New Article Published: Does socialism really lead to economic failure? The USSR and COMECON Eastern Europe before 1989

My new article has been published in the Journal of Labor and Society:

https://onlinelibrary.wiley.com/doi/full/10.1111/wusa.12467

Based on important new figures from the Maddison Project Database, it refutes the claim that the countries of Eastern Europe were economic failures when they were still ruled by (ostensibly) communist regimes.  This is important because it shows that state ownership of economies does not have to mean a poor standard of living.  It means that those who want the liberation of the working class from capitalism can carry on their fight and give up the search for some mythical ‘third way ‘ between economies under state ownership and the market. Though the article was written last year,  its implication is that a world faced with the appalling economic and social costs associated with coronavirus, we do not have to resign ourselves to years of high unemployment and poverty under the market system.

This article is purely about economic performance. It is not a political defence of the Eastern European regimes.  I believe that most of these regimes went down the capitalist road after 1953.  I believe that Mao Zedong was right to see the Soviet-led Warsaw Pact as an enemy of the genuine socialism that he was trying to promote around the world.  It is foolish, however, to pretend that the fate of these regimes has no bearing on the current level of support for socialism.  The economies of these countries were state-owned and they retained some elements of state planning to a greater or lesser degree.  The incorrect belief that state ownership led to economic disaster in all of these countries has been very damaging to the socialist cause and must be challenged.

The New Figures

For years writers on Eastern Europe have used figures calculated by Angus Maddison   to argue that the countries in COMECON, the Soviet led economic bloc, performed very badly compared to Eastern Europe.  To illustrate this I reproduce a chart from the pre-review version of my article.  This shows figures calculated from the 2010 version of the Maddison Project Database:

Country GDP Per Capita % of 16 Western Europe Nations

MPD  2010

  1988 1990 2000
Albania 16% 16% 14%
Bulgaria 41% 35% 28%
Czechoslovakia 57% 53% 46%
Hungary 46% 41% 37%
Poland 38% 32% 38%
Romania 27% 22% 16%
Russia 49% 28%
USSR 46% 43% 23%

As we can see the figures  are very low.  It is easy to show that some of them at least are unrealistically low.  When the MPD 2010 GDP per capita figures are projected forward to 2016 using economic growth rates (see Maddison Project Database 2018, 1990 $ version), Russia’s GDP is only 28% of the USA’s.    According to  the CIA factbook  Russia had a PPP GDP per capita income that was 47% of the USA’s in 2016.  In fact, it is completely incredible to think that Russia has a GDP that is so low in 2016.  It must be that Maddison’s figure for Russia for  1990 is too low, making his Soviet figure too low too.  When it is extrapolated to 2016 it becomes contradicted by our current knowledge of the world. The Romanian figure is also very unrealistic.  It is impossible to believe that Romanian standards of living were the same as Albanian standards of living in 2000.  I would suggest that Maddison underestimated COMECON GDP in the case of socialist era Romania and the Soviet Union.  As it is generally accepted that living standards in Czechoslovakia were higher than Soviet living standards, I believe the figure for Czechoslovakia must be wrong too.

In 2018 a whole new Maddison Project database was brought out using a new method. The 1990 GDP per capita benchmark that Angus Maddison used for MPD 2010 was omitted from the whole database. GDP per capita rates for the COMECON countries were extrapolated back from the 1990s using economic growth rate figures or interpolated between a 1990s benchmark and 1980s benchmark.  The benchmarks are national income figures calculated at purchasing power parity by the UN International Comparison Programme or associated bodies like the European Comparison Programme.  The new per capita GDP figures (CGDP) figures show this:

 

Country 1988 CGDPpc 1988

% of W.European

CGDPpc

2016 CGDPpc 2016

% of

W. European CGDPpc

Bulgaria 11344

 

51% 17953

 

44%
Czechoslovakia 17361

 

78% 30118

 

75%
Hungary 12486

 

56% 24047

 

60%
Poland 8187

 

37% 26002

 

64%
Romania 7223

 

32% 20549 *

 

51% *
USSR 14367

 

64% 17903

 

44%
Western Europe 22318

 

40364

 

Data source. MPD 2018, authors own calculations.  The USSR figure is the author’s calculation. CGDPpc values for the 15 Soviet republics are multiplied by their population and then added.  It is not the ‘former USSR’ figure from the MPD 2018 database as the MPD team could not explain how this was calculated and it is unrealistically high.

* The 2015 CGDPpc is given for Romania because of an error on the MPD 2018 database with the 2016 figure.

The figures in Table 2 do not show the superiority of a system based on private ownership.  In two out of six COMECON countries, the USSR and Bulgaria, the state-owned system performed better than the market system, comparing 1988 to 2016. In another two out of six, Czechoslovakia and Hungary, the state-owned system performed at roughly the same level.  In only two countries, Poland and Romania, can we see that the state-owned system did worse than the private ownership market system.

Implications

The new figures from the Maddison Project demonstrate that on the whole ‘socialism’ did not underperform capitalism comparing 1988 and 2016.  Indeed the old MPD 2010 figures when extrapolated to 2016 (Maddison Project Database 2018, 1990 $ version) would probably indicate a similar conclusion, but the actual GDP figures are too low in absolute terms as indicated above.

There will be the usual argument that the GDP figures do not reflect the quality of output.  I deal with this objection extensively in my article. Briefly, the national income figures are based on ICP benchmarks which do take the characteristics of products into account. The ICP calculates these ratios using detailed product specifications which should give them a reasonably accurate picture of the genuine characteristics of a product. For example, in 1975, the category of eggs contained a specification detailing a specific size and even the firmness of the yolk  In 1975 the ICP also asked countries for information about the maximum speed and size of cars as well as the number of cylinders.   With housing the ICP asked about the year the house was built, its size and the presence of facilities like electricity, bath, toilet, and central heating.

The other argument against socialism is that the GDP results were poor in relation to investment outlays due to inefficiency. This argument has already been refuted in relation to Eastern Europe by Vonyo and Klein in their article ‘Why did socialist economies fail? The role of factor inputs reconsidered?’

https://onlinelibrary.wiley.com/doi/full/10.1111/ehr.12734

Basically, the ‘inefficiency’ argument stems from using western (lower) estimates of GDP growth, rather than official figures, but using official figures for investment.  Once you recalculate investment using the same type of western data used to calculate economic growth, investment is lower and the efficiency problem is not so bad. Vonyo and Klein do not apply this to the USSR but I do because both Angus Maddison and the CIA believed that Soviet investment figures were boosted by hidden defence spending.

Conclusion

As Vonyo and Klein note, investment levels in ‘socialist’ economies in the later period were actually quite low compared to similar capitalist economies.  The logic is that they could have done better if they had invested more. The adequate but rather mediocre economic performance of ‘socialism’ in its last phase (in most countries) could have been remedied with some short term sacrifice for higher living standards later on.  The only exception is Poland where the significant economic failures must be explored in more detail.  Romanians suffered grievously from around 1982 to 1989 due to Ceausescu’s international debt repayment programme but ironically actual growth of GDP was not too bad at the time.

Economic well-being is important but no one is going to risk their life on the barricades for a better quality TV.  Now that the question of whether or not socialism is an economic disaster has been settled in favour of socialism, it is time for socialists to stop worrying about economics and debate the important questions: democracy versus dictatorship, the individual versus the collective, the role of the party versus the role of the people etc.

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