Economical and political institutions: a historical analysis.

“Why could central planning in the Soviet Union never have lead to sustainable economic growth?” – By Thomas Budie, 2015

When people think of the former Soviet Union, the one and only thought arises: ‘communism’. This political and economical ideology highlighted the importance of common ownership and the absence of social classes.

While nowadays it is a stated fact that the system failed and that the state collapsed, up until the 1980s, the majority of Western society believed in a Soviet future. This was not without reason, because the rates of growth were staggering. In the figure below, you can observe the level of income per capita against the ratio of the 1928 to the 1970 level. Except for Japan, no other country experienced higher growth rates than the USSR (Maddison, 1995).

GDP USSR

This economic growth was acquired through the process of industrialization. But since the state did not possess of a proper tax system, it made use of the collectivization of agriculture, which could have been seen as a parallel to the abolishment of property rights (Allen, 2003). As a result, incentives for efficiency and development were destroyed, which should have lead to immediate economic decline, but it did not. This can easily be ascribed to the excessive allocation of resources to the industry: if the productivity of one sector is relatively much higher, it can produce national economic growth (Allen, 2003).

But precisely this growth based upon extractive political and economical institutions was the key ingredient for unsustainable economic growth, since it was not created by technological growth (Acemoglu & Robinson, 2012). In order to fully understand this concept, it is wise to explain these types of institutions.

Political power in an extractive state is narrowly allocated, while inclusive states are made up of pluralistic institutions. Furthermore, an exclusive state lacks sufficient centralization. The reasons why these two features are compulsory for an inclusive system are because pluralistic political institutions distribute power across a broad society, while a centralized state can enforce law and order. When either of these are absent, the institutions are referred to as extractive political institutions.

Economical institutions can be called inclusive when they feature secure private property rights, unbiased systems of law, permission of people to choose their provision and the presence of public services that guarantee an arena where people can contract and exchange (Acemoglu & Robinson, 2012).

In the case of the Soviet Union, it possessed neither of these economical and political inclusive properties since there was an absolutist political power and hardly any property rights or freedom in business. However, it did have a strong centralized state (Kort, 2001). According to Acemoglu & Robinson (2012), a state can not create sustainable economic growth under extractive institutions, but if absolutist rulers control over a centralized state, they can implement some law and order and set up certain rules that favor economic growth.

For forty years, the Soviet Union experienced an exceptional economic growth, but this was due to the reallocation of resources and labor from the rural areas instead of the creation of incentives, which ultimately leads to technological improvement, creative destruction, higher efficiencies and thus sustainable economic growth (Allen, 2003).

It is because of these existing institutions that it could have be forecasted that the Soviet Union would not last forever. The only way of achieving an economic system where the population could exploit their talents was to remove the extractive properties of it, but this would endanger the combined extractive political power.

Ultimately, this is exactly what happened when Gorbachov began to accept inclusive economic institutions: the Soviet Union and its communist party collapsed.

References:

  1. Acemoglu, D., & Robinson, J. (2012). Why nations fail: The origins of power, prosperity, and poverty. New York: Crown.
  2. Kort, J.F. de (2001), ‘Plan de campagne: de centraal geleide economie van de Sovjet-Unie’, Leidschrift, 16(3), pp. 43-59.
  3. Allen, R. (2003). Farm to factory: A reinterpretation of the Soviet industrial revolution. Princeton, NJ: Princeton University Press.
  4. Maddison, A. (1995). Monitoring the World Economy, Paris, OECD.
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