The economy of the Soviet Union was based on state ownership of the means of production, collective farming, and industrial manufacturing. An administrative-command system managed a distinctive form of central planning. The Soviet economy was second only to the United States and was characterized by state control of investment, prices, a dependence on natural resources, lack of consumer goods, shortages of goods and services, little foreign trade, public ownership of industrial assets, macroeconomic stability, low unemployment and high job security.Hanson, Philip (2003). The Rise and Fall of the Soviet Economy (Routledge). pp. 1–8. A 1986 study published in the American Journal of Public Health citing World Bank data claimed that the Soviet model provided a better quality of life and human development than most market economies at comparable levels of economic development.
Beginning in 1928, the course of the economy of the Soviet Union was guided by a series of five-year plans. By the late 1930s, the Soviet Union had rapidly evolved from a mainly agrarian society into a major industrial power. Its transformative capacity meant communism consistently appealed to the intellectuals of developing countries in Asia..One notable person in this regard was Nehru, "who visited the Soviet Union in the late 1920s and was deeply impressed by Soviet industrial progress." See . Soviet economic writers such as Lev Gatovsky (who participated in the elaboration of the first and second five-year plans) used their economic analysis of this period to praise the effectiveness of the October Revolution.
The growth rates during the first three five-year plans (1928–1940) are particularly notable given that this period is nearly congruent with the Great Depression. During this period, the Soviet Union saw substantial industrial growth while other regions were suffering from crisis. The White House National Security Council of the United States described the continuing growth as a "proven ability to carry backward countries speedily through the crisis of modernization and industrialization", but the impoverished base upon which the five-year plans sought to build meant that at the commencement of Operation Barbarossa on 22 June 1941 the country was still poor.
The Soviet Union had the second largest economy in the world from the start of World War II until the mid-1980s. A significant aspect of Soviet economy was its dependence on its enormous supply of oil and gas, which became much more valuable as exports after the world price of oil skyrocketed in the 1970s. As Daniel Yergin notes, the Soviet economy in its final decades was "heavily dependent on vast natural resources–oil and gas in particular". During the 1980s, the Reagan administration used the global energy market against the USSR. At the request of CIA Director Bill Casey, Saudi Arabia intentionally flooded the market with oil to crash prices and drain Soviet foreign currency reserves. World oil prices collapsed in 1986, putting heavy pressure on the economy,Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World (2011); quotes on pp 23, 24. a move later described by a former CIA chief of staff as a "body blow to the Soviets. It was the equivalent of stepping on their oxygen tube."
During the era in which the Soviet economy was publicly owned and planned (1928–1989), the Soviet Union’s GDP per capita growth outpaced nearly all other world economies, trailing only Japan, South Korea, and Taiwan. Data shows that Soviet per capita growth expanded by a factor of (5.2), exceeding the growth rates of Western Europe (4.0), and the USA, Canada, Australia and New Zealand (3.3). Ultimately, the Soviet model of public ownership raised average incomes more than the leading industrialized market economies of the 20th century.
The complex demands of the modern economy somewhat constrained the central planners. Data fiddling became common practice among the bureaucracy by reporting fulfilled targets and quotas, thus entrenching the crisis. From the Stalin-era to the early Brezhnev-era, the Soviet economy grew slower than Japan and faster than the United States. GDP levels in 1950 (in billion 1990 dollars) were 510 (100%) in the Soviet Union, 161 (100%) in Japan and 1,456 (100%) in the United States. By 1965, the corresponding values were 1,011 (198%), 587 (365%) and 2,607 (179%).Angus Maddison, The World Economy: A Millennial Perspective (2001) pp. 274, 275, 298. The Soviet Union maintained itself as the world's second largest economy in both nominal and purchasing power parity values throughout the Cold War, until 1990 when Japan's economy exceeded $3 trillion in nominal value."Japan's IMF nominal GDP Data 1987 to 1989 (October 2014)".
However, in most cases, this did not correspond to better access to resources and ultimately many other countries outperformed the Soviet Union in terms of social and economic gains. Shortages of goods and services were commonplace due to the planned nature of its economy.
After Mikhail Gorbachev became the General Secretary of the Communist Party of the Soviet Union and came to power in March 1985, he began a process of economic liberalization by dismantling the command economy and moving towards a mixed economy modeled after Lenin's New Economic Policy. The Chernobyl disaster beginning on 26 April 1986 was the costliest disaster in human history. At its dissolution at the end of 1991, the Soviet Union bequeathed its successor state, the Russian Federation, with a growing pile of $66 billion in external debt and barely a few billion dollars in net gold and foreign exchange reserves..
The Soviet Union's relatively medium consumer sector accounted for just 60% of the country's GDP in 1990 while the industrial and agricultural sectors contributed 22% and 20% respectively in 1991. Agriculture was the predominant occupation in the Soviet Union before the massive industrialization under Soviet general secretary Joseph Stalin. The service sector was of low importance in the Soviet Union, with the majority of the labor force employed in the industrial sector. The labor force totaled 152.3 million people. Though its GDP crossed $1 trillion in the 1970s and $2 trillion in the 1980s, the effects of central planning were progressively distorted due to the growth of the black market informal second economy in the Soviet Union.Vladimir G. Treml and Michael V. Alexeev, "THE SECOND ECONOMY AND THE DESTABILIZING EFFECT OF ITS GROWTH ON THE STATE ECONOMY IN THE SOVIET UNION: 1965–1989" (pdf), BERKELEY-DUKE OCCASIONAL PAPERS ON THE SECOND ECONOMY IN THE USSR, Paper No. 36, December 1993
Planning
Based on a system of state ownership, the Soviet economy was managed through Gosplan (the State Planning Commission), Gosbank (the State Bank) and the Gossnab (State Commission for Materials and Equipment Supply). Beginning in 1928, the economy was directed by a series of five-year plans, with a brief attempt at seven-year planning. For every enterprise, planning ministries (also known as the "fund holders" or fondoderzhateli) defined the mix of economic inputs (e.g. labor and raw materials), a schedule for completion, all wholesale prices and almost all retail prices. The planning process was based around material balances—balancing economic inputs with planned output targets for the planning period. From 1930 until the late 1950s, the range of mathematics used to assist economic decision-making was, for ideological reasons, extremely restricted.: "The mathematical sophistication of the tools actually employed was limited to those that had been used in Das Kapital: the four arithmetical operations, percentages, and arithmetic (but not geometric) mean." On the whole, the plans were overoptimistic and plagued by falsified reporting.Holland Hunter, "The Overambitious First Soviet Five-Year Plan." Slavic Review 32.2 (1973): 237-257.
After 1928, the industry was long concentrated on the production of capital goods through metallurgy, machine manufacture, and chemical industry. In Soviet terminology, goods were known as capital. This emphasis was based on the perceived necessity for very fast industrialization and modernization of the Soviet Union. After the death of Joseph Stalin in 1953, consumer goods (group B goods) received somewhat more emphasis due to the efforts of Georgy Malenkov. However, when Khrushchev consolidated his power by sacking Malenkov, one of the accusations against him was that he permitted "theoretically incorrect and politically harmful opposition to the rate of development of heavy industry in favor of the rate of development of light and food industry"."Георгий Маленков. 50 лет со дня отставки", Radio Liberty Since 1955, the priorities were again given to capital goods, which was expressed in the decisions of the 20th Congress of the Communist Party of the Soviet Union (CPSU) in 1956.Пыжиков А. В. Хрущевская "Оттепель" : 1953—1964, Olma-Press, 2002
In 1959, economist Naum Jasny wrote that while many of the official statistics were correctly reported: The fact is that the most important official general indices of economic development – those of national income, industrial output, real incomes of wage-earners and peasants, labour productivity and production costs in industry – have, over long periods of time....nothing in common with reality.Naum Jasny, "Some Thoughts on Soviet Statistics: An Evaluation," International Affairs 35#1 (1959), pp. 53-60, online
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 and thus Soviet planners had very little reliable feedback that 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, some goods tended to be underproduced and led to shortages 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. By the 60s calorie consumption per person in the Soviet Union was at levels similar to the United States. 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 such as cigarettes that were particularly sought after, but it constantly underproduced. People were developing unique social "networks of favors" between people having access to sought after goods (for example, working in particular shops or factories).
Drafting the five-year plans