Econ 330 Final

Front 1

1. Describe the environmental obstacles to economic development in Less Developed Countries of the world.

Back 1

Land man ratio is very small.

Most of this region receives rainfall all year and/or heavy monsoon rains for half of the year and no rain for rest of the year.

Temperatures range from hot to very hot (strain on human body, work animals, electronic equipment and vehicle radiators)

Excessive heat has burned away the organic matter of the soil and excessive rain has washed away its nutrients.

• Tropical climate and poor sanitation favor the reproduction of insects pests and parasites that attack, people, plants and animals.

Front 2

Describe the cultural obstacles to economic development in Less Developed Countries of the world.

Back 2

Except for Japan, all rich countries in recent history, Christian.

Protestant countries richer than Catholic.

Almost all Islamic countries, except those with rich natural resources, are poor.

Hindu culture, caste system places limits on labor mobility income inequality. No work incentives.

Confucius Heritage: Confucius work ethics (emphasis on education, hard work, savings/frugality)

Front 3

Describe institutional obstacles to economic development in Less Developed Countries of the world.

Back 3

Land Tenure System:

define how property rights to land are to be allocated within societies.

(a) feudalism, common ownership (right of use rotated among families) family has little incentive or opportunity to engage in long term projects to irrigate and improve land

(b) Muslim system of inheritance, small and inefficient plots.

(c) In LA Latifundio (too big) and minifundio (too small), the share cropper have no incentive to improve land.

Latifundio - a large landed estate or ranch typically worked by slaves.

Front 4

Describe the market structure in Less Developed Countries of the world.

Back 4

Market mechanism primitive with limited ability to coordinate and guide the development of the economy

(Barter) exchange (goods or services) for other goods or services without using money

(b) markets disconnected from farms, from each other and from the outside world due to poor transportation and communication

(c) monopolies and

price controls - government establishing a maximum price to be charged for specified goods and services.

Front 5

Describe the labor market in Less Developed Countries of the world.

Back 5

• Labor Markets:

Dual labor market:

Modern Sector: industrial prod. in cities! Better Wages!

Traditional Sector: agricultural prod. in rural areas! Bad Wages!

The dual wage system promotes income inequality and attracts large number of people to large cities contributing to urban unemployment, crowded cities and inequality.

Front 6

Describe the financial markets in Less Developed Countries of the world.

Back 6

Credit organized around a few heavily regulated banks.

No stock or bond markets!

Money lenders charge excessively high interests.

Front 7

How does the “vicious circle of poverty” explain economic backwardness in LDCs?

Back 7

Vicious circle of Poverty - poverty-stricken individuals experience disadvantages as a result of their poverty, which in turn increases their poverty. This would mean that the poor remain poor throughout their lives.

1. Savings and Investment: Poor, no savings,no investment, no growth.

2. Health and education: Cannot afford health and education, productivity down ( Poverty begets disease, illiteracy and low productivity which cause continuation of poverty)

3. Market size: low incomes , restricted market demand ,demand difficult to increase efficiency through mass production. /Income down, demand down, no economies of scale

4. Political Instability: no foreign investment, no growth, poverty. (Instability and unsecure tenure in office encourages rulers to undertake short sighted economic policies such as inflationary creation of money .)

Population growth: The populations of poor countries tend to grow rapidly because of their rural life styles and their inability or unwillingness (for religious and other reasons) to practice birth control.

The poorest countries also have the highest dependency ratios: the percentage of population that is not of working age.

Income Inequality: Kuznets pattern: Efforts to promote economic growth may cause inequality to grow worse (in the beginning inequality than equality).

May contribute to political instability which may put an end to economic growth.

Front 8

What factors, according to imperialism and dependency theorists, are responsible for poverty and economic backwardness in less developed countries (LDCs) of the world?

Back 8

Dependency Theory: resources flow from poor and underdeveloped states to wealthy states, enriching the latter at the expense of the former.

Imperialism: a policy of extending a country's power and influence through diplomacy or military force.

Marxists/others do not accept environmental and vicious circle explanations of poverty. They say that the more developed countries have employed a number of methods to extract LDC's investable surpluses.

The rich have got richer by causing the poor to remain poor.

Exploited During Colonial Era.

MDCs have continued their exploitation through foreign trade and investment .

Investment

MNC (Multinational Corporation) an organization that owns or controls productions of goods or services in one or more countries other than the home country.

MNCs extract excessive profits from investment

Introduce inappropriate products and technologies

Shift high skilled labor elsewhere

Encourage corruption

Detrimental to host countries.

Crowd out local investors.

Trade

• MDCs manipulate patterns of trade to their advantage.

• MDC buy LDC products at low prices, and sell their own products to LDCS at higher prices.

Poor countries produce primary goods

primary goods: no manf. process needed. Raw materials.

Engel’s Law :

Income elasticity of demand

(%change in Q demanded/%change in income) for manufactured goods(luxuries) is >1 more elastic and

for agricultural/primary goods/necessities is <1 less elastic.

increase in demand for manufactured goods is, generally, more rapid than for primary goods.

Demand for manufactured goods increases more rapidly,

Demand for primary goods products stays same or increases less rapidly,

Poverty begets low prices and low prices beget poverty.

(low wages-low prices-low incomes)

Front 9

Briefly explain the major development strategies to overcome underdevelopment in LDCs, as discussed in the class.

Adam Smith, Ricardo, Arthur Lewis

Back 9

1. Adam Smith: Growth is natural,it cannot be stopped and it cannot be promoted by the government (invisiblehand)

2. Ricardo:

Too much surplus labor in agriculture and labor productivity is low.

(ii) Allow free trade based on comparative advantage

(iii) Repeal corn laws, food prices will go down, labor wages and land rents will go down, labor will move from low productivity agriculture to high productivity industry

(iii) productivity will increase, production will exceed subsistence needs, so investment and economic growth.

3. Arthur Lewis 1954 : Government action needed to move surplus labor from agriculture to industry.

LDCS have within themselves all that is required for growth.

Result: surpluses, investment and economic growth

Front 10

Balance Growth V.S. Unbalanced Growth

Back 10

4. Balanced Growth (Rosenstein-RodanNurske):

(i) For self sustaining growth a critical ground speed before takeoff.

(ii) A minimum size of investment in all sectors.

(ii) No single industry can go it alone because of Say’s law (Demand for one good is generated by production of other goods).

5. Unbalanced Growth (Rostow-Hirschman):

(i) Development can be initiated by launching a few leading sectors, USA/ European history (Textiles UK, RailwaysUSA)

(ii) Stages of growth:

(a)Preconditions for take off (change in attitudes /saving habits) (b) Take-off stage investment increases for 1-2 leading sectors (Textiles,railways/locomotive or other industries)

(c) Technological maturity

(d)mass consumption

(e) Search for quality.

Front 11

Import Substitution Industrialization

Back 11

is a trade and economic policy which advocates replacing foreign imports with domestic production. ISI is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products.

•ISI Positives:

((a)no vulnerability to international price fluctuations,

(b)no BOP problems.

c.) more advanced lines of production).

•ISI Negatives:

(i)distorts resource allocation

(ii) reduces gains from comparative advantage and specialization.

(iii)demand for imports down, demand for foreign currency down, local currency increases in value , so X down.

(iv) corruption in government, smuggling

(v) retaliation

(vi) Limited domestic market.

Front 12

Export Promotion

Back 12

•Acountryshould baseits development on a fewleading sectors

•Governmentto supportX industrywith appropriatelegaland regulatory environment , education, training, infrastructure development,and tax relief

•keep country open to foreign trade and competition

•Derivebenefitsfrom internationalspecialization and economies of scale

Front 13

Briefly describe various land tenure systems in Latin America. Describe four major protest and reform movements against the unfair distribution of land in Latin America.

Back 13

Independence Movement

• When Looting of Aztecs and Incas was complete, a growing immigran t population demanded more food, the focus shifted toward farming and ranching.

• A dualistic system of Latifundio and Minifundio emerged with Criollo controlling the former and Mestizo the latter.

• As the masters of the agricultural sector, Criollos were able to exercise strict authoritarian rule over their farm workers and were eventually able to challenge the authority of European born colonial rulers.

• The US declaration of independence 1776 provided precedence for LA revolutionaries.

• Most important leader of revolutionary era was Simon Bolivar, A Venezuelan Criollo who dedicated his military talents, aristocratic position and substantial wealth for the cause of independence.

• Latin America countries invested him with the title of Libertador.

• Bolivar led revolutions in his native Venezuela,Colombia, Ecuador, Panama, Peru, and Bolivia, the country that adopted his name.

• Haiti became first country to win independence 1804.

• By 1824 almost all LA countries independent.

• Freedom allowed LA to expand its international trade linkages but no internal structural reforms.

• Large agricultural estates not divided into more equitable and manageable units.

• New Aristocracy preserved many inefficiencies of the colonial era.

• Native people earlier enslaved by the Spaniards were now subjugated to the Criollos.

• Inequality lead to new revolutionary movements and land reforms.

Front 14

1. Briefly describe various land tenure systems in Latin America. Describe four major protest and reform movements against the unfair distribution of land in Latin America.

ISI (Import Substitution Industrialization)

Back 14

Import Substitution Industrialization(ISI)

ISI policies were enacted by countries in the Global South with the intention of producing development and self-sufficiency through the creation of an internal market.

• The era of export led growth in LA continued until 1930's when GD caused foreign export demand to collapse.

• LA countries experimented with a wide range of interventionist programs in 1950-60s. These programs successful. Real incomes increased 1960-73.

• Under pressure from industrialists and labor leaders governments strengthened programs of trade protectionism and import substitution industrialization.

• After WWII,ISI program received legitimization. The US economic commission for LA argued that LA countries would suffer from deterioration of their TOT if they continued to rely on exports of primary products, thus governments needed to take active measures to encourage and protect new industries

Front 15

Please describe the main features of Industrial Organization of Latin American economies.

Back 15

· Aztecs/Incas had centrally planned economies

· Spaniards pursued economic extraction in the name of the crown.

· Most LA companies are micro enterprises employing < 15 people

· 19th century export oriented growth.

State owned industries.

· ISI caused migration to urban areas(48%in 1960 to 74%in 1995).

· The Informal sector, includes micro enterprises , self employed, domestic servants, vendors.

Front 16

Please describe the labor markets of Latin America.

Back 16

· Historically slavery and forced labor

· 19th century legal codes prohibited workers to signing written contracts with employers.

· ISI, state owned industries. Direct state-labor dealings. Often relationship antagonistic.

· Militant unions emerged in mining towns and textile mills, organized strikes. Government sided with the employers with military force.

· 1930s ISI strategy encouraged migration rural- urban areas, development of informal sector.

Front 17

What role did the Catholic Church played in the economy and the society of Latin America.

Back 17

Role of the Catholic Church

Church played a controversial role in economic development.

An early missionary was a pawn of the conquistador who governed region of the new world as trust from the Spanish crown.

• Conquistador extracted riches for himself and for the crown

• Conquistador also responsible for religious training of the native people .

• Localpriests became accomplices in a system of paternalism, discipline and gross exploitation.

• Church accumulated own holdings of land and its leaders gained positions of privilege.

• on the other hand the church attempted to help the native population, education , new farming methods/techniques, health services, credit facilities, and unionization of labor.

• 1910-1916 Mexican civil war for land reforms, Church identified with the rich and the landlords. Worst repression against Catholics , churches closed property confiscated, priests banned and executed.

• 2 developments changed the face of the church in 1960s

(a) An institutional reform initiated by the pope that ended the political monopoly of European blooded clerics

(b) an ideological movement known as Liberation Theology.

• Liberation Theology: Camilo Torres (1966) a Colombian priest killed by the government, said, “necessary for a Christian to be revolutionary and take over power for the majority poor”.

Front 18

Describe the main features of Chinese leader Mao’s “Importing of the Soviet Model”

Back 18

I. Importing the Soviet Model (1949-57)

• Farmland confiscated and distributed among poor peasants.

• Collectivization program, by 1957, 800,000 cooperative farms created.

• Nationalized industries.

• Strict laws against production and use of drugs.

• Marriage laws to protect women’s rights.

• Compulsory education. Compulsory education refers to a period of education that is required of persons, imposed by law.

Front 19

Please describe the main features of the “Great Leap Forward” in China.

Back 19

· By 1958 Mao realized that Soviet development model not appropriate for China .

· Moral incentives rather than soviet style bureaucratic organization and material rewards.

· Small scale industry: Small scale labor intensive facilities in the interior of the country. Strategy designed to absorb unemployed and provide industrial inputs to agriculture.

· Small plants established by local governments to produce agricultural tools, fertilizer, pesticides, iron, steel.

· social ownership taken to the extremes: collectivized all personal property down to cooking pots.

Front 20

Positives and negatives of the "Great Leap Forward."

Back 20

Positives:

· Spread industrial production, almost all provinces became steel producers.

· Millions of workers mobilized to dig irrigation ditches/canals, build dikes/ dams for flood control, raise forests, and build roads and railways, schools, hospitals. ·

Negatives:

· Disruption of economic management and local government services

· Rapid increase in industrial labor force led to food shortages.

· Large part of income distributed according to “to each according to his need”

· Many small factories inefficient, unable to obtain raw material, operated only a few hours a day and a few days in the week with unskilled labor

· Quality of output poor.

Front 21

Legacy of the "Great Leap Forward"

Back 21

Legacy of GLF:

· GLF contributed to an ideological dispute between Beijing and Moscow.

· Private agricultural plots and rural markets liquidated

· disruption in local government services, schools, hospitals.

· shifting of agricultural labor to industrial production contributed to a famine that was one of the worst catastrophes in human history.

Front 22

Briefly describe the outlines of market oriented reforms introduced by Deng Xiao Pingand his successors in China since 1978.

Back 22

Deng Xiao Ping Reforms (1978):

Reform strategy aimed at coexistence of a market track and a plan track.

Dual Track Production:

• rapid and comprehensive liberalization of agricultural sector while industrial sector remained under traditional central planning management.

• agricultural communes disbanded and land distributed among peasants.

• state procurement quotas for consumer goods much lower than for producer goods

Front 23

Briefly describe Dual Track Pricing

Back 23

Dual Track Pricing:

• State procurement prices for agricultural products were raised and free markets for products allowed.

• Industrial goods prices determined bydecree.

• two exchange rates, official and black market were allowed in the beginning but unified in 1993.

Front 24

Briefly describe Dual Track Ownership

Back 24

Dual Track Ownership

• 1979-83 collective commune system replaced by HH farming. So, agriculture a private sector activity.

• An important driving force behind change in ownership structure is foreign investment, especially overseas Chinese investment.

Rural industrial enterprises and foreign joint ventures communally owned. Foreign investment especially overseas Chinese investment increased.

• Large scale industry still state owned enterprises (SOEs)

Front 25

Briefly describe Town and Village Enterprises

Back 25

Town and Village Enterprises Classified

• TVEs actually private but registered as collectively owned to escape legal discrimination.

• Those which receive approval from local authorities in return for a commitment to make an annual contribution to the village funds.

• local authorities exercise total control over the TVEs.

Front 26

Differences between SOEs and TVEs

(State Owned Enterprises) (Town and Village Enterprises)

Back 26

Differences between SOEs and TVEs

• TVEs represent localized socialism compared to centralized socialism embodied by SOEs.

• TVEs shorter supervision distance so face less principal- agent problem than SOEs.

• No soft budget constraints.

• TVEs non-state enterprises their rescue not a state responsibility.

• TVEs cannot borrow for ever, so unlike SOEs can be shut down by competition.

• TVEs unlike SOEs can implement institutional innovations without central government permission.

Front 27

Briefly describe Dual Track Regional Development

Back 27

Dual Track Regional Development

• 1980 four southern coastal cities designated as special economic zones (SEZ) and given autonomy to experiment with new institutions and reform, eg. exempted from many regulations governing foreign investment.

• The resulting phenomenal growth spurred other regions to demand economic liberalization as well.

• Eventually 20 cities approved as economic and technological development districts (ETDD)which had some of the privileges of SEZs.

• The whole country saw high growth in coastal areas due to rapid development of non-state sector. Interior of the country was mostly following traditional economic systems.

Front 28

What are the main sources of growth in contemporary China?

Back 28

Integration into Global Economy.

• Access to international markets for labor intensive manufactured goods accelerated the movement of labor out of low productivity agriculture into high productivity industry.

• China could now buy modern technology (some of which was previously denied to China).

• Foreign direct investment increased capital stock, transferred new technology.

Saving Behavior:

• China’s saving rates are unusually high.

HH savings ( result in Increased savings, decreased consumption, ADdown inflation down)

The Existence of Family Ties Between Mainland Chinese & the Overseas Chinese:

• The explosive growth of special economic zones (SEZs) in southern China was caused by the wholesale movement of labor intensive industries from HK and Taiwan.

Front 29

· What were the main characteristics of the War Communism (1917-1921), the firsteconomic policy introduced by the Bolsheviks under Vladimir Lenin.m

Back 29

· VladimirLenin elected leader of the Russian Social Democratic Party (laterBolsheviks) in 1902.

· 1905thousands of worker protesters fired upon, protesting hardships caused by war with Japan, Tsar forced to grantconcessions , including formation of parliament (Duma).

· WWI,14 million soldiers enlisted, 2 million killed, food production declined30%, also corruption in Government , food riots in St. Petersburg.

· 1917February Tsar abdicated .Duma established moderate government headed by Kerensky of labor party.

· October1917 Bolshevik underLenin’s leadership overthrew theprovisional government and dedicated itself to establish socialism and ultimately communism.

· Effortsto establish domestic control and reformcomplicated by Russian cooperation withthe allies in WWI.

· WhiteRussian party occupied Urals and Siberia, Caucasus, Germans in possession ofUkraine, Baltic states declared independence, 75% of Russian land underopposition control.

· Leninand his friends decided to cut losses by negotiating a separate peace with the Germans (1918). Inexchange were required to recognize German control over several territories (Georgia, Ukraine, Poland and Balticstates)

· Thetruce with Germany precipitated aninvasion of allied soldiers whose mission was todrag Russia back into war , to recoverammunition stored there and to protectinvestments that had beennationalized by the Bolsheviks.

· Bolsheviksprinted money to fight all these wars, result: hyperinflation. Neededradical measures.

· WarCommunism proclaimed.

· Landdecree:Confiscating all private and church land and Livestock without compensation.

· Militarystyle ofeconomic organization (war communism)· Policeand /CP activists sent to thecountryside to extract surpluses frompeasants forcefully

· Labormade compulsory forall.

· astrict system of militarydiscipline exercised over labor.

· laborarmies formed torebuild roads , railways, to speedrecovery of coal, mining, forestry, and oil extraction

· workersmovements restricted,deserters punished Equal wages paid to all in an industry.

· Foodand other goods rationed to workers and families · Foreigndebt repudiated

· Moneyabolished

· Privatetrade outlawed.

· 37000enterprises, many foreign owned, nationalized.

· Bythe end of 1920 Bolsheviks won wars against all, consolidated power and regained territories.

· farmers,industrial workers and army against continuing War Communism.

· WarCommunism abolished.

Front 30

What were the main features of the New Economic Policy introduced in Soviet Union in 1921.

Back 30

· Combination of capitalism and socialism.

· Lenin said it was a temporary step backward to capitalism designed to get the economy back on its feet, so that it would become possible to take 2 steps forward towards full communism.

· Land given to peasants so agriculture in Private hands.

Peasants could sell to cooperatives, Nepmen (private traders), and government.

· Private trade legalized.

· No rationing.

All industry except commanding heights denationalized. (To transfer (an industry, for example) from governmental to private ownership.)

Commanding heights industries(fuel, metallurgy, transportation, banking, communication, war industry,foreign trade)

· By controlling commanding heights industries Lenin believed that it would be possible to set the course for the rest of the economy

· Restrictions on labor mobility abolished

Market determined wages

· Labor legislation 1922 entitled workers to an 8 hour day and two week paid holiday

· Money reintroduced (Chervonetz)and made stable

· Foreign concessions granted/investment encouraged.

Front 31

Why did the NEP (New Economic Policy) fail and replaced in the Soviet Union?

Back 31

Why NEP Replaced?

• Growing strength of NEPMEN and Kulaks (rich peasants) perceived a threat by CPSU.

• Agriculture recovered more rapidly than industry.

• Monopoly trusts increasedindustrial prices

• Peasant terms of trade deteriorated.

• Soviet authorities failed to understand working of a market economy

• Low prices of agricultural commodities paid by the government.

• Inflation

• Inflation misunderstood, between 1924-27, MS increased 2665%, government used price controls to bring inflation under control.

• Failed to appreciate basic concept of opportunity cost (state grain procurement price less than peasant opportunity cost)

• State interested in amount of graindelivered to state than total grain production

• Government intervention failed.

• 1.6 million unemployed in rural areas

• General mistrust of the market system

• CPSU realized that SU must become industrially, economically and militarily strong.

To achieve this goal agricultural surpluses a must, something not possible under NEP small scale peasant agriculture.

To establish large farms/collectives peasant agriculture must be replaced by large efficient large collective farms(Kolkhoz).

Front 32

Under the Soviet socialist system all economic activities were coordinated by the Central Planning Organization. What were the functions and procedures of the Soviet central planning organization, Gosplan?

Back 32

Basic Principles/Functions of Soviet Planning

• Control figures to provide general direction of the economy.

• The ministries - operational links between Gosplan and the enterprises as they were involved in the planning process and in making actual distribution of industrial materials.

• Gosplan made the nationaleconomic plan, it was the responsibility of the ministries to execute it.

Planning Procedure

• Politburo (central committee of the communist party of Soviet Union, CPSU) establishes its priorities/output targets for next year

• Ministries and Gosplan together estimate input requirements

• Ministries disseminate control figures to enterprises, after disaggregating,for feed back.

• Information begins to flow up from enterprise to Ministry to Gosplan. Figures aggregated.

• Final version of the plan presented to politburo for approval

• Approved plan becomes next year’s USSR plan.

• Plan establishes enterprise output targets , input allocations, supply plans, delivery plans, financial flows, wage bills etc.

Front 33

Why many economists believe that the socialist economic system is inherently inefficient? (1-6)

Back 33

· One: Information Handling: For any human organization impossible to handle all info.

· Two: Soviet wholesale and retail prices did not send out reliable signals.

Retail prices determined by demand , Wholesale prices determined by costs of production (mainly labor costs).

· Three: Combination/allocative efficiency: MPL/Pl=MPK/PK. Ace also lack Technical efficiency: MC=MR.·

Four: Principal-Agents problems: Agents (Managers ) had superior information about local conditions than the Gosplan or the Ministries (principals) located thousands of miles away. This used by mangers in ways that fulfilled their own not economy/ministry/Gosplan interests.

Five: Managers had a built in incentive to report false information to their superiors and Conceal capacity: The managers main objective was to fulfilloutput targets. An incentive to concealor understate capacity in order to be able to easily fulfill output targets. ·

Six: The Ratchet Effect:

The managers will not produce more even if they could, because producing more this year means that next year’s required output targets will be ratcheted up.·

Front 34

1.Why many economists believe that the socialist economic system is inherently inefficient? (7-11)

Back 34

Seven: Socialism as a Perpetual Shortage economy: The managers over-demand inputs, because that will make it easier for them to fulfill output targets. Consumers also wanted more than available. ·

Eight: ACE and Soft Budget Constraints : An enterprise in a market economy faces a hard budget constraint, as those unable to cover costs, close down. ACE enterprises that do not cover costs are subsidized by the ministry or from state budget. No enterprise fails even if AC>price/revenue. ·

Nine: Economic growth and technological change: In market economies the incentive to introduce new technology is fostered by the need to remain competitive, by the advantages of cost reduction achieved through new technologies, and through the ability of new products and new technologies to generate market growth and profits.

Ten: Problems of Investment criteria/choice: A capitalist corporation knows the cost of investment projects and will automatically select those investment projects that yield reasonable rates of return (yearly return/total investment costs).

A corporation makes appropriate comparisons of income and costs over time because interest rates allow cumulated costs and benefits to be reduced to a common denominator of present discounted value. (PV= A/(1+i)t) or A/i)). In ACE Investment finance was provided to the enterprise free of charge. Soviet enterprise faced few incentives to minimize costs of production including capital charges. ·

Eleven: Consumer Welfare and quantity constraints: Soviet enterprise did not produce enough consumer goods to satisfy market demand at prevailing prices . Instead the Soviet authorities used quantity restrictions such as ration coupons requiring people to stand in line to obtain products . When consumer freedom of choice is restricted by quantity constraints their consumer welfare declines as compared to unrestricted choice. when consumer choices are restricted their earned income becomes less meaningful, why should they work hard, if their ability to buy goods depends not on their income but on their willingness to stand in line. Quantity constraints may also affect the incentive to save. Quantity constraints make people save less and work less. l

Front 35

1.Describe Glasnost-Perestroika reforms program introduced by Mikhail Gorbachevin Soviet Union in 1985.

Back 35

Glasnost:Political Reforms.

• opening of Soviet society through daily discussions, the media,literature.

• Democratization of daily political life

• Democratization also applied to the worker inthe enterprise

• opening of society will lead to acceleration ofeconomic growth

• Human factor contributed to the earlier Brezhnevera stagnation of the economy

• Workers with increased voice in enterpriseaffairs, less likely to be alienated from economic system

• For ordinary soviet citizens to supportchange, must understand costs andbenefits

• openness and candor will lesson voices ofopposition in CPSU.

• Givingmore say to Soviet citizens will makethem more willing to bear costs ofrestructuring

• democratizationto increase morale in work force.

• Glasnost and democratization will enhance Sovietstanding in the world

• democratization will prepare west to help inSoviet modernization

• Retooling of Soviet factories will be possible. Perestroikaor The Law of State Enterprises.

• Less interference in enterprise affairs

• Enterprises free to enter contracts with other enter.

• Ministries and planners to influence actionsthrough laws, rules and norms.

• Local units of CPSU to eliminate tutelage of local enterprises.

• Local enterprises to have autonomy. Responsiblefor results.

• Enterprises self financing.

• investment requirements to be met with retainedearnings or bank credit

• bonus payments from enterprise profits

• no automatic subsidies to unprofitableenterprises

• No soft budget constraints , enterprises couldgo out of business.

• enterprise self managed. Managers to beelected by worker councils

• retoolingof soviet factories through foreigninvestment/joint ventures

• No foreign trade monopoly by the government.

Front 36

Why did the Perestroika reforms program fail in the Soviet Union?

Back 36

Why Gorbachev Reforms Failed?

• Soviet economic performance declined in 1980s.

• By late 1980s traditional arrangements of Soviet system were collapsing but nothing was replacing them

• An impossible balance between center and local levels

• little attention paid to changing property rights

• enterprises could have contractual dealings but no legal system to enforce them

• enterprises freed from rigid input allocation system but no wholesale markets.

• bureaucratic resistance

• Uncertainty

• Although Gorbachev avoided committing his administration to a radical transformation, his failure to stop Yeltsin’s program allowed reform to proceed at a pace that alarmed the leadership of the communist party.

• As Gorbachev’s position weakened and the failure of piecemeal reform became more apparent, Western nations, whose financial support was vital to the Soviet Union’s reform effort increased pressure on Gorbachev to adopt a more liberal stance.

• During the summer of 1991, a group of Soviet reformers and Western academics gathered and drafted what became known as the Grand bargain, under which the SU would commit to rapid economic and political reform, while in return the West would provide substantial economic aid.

• Gorbachev rejected the plan and tried to negotiate less conditional terms in a meeting of the leaders of the G-7 nations held in London in July, 1991. It was almost his last act as leader of the Soviet Union and he came away empty handed.

• While vacationing in Crimea in August, he was the target of a coup led by communist party leaders, which because of an inability to neutralize Yeltsin, unraveled after a few days of chaos.

• This failed putsch led directly to the breakup of the Soviet Union; during September most of the constituent republics declared their independence.

• On December 25, 1991 Gorbachev resigned, and over the Kremlin the red flag of the Soviet Union was replaced by the red, white, and blue banner of the Russian Federation.

• The Soviet Union disintegrates, replaced by 15 independent countries.