, declining quality, and later price increases. Fixed prices prevented one signal while the underlying imbalance grew.
9. Economic deterioration changed political attitudes. Reform lost legitimacy among consumers before a functioning alternative could demonstrate benefits.

Chernobyl and institutional failure

1. Reactor number four at the Chernobyl nuclear power station exploded on 26 April 1986 during a poorly managed safety test. Fire released radioactive material across a wide area.
2. Operators made serious errors, but reactor design flaws and a secretive safety culture also shaped the disaster. Institutions had discouraged open reporting of technical weakness.
3. Local authorities delayed evacuation of nearby Pripyat until the next day. Public announcements remained limited even after foreign monitoring detected radiation.
4. Firefighters and plant workers faced extreme exposure while containing the accident. Many received incomplete information about the danger.
5. The cleanup mobilized hundreds of thousands of liquidators. The state evacuated communities, created an exclusion zone, and spent large resources on containment.
6. Secrecy damaged trust because citizens learned that officials had protected institutional reputation before public safety. Foreign evidence made concealment impossible.
7. Chernobyl strengthened Gorbachev's support for glasnost. Open criticism appeared necessary to reveal failures before they became disasters.
8. The accident also imposed economic costs through relocation, health monitoring, lost land, construction, and energy disruption. These costs added to existing fiscal pressure.
9. Chernobyl connected economic reform with political openness. Managers could not improve performance when information about risk, error, and responsibility remained suppressed.

The 500 Days debate and union conflict

1. By 1990, reformers proposed a faster transition because partial measures had deepened imbalance. Stanislav Shatalin and Grigory Yavlinsky led work on the 500 Days program.
2. The plan proposed private property, price liberalization, fiscal reform, competition, and transfer of economic power from union ministries. Its timetable aimed to make reversal difficult.
3. Boris Yeltsin and the Russian republic supported the plan. Republican control over resources gave market reform a new struggle over sovereignty.
4. Prime Minister Nikolai Ryzhkov favored a slower government program that preserved stronger central direction. Conservatives feared inflation, unemployment, and loss of union authority.
5. Gorbachev tried to combine the rival proposals. The compromise removed clarity and failed to satisfy either rapid reformers or defenders of planning.
6. Republics passed laws asserting control over taxation, enterprises, land, and natural resources. The central budget lost revenue and enforcement capacity.
7. Price reform became politically dangerous because shortages made large increases unavoidable. Leaders delayed decisions while monetary imbalance worsened.
8. Failure to choose strengthened Yeltsin's claim that the Russian government could reform more decisively than the union center. Economic policy shifted into a contest for political power.
9. The 500 Days episode shows that perestroika was no longer only economic management. By 1990 it had become inseparable from the survival and distribution of authority within the USSR.

Why perestroika failed

1. Perestroika changed parts of the command economy at different speeds. Enterprise autonomy, private trade, fixed prices, state orders, and ministerial allocation operated together without coherent rules.
2. Anders Aslund emphasizes insufficient market commitment. From this view, delay allowed shortages, deficits, and rent seeking to expand before prices and ownership could adjust.
3. Archie Brown emphasizes political constraint. Gorbachev faced conservative officials, social fear, republican conflict, and the possibility of organized removal.
4. Both interpretations explain part of the outcome. Political compromise produced the economic inconsistency that then weakened Gorbachev's political position.
5. External pressures mattered but did not determine failure alone. Oil prices, defense costs, and world competition exposed weaknesses embedded in Soviet institutions.
6. Reform also created genuine gains through legal enterprise, wider information, and debate about ownership and management. These changes did not deliver short term stability.
7. Citizens experienced declining supply before receiving the benefits promised by a market transition. This sequence associated reform with insecurity and discredited the union center.
8. Yeltsin and republican leaders gained authority by offering clearer alternatives. Their rise reduced the ability of central institutions to implement any all union economic program.
9. The strongest judgement is that partial reform accelerated crisis within an already weakening economy. Perestroika neither preserved planning nor established the institutions required for a stable market.