On this day 30 years ago the evil empire, Soviet Union, collapsed and millions of people became free

Spoiler: 30 years ago today, the Soviet flag was replaced by the Russian flag on the Kremlin flagpole. Soviet Union was dissolved after almost 70 years. A giant on clay collapsed due to an inefficient resource wasting economy that could not deliver its oppressed people the same levels of living standards that people in the free world enjoyed.

It is often argued that the USA under Reagan massively increased its military spending forcing the Soviet Union to do the same which ultimately led to the collapse. However, the spending theory isn’t true. Neither USA nor Soviet engaged in an arms race during the Reagan years. Soviet collapsed because the of its inherent inefficiency and dependency of oil revenues. When oil prices fell, the Soviet economy fell.

The inefficiency of the planning system caused the collapse. It was an economic system that was unable to produce enough grain and agricultural products to its own population. The economy was dependent on high oil prices to pay for the food imports and expenditures for the military, and subsidies for energy, food and housing for its citizens.

The collapse meant that millions of people became free. Not everyone liked it. Today, a bare-chested little psychopath that thinks that the collapse was the biggest geopolitical catastrophe in the 20^th century, tries to restore the evil empire.

Soviet did not collapse due to an arms race

Contrary to what many think, and is often repeated in the media, there was no dramatic increase in military spending during Reagan’s presidency. Even though the “Star Wars programme” or Strategic Defence Initiative (SDI), which was the programme’s name, initially got some big funding, its budget was repeatedly cut after a few years. In any case, military spending in percent of US GDP did not increase during Reagan, c.f. Figure 1.

Figure 1. Military spending in percent of national income in the USA (blue line) and USSR (red line).

Source: https://nintil.com/the-soviet-union-military-spending and the sources mentioned therein. Note: National income is GDP for USA and NMP converted to GDP for the Soviet Union. The many red dots in 1980 corresponds to different estimates of USSR spending.

I nicked this graph from Jose Luis Ricon’s blog where you can find more evidence on this point. Large Soviet military spending increases occurred before Reagan took office.

Even though military expenditures were not the direct cause of the collapse, they did contribute to the ill-functioning economy for several reasons. Military expenditures have opportunity costs; the money and the resources could have been put to better use elsewhere in the economy. Military expenditures were high not only due to the need to suppress the populations in the Soviet Union and Eastern Europe but also because the military part of manufacturing was so low-productive. This caused high expenditures in at least two ways. Firstly, to keep up with US manufacturing of tanks, airplanes, ships and more, the Soviet Union’s industry needed to use more resources. Secondly, the Soviet Union production of weapons needed to be on a high level because of the more productive US manufacturing industry. In case of war or a conflict between Soviet and US allies elsewhere in the world, USA could increase its production of arms much faster than the Soviet Union.

The inefficient wasteful planning economy was bound to collapse

To understand why the Soviet Union collapsed, one needs to know that the Soviet economy was a shortage economy. It was characterised by chronic shortages, waste of resources and low innovation and productivity growth. A lot of the growth during this time was due to forcefully moving labour from agriculture to factories. These factories produced a lot of concrete and steel but not many apartments or cars for the population.

And a lot of the growth was thin air. Goods weren’t produced to satisfy demand but to fulfil the plans. Production targets were specified in terms of tons. Firms that were ordered to produce furniture, produced as heavy chairs, tables, beds and sofas as possible. Transportation firms could have targets specified in number of kilometre tons. Those firms met their targets by filling their trucks as much as possible and had their trucks driven back and forth on the same road until their targets were met. A lot of projects that seemingly contributed to growth were useless, among them tractor factories that never produced any tractors, the White Sea Canal which was too narrow and shallow when it was inaugurated, the projects aiming to reverse the flows of rivers and so on. You can find more details about the useless planning economy in this post.

The inefficiency of the Soviet economy had detrimental effects on its citizens’ health since the food consumption contained less nutrition than for example the nutrition in Americans’ food consumption, c.f. Table 1.

Table 1. Per capita consumption in the Soviet Union and the USA 1976. 

Source: Birman, I. (1989). Personal Consumption in the USSR and the USA. The table above and others quoted here: https://artir.wordpress.com/2016/05/11/the-soviet-union-food/

Apart from alcohol, the Americans had more to eat and drink. The high consumption of alcohol was also at least partly responsible for the stagnation and decline of life expectancy in the Soviet Union that occurred in the 1960’s and continued during the 1970’s. Ironically, tax on alcohol was on the of largest sources of revenue for the Soviet budget. The anti-alcohol campaign during the last years led to decreased sales of alcohol in the state's shops but to an increse of consumption of sugar and other ingredients which are needed to make alcohol. The sales taxes from those did not compensate for the reduced sales taxes from alcohol bought in the shops. Thus, the budget deficit increased.

Increasing food imports and falling oil prices led to a hard currency crisis and the end

The agricultural sector was a disaster. Beginning in the 1960’s, the Soviet Union began to import grain and agricultural products. The real problems began during the 1970’s when the Soviet Union was forced to import grain and agricultural products. Previously, agricultural exports had been used to pay for imports of capital goods to the manufacturing industry. To pay for these imports, the regime first started to deplete its gold reserves but eventually became a debtor on the international loan markets. This added to the looming economic problems. Subsidies for food, energy and housing made up for large shares of the budget together with the military. Extractions of the oil in Western Siberia merely delayed the problems. When oil prices fell in the mid 1980’s, the economy collapsed, c.f. Figure 2.

Figure 2. Oil prices 1950-1991.

Source: Our World in Data, https://ourworldindata.org/grapher/crude-oil-prices?time=earliest..latest

Previously, the revenues from oil exports paid for imports of food, consumer goods, capital goods and the military expenditures. Low grain harvests in the world 1989-1990 led to increased prices and exacerbated the problems. The Soviet economy ran budget deficits which led to a balance of payments problem and finally a hard currency crisis. When the growth of the economy is lower than the interest on the debt, the debt will continue to grow. This is what happened to the Soviet economy and finally led to a Balance of payments problem and a hard currency crisis. Finally, the State couldn’t service its debts.

Output fell dramatically in the former communist countries 1990-1992. Russian GDP declined by two-digit numbers 1992-1994. A lot of the declining output was due to elimination of products that no one wanted anymore. As no one wanted the final goods, there was no demand for the intermediate goods, raw material and energy that previously was used for the production. What happened afterwards is well-known. Miserably designed transition policies created a class of oligarchs that robbed Russians. Luckily, oil prices began to rise again in 2000. Unluckily, by then the former KGB had made sure that one of its agents now had become President. And as is well known, he began to destroy Russia immediately. 

Soviet enslavement of Eastern Europe

As we all know, WWII began because of the Molotov-Ribbentrop pact between Nazi Germany and the Soviet Union. Poland was attacked from the west by the Nazis and from the east by Soviet Union. As part of the agreement between the two, Soviet occupied the Baltic countries, parts of Romania and attacked Finland which heroically resisted Stalin’s of occupation. In the end of WWII, Stalin imposed useless and cruel communist regimes on the Baltic countries, Poland, Czechoslovakia, Bulgaria, Romania, and Moldova.

Protests and demands for freedom in Eastern Germany , Hungary and Czechoslovakia, and also inside the Soviet Union as in Novocherkassk, were brutally crushed by the Red Army. And in 1980, Soviet Union threatened to intervene in Poland when Lech Walesa’s Solidarity Movement gained support in its protests against oppression and regime-caused poverty.

The Soviet collapse followed Gorbachev’s campaigns of Glasnost and Perestroika. His attempts to keep the Soviet Union together were doomed to fail as his reforms opened up for cries for freedom and independence which he couldn’t control. But he tried.  We all remember the heroic Baltic peoples’ manifestation in the Baltic Way 23 August 1989 when a human chain of people held hands through Estonia, Latvia and Lithuania. The date of 23 August was carefully chosen. The Molotov-Ribbentrop pact was signed on the same day in 1939.

Estonia declared its independence on 20 August 1991. Latvia held democratic elections in March 1990 and declared its independence in May. In January 1991, Gorbachev reacted by sending Soviet political and military forces which unsuccessfully tried to overthrow the Republic of Latvia authorities. He had to give up and Latvia’s full independence was restored on 21 August 1991. Gorbachev was even more brutal in Lithuania. Lithuania was the first Baltic country to declare its independence, on 11 March 1990. Gorbachev replied with an economic blockade followed by a failed attempt of a coup which resulted in Lithuanians flooding to Vilnius to defend their independence. Soviet replied by opening fire on unarmed people. Fourteen died and hundreds were injured. On 31 July, Soviet troops killed seven Lithuanian border guards in the  Medininkai Massacre.

Once the Baltic countries were free from the Soviet oppression, they transformed their countries to democracies where people were free to exercise their human rights. They could do so without having to fear a knock on the door at 4 o’clock in the morning and being thrown on to train destined for Siberia.

As shown many times on this blog, democracy and prosperity appear to be related. The developments for the Baltic countries and other East European countries previously oppressed by the Soviet Union, are presented in this post.  Former communist countries that choose the road to freedom fared also much better in terms of living standards, c.f. Figure 3.

Figure 3. GDP per capita developments 1990-2017.

Source: World Bank Database. https://databank.worldbank.org/data/source/world-development-indicators# Note: All series are shown as logs of an index, which equals 1.0 at 1990 so the series start at zero. Since the vertical axis is in log units, the slopes of the series are the rates of growth. An increase of 0.1 is a growth of 100*(exp(0.1)-1). As an example, FSUNF GDP had decreased by some -0.75 in 1996 which corresponds to a 100*exp(-0.75)-1) = -52.7%. Log changes are approximations. Note: FSU12, FSUF, and FSUNF denote former Soviet Union republics (excl Baltics), former Soviet Union republics endowed with oil, and former Soviet Union republics without oil.