How did the government structure in the former Soviet Union impact its economy?

The economy of the Soviet Union was based on state ownership of the means of production, collective farming, and industrial manufacturing. The highly centralized Soviet-type economic planning was managed by the administrative-command system.

For much of the 20th Century, the Soviet Union rivaled the United States in political, military and economic strength. While the central command economy of the Soviet Union was diametrically opposed to the market liberalism of Western nations, the rapid economic development that the Soviets posted in the middle decades of the century made their system appear to be a viable economic alternative.1

But after growth tapered off and various reforms were instituted to revive the stagnating economy, the Soviet Union eventually collapsed, along with its promise of an alternative to Western capitalism. Where centralized economic planning helped spur its mid-century growth, the Soviet Union's piecemeal reforms to decentralize economic power ultimately undermined its economy.

KEY TAKEAWAYS

The Soviet Union officially fell on December, 26 1991 when the USSR was dissolved and the communist-era policies of the region ceased.

The USSR's weakened military and economy following World War II saw an initial boost from communist politics and economic direction.

However, soon this economic system could not compete on the global stage. Along with public dissatisfaction with President Gorbachev's policies of perestroika and glasnost, the Soviet Union ultimately failed.

Beginnings of the Soviet Command Economy

The year 1917 saw the Russian czar overthrown by groups of revolutionaries including the Bolsheviks, who fought and won a subsequent civil war to create a socialist state within the borders of the former Russian empire. Five years later, the Union of Soviet Socialist Republics (USSR) was established, bringing together a confederation of states under the rule of the Communist Party. Starting in 1924, with Joseph Stalin's rise to power, a command economy characterized by totalitarian control over political, social, and economic life would define the Soviet Union for most of the remaining 20th Century. The Soviet command economy coordinated economic activity through the issuance of directives, by setting social and economic targets, and by instituting regulations. Soviet leaders decided on the state's overarching social and economic goals. In order to achieve these goals, Communist Party officials assumed control over all of the country's social and economic activities. The Communist Party legitimized its control by claiming it had the knowledge to direct a society that would rival and overtake any Western market economy. Officials managed the significant amounts of information necessary for centralizing the planning of both production and distribution. Hierarchical structures were instituted at all levels of economic activity, with superiors having absolute control over the norms and parameters of planning assignments, as well as setting regular performance evaluations and rewards. (To read more, see: What’s the Difference Between a Market Economy and a Command Economy?) Initial Period of Rapid Growth At first, the Soviet Union experienced rapid economic growth. While the lack of open markets providing price signals and incentives to direct economic activity led to waste and economic inefficiencies, the Soviet economy posted an estimated average annual growth rate in gross national product (GNP) of 5.8% from 1928 to 1940, 5.7% from 1950 to 1960, and 5.2% from 1960 to 1970. (There was a dip to a 2.2% rate between 1940 to 1950.) The impressive performance was largely due to the fact that, as an underdeveloped economy, the Soviet Union could adopt Western technology while forcibly mobilizing resources to implement and utilize such technology. An intense focus on industrialization and urbanization at the expense of personal consumption gave the Soviet Union a period of rapid modernization. However, once the country began to catch up with the West, its ability to borrow ever-newer technologies, and the productivity effects that came with it, soon diminished.

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