Reversing the Soviet Economic Collapse

THE SOVIET ECONOMY iS collapsing. In 1990, official gross national product had fallen 2 percent relative to 1989. By the first quarter of 1991, GNP had fallen 8 percent relative to a year earlier. Moreover, as table 1 illustrates, the decline has spread to just about every sector, from processed food, to consumer durables, to energy and agriculture. Many observers expect this decline to continue through 1991-even to accelerate. ' Such a sharp contraction is unprecedented in the postwar Soviet economy, which historically has grown moderately and without sharp interruptions. In August 1991, the Soviet Union collapsed politically as well, splitting into a number of sovereign states with highly uncertain future economic ties. In the face of this uncertainty, the central government and the republics are contemplating reform policies designed to reverse the economic collapse. In this paper, we analyze the causes of the decline and discuss what reforms are appropriate and how to achieve them. The decline of the Soviet economy is sometimes explained by exogenous shocks, like the troubles in the oil industry, the coal strike in the first quarter of 1990, the collapse of trade with Eastern Europe following its liberation, the plant shutdowns for environmental reasons, and the regional frictions in the USSR. All of these factors doubtless play a role,