INTERNATIONAL ECONOMICS AND BUSINESS HISTORY

LECTURE 25: USSR (Union of Soviet Socialist Republics): from Lenin to Stalin

Lenin on electrification in 1920:

“Communism is Soviet Government plus the electrification of the whole country”.

Stalin in 1931:
“We are fifty or a hundred years behind the advanced countries. We must make good
this distance in ten years. Either we do it, or they will crush us.” (Stalin said this in
1931, at the beginning of the rapid industrialization campaign).

Nazi Germany invaded the Soviet Union in 1941.

Timetable to the Communist state in the USSR

1. (1900–1914) Russia shows relatively backward but state-induced economic

growth. Russia entered the twentieth century as the biggest country in the
world, inhabited by 126 million people. It was considered inefficient and
economically and technologically backward. And, having only abolished
serfdom (the ownership of peasants by landowners) in 1861, it was not
attempting a massive economic transformation aimed at modernizing the
country to the levels of Britain, France and USA. The key proponent of this
huge push towards industrialization was Sergei Witte, head of finance, and a
man widely regarded as a visionary statesman. He developed many proposals
aimed at attracting foreign investment in Russian industry, and in an entirely
economic sense, his ideas worked.

2. (1914 – 1917) Russia in the Great War- tested to destruction by a “modern”

war. The loses Russia suffered in the world war were catastrophic.
Economically Russia was devastated: a lot of debt, high inflation, the gold
reserves were nearly empty, and revenues were low while reconstruction costs
were huge. Russia was on the verge of complete collapse.

3. (1917) February Revolution - Kerensky (1881-1970) and the Socialist

Revolutionary Party. By 1917, most Russians had lost faith in the leadership
ability of the czarist regime. The immediate cause of the February Revolution
was Russia’s disastrous involvement in World War I. Militarily, imperial Russia
was no match for industrialized Germany. The main events of the revolution
took place in and near Petrograd (present-day St. Petersburg) and then
Russian capital, where discontent with the monarchy erupted into mass protests
against food rationing. Revolutionary activity lasted about eight days. It involved
mass demonstrations and violent armed fights. Tsar Nicholas II abdicated,
ending Romanov dynastic rule, and the imperial Russia. After the February
Revolution of 1917 the joined he joined the newly formed Russian Provisional
Government.

4. (1917) October revolution - Bolshevik seizure of power. It was a revolution in

Russia led by the Bolsheviks and Vladimir Lenin. It took place with an armed
insurrection in Petrograd and it supposed the establishment of the Soviet
regime.

Russian Revolution of 1917 includes two revolutions, the first of which, in

February which overthrew the imperial government and the second of which, in
October placed the Bolsheviks in power.
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5. (1918 – 1921) Civil War and War communism. The Russian Civil War was a
multi-party war in the former Russian Empire immediately after the Russian
Revolutions of 1917, as many factions vied to determine Russia’s political
future. The two largest combatant groups were the Red Army (fighting for the
Bolshevik form of socialism led by Vladimir Lenin) and the White Army (included
diverse interests favoring monarchism, capitalism, and alternative forms of
socialism, each with democratic and antidemocratic variants). War Communism
was the name given to the economic system that existed in Russia from 1918 to
1921. War Communism was introduced by Lenin to combat the economic
problems brought on by the Civil War in Russia. It was a combination of
emergency measures and socialist dogma.

6. (1921 – 1928) NEP - New Economic Policy. It was a revised economic

strategy, introduced by Lenin and the Soviet government in 1921. The main
feature of the NEP was to relax the severe restrictions imposed on Russia by
War Communism. The NEP represented a more market-oriented economic
policy, necessary after the Russian Civil War, to foster the economy of the
country, which was almost ruined. The complete nationalization of industry,
established during the period of War Communism, was partially revoked and a
system of mixed economy was introduced, which allowed private individuals to
own small enterprises, while the state continued to control banks, foreign trade,
and large industries.

7. (1928 - 1932) First Five Year Plan - debate about economic policy and
introduction of central planning- Stalin. It was a list of economic goals created
by Stalin. It was focused on developing heavy industry and collectivizing
agriculture, at the cost of a drastic fall in consumer goods.

Economic growth in the USSR under Stalin’s industrial program (1928-1953)

(History of the Soviet Union between 1927 and 1953 covers the period in Soviet history
from establishment of Stalinism through victory in the Second World War and down to
the death of Stalin in 1953).

• Starts from low base- though recovery to 1914 levels of output by mid-1920s.

• Relatively high rates of economic growth - even in face of challenge of the

“Great Patriotic War” (1941-1945). The Great Patriotic War describes the
conflict fought along many fronts of the Eastern Front of World War II between
the Soviet Union and Nazi Germany and its allies.

• Industrial growth rates high - especially “heavy industry” - capital

concentrated in producer goods. The central aspect of the first Soviet five-year
plan was the rapid industrialization of the Soviet Union.

• Urbanization increased greatly. In addition, there was an important

demographic shift. Women become more educated and had access to jobs.
Bolsheviks promoted women emancipation so the number of kids per family
were reduced.
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• Collectivization - led to dislocation and famine (millions of deaths from

starvation). It was enforced by the Soviet Union through the first five-year plan.
The Soviet leadership expected that the replacement of individual peasant
farms by collective ones would immediately increase the food supply for the
urban population, the supply of raw materials for processing industry and
agricultural exports. Planners regarded collectivization as the solution to the
crisis of agricultural distribution that had developed from 1927. In the early
1930s over 91% of agricultural land became “collectivized” as rural households
entered collective farms with their land, livestock, and other assets. The
collectivization involved tremendous human and social costs.

Vladimir Ilyich Ulyanov (Lenin)

The development of Russian capitalism (1899)
• Russia underdeveloped relative to Western European Economies.

• Late and slow development of Russian agriculture -- Russian

characteristics of rural village (end of serfdom and periodic re-division of land).

• With economic growth of the agrarian sector - class differentiation in

countryside: rich peasants (kulaks) and poor peasants. Kulaks were
considered wealthy and prosperous peasants, generally characterized as one
who owned a relatively large farm and several head of cattle and horses and
who was financially capable of employing hired labour and leasing land. Before
the Russian Revolution of 1917, the kulaks were major figures in the peasant
villages. They often lent money, provided mortgages, and played central roles
in the villages’ social and administrative affairs.
During the War Communism period, the Soviet government undermined the
kulaks’ position by organizing committees of poor peasants to administer the
villages. But the introduction of the New Economic Policy favored the kulaks. In
1917 the Soviet government began to shift its peasant policy by increasing the
kulaks’ taxes and restricting their right to lease land. In 1929, it began a drive
for rapid collectivization of agriculture. The kulaks opposed the efforts to force
the peasants to give up their small privately-owned farms and join large
cooperative agricultural establishments. At the end o 1929 a campaign to
“liquidate the kulaks as a class” (dekulakization”) was launched by the
government. By 1934, most kulaks (as well as millions of other peasants who
had opposed collectivization) had been deported to remote regions of the
Soviet Union or arrested and their land and property confiscated.

To sum up, we can conclude that Bolsheviks (post revolution) showed political
distrust of Kulaks (thought to be a political and economic threat).

• Growth of manufacturing in the countryside - Kustar - cottage industry. A

kustar is a Russian home or cottage worker, a peasant engaged in cottage
industry. The kustar produced a wide range of products, including embroidery,
and the popularity of kustar products can be regarded in the light of the arts and
crafts revival of the nineteenth century.

• Late nineteenth century = development of large-scale industrial factories and

companies.
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Figure 1: Production Possibility Frontier

The production possibility frontier (PPF) is a curve

depicting all maximum output possibilities for
consumer and producer goods, given a set of inputs
consisting of resources and other factors. The PPF
assumes that all inputs are used efficiently. The
PPF is depicted graphically as an arc, with one
commodity on the X axis and the other commodity
on the Y access. At each point on the arc, there is
an efficient number of the two commodities that can
be produced with available resources. Point D
shows were tsarist economy is located which is

inefficient.

Figure 2: Economic growth

(1928 – 1970)

Figure 3: A reinterpretation of the

Soviet Industrial Revolution. We can
observe relatively high levels of
productivity. However, productivity falls
through years while capital accumulation
keeps increasing.

Figure 4: Soviet GDP per Head

from 1928 to 1955.
We can underline the increasing
value of the Soviet GDP per head.
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Civil war and war communism (1918-1921)

• “Bread, Peace and Land” -promised problems for the Bolsheviks. This slogan
spoke to some of the reforms the Bolsheviks planned to implement. Prior to the
1917, Russia was still fighting Germany and her allies in the First World War.
This war was a disaster for Russia. The Bolsheviks were against the war from
the beginning, as they saw it was nothing more than an imperialistic war. Lenin
promised to end the war (obtain peace). The promise of land and bread were
related with abolishing capitalism and establishing communism. Land and
business would be taken from wealthy property owners and would be given to
peasants and everything administered by the government. This system was
though to create a more equal distribution of wealth allowing more “bread” and
“land”. The idea of bread also comes from the shortages that were associated
with the war.

• Civil War - saw disintegration of the economy - problem of control and

command

• War communism: a response to economic collapse. It was the economic and

political system that existed in Soviet Russia during the Russian Civil War from
1918 to 1921. This system had to be use because the ongoing war disrupted
normal economic mechanisms and relations.

• Also influenced by idealism of the Bolsheviks and supporters in the towns and
factories.

• Extensive policy of nationalization: banks, factories, transport facilities…

(taken in the state ownership). This policy was established as a part of “War
Communism”.

• Tax on peasants in kind and forced grain requisition (The countryside,

peasants, were reluctant to the Soviet economy (tax policies, ideological
issues…). To feed people in the cities, the Soviet government confiscated grain
from the farmers without having money to pay them. It was the war that forced
the government to establish such as radical policies that were necessary to
meet the requirements of the army and sustain the workers.

NEP: New Economic Policy (1921-1928)

• Mixed economy - “state capitalism” & “Communists learning to trade” (Lenin).

The complete nationalization of industry, established during the period of War
Communism was partially revoked and a system of mixed economy was
introduced, which allowed private individuals to own small enterprises, while the
state continued to control banks, foreign trade and large industries. In addition,
the NEP abolished “prodrazvyorstka” (forced grain requisition) and introduced a
tax on farmers, payable in the form or raw agricultural product.

• Retention of political control – Bolsheviks had monopoly of political power.

Liberalization of commerce and tolerance of small and medium sized firms.
 INTERNATIONAL ECONOMICS AND BUSINESS HISTORY

Economic imperative – efficiency and optimization. Lenin understood that

economic conditions were desperate, so he opened markets to a greater
degree of free trade, hoping to motivate the population to increase production.
Lenin was following Karl Marx’s precepts that a nation must first reach “full
maturation of capitalism as the precondition for socialist realization”. NEP
economic reforms aimed to take a step back from central planning and allow
the economy to become more independent. NEP reforms also opened up
government positions to the most qualified workers.

• De-nationalization of factories – creation of “trusts”. The NEP represented a

move away from full nationalization of certain parts of industries. Except -
Banks, transport and military factories - remained in state hands.

• Monetary reform – action to remove inflationary pressure. It was aimed at

the stabilizing of the Soviet currency after an enormous hyperinflation during the
Russian Civil War with its policy of War Communism. The reform replaced all
currencies of the time by a new one (chervonets) backed by the gold standard.

• Monetary tax on peasants – use of the market. One of the first measures
taken by Communists was the reduction of the farmer’s tax. During the First
World War and throughout the Revolution all farmers were obliged to give most
of their production to the state to provide food for the entire nation. When this
tax was cut, peasants received an incentive to work again and the farming
industry began its recovery.

• Companies encouraged to expand – responding to market opportunities.

• Bank credit used to encourage industrial growth

• Attempts to attract of foreign capital and foreign technology. The

government tries to encourage foreign investment and jointly with foreign
technology took place the creation of VSNKh. It was considered the superior
state institution for management of the economy.

• Creation of VSNKh – Supreme Council of the Economy – early indicative

planning.

• NEPmen (for Bolsheviks they seemed to be a threat for the Soviet Union). They
were businesspeople in the young Soviet Union who took advantage of the
opportunities for private trade and small-scale manufacturing provided under
the New Economic Policy. As they gained a greater standard of living compared
to their poor, working class counterparts, NEPmen became reviled and
stereotyped as greedy. By the early 1920s NEPmen began to be taxed heavily.
In 1925 the administration reduced these restrictions, affording NEPmen
greater leeway in conducting commerce. This would not last for long, however.
As Stalin consolidated his power, he moved violently to end the New Economic
Policy and to put NEPmen out of business, abolishing private commerce in
1931.

• The results were astonishing. Market relations quickly infiltrated almost all
spheres of life. In just five years Russia’s production grew by three times
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and surpassed pre-war, Tsar-era figures. At one point the ruble became
stronger than both the US dollar and the Royal pound.

The End of NEP

• It was an idea that worked so well, it managed to drag an entire country out of
starvation and chaos and drive it onto the road to quick economic and
industrial recovery. It created capitalism in a socialist state. However, it was too
visionary to remain sustainable for too long.

• Lenin’s health began worsening almost from the start of the NEP. Lenin began
looking for a possible successor and put together personal characteristics of
some of the Party’s most prominent figures of the time, including Trotsky and
Stalin. Lenin warned that giving Stalin the seat as the Party’s secretary general
would give him too much power which, according to Lenin, would be dangerous
due to Stalin’s crude temper. When Lenin died, Trotsky was removed from all
commanding posts while Stalin’s political weight gained strong strength.

• Stalin quickly began redirecting most of the power strings into his own hands,
which did not leave the economy unaffected. From the second half of the
1920s, authorities began shutting down industrial syndicates and forcing private
capital out of the economy. The final step officially shutting down the project
was the Party’s decree to prohibit all private trade in the country in 1931,
snuffing out the remaining signs of capitalism.

• Bolsheviks split (Lenin’s testament):

- Right (Bukharin). He supported the continuation of the two parallel

sectors: the state sector holding the “commanding heights” of the
economy and the private one represented by small-scale industry,
handicraft and individual peasant farming. It basically implied an
indefinite continuation of a mixed economy, which was the essence of
the NEP.
- Left (Trotsky). The left was against making any concessions to the
peasants and insisted upon speedy industrialization by increasing the
tax burden on the peasantry and channeling the bulk of resources into
state-owned industries.

Stalin used the controversy between the left and the right to his personal
advantage.

• Preobrazhensky (closely associated with Trotsky and the left opposition)

called for a “Great Leap Forward” – concentration on growth of capital stock
– and stress on producer goods (at expense of consumer goods production) –
theorized as “primitive socialist accumulation”. The Great Leap Forward
was considered Stalin’s justification of collectivization and forced
industrialization, the chief aims of the First Five Year Plan.

• Stalin – organized removal of the Left – then moved to isolate the Right. Stalin
then has control of the Communist party.
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• Bolsheviks split – analysis of rural society in the USSR.

• Overall/general – problem of feeding the urban workers.

• Political problem – fear of the re-emergence of capitalism and a capitalist

class in the countryside.

• Bukharin – “enrich yourself” – unpopular slogan for many Bolsheviks.

• Stalin – waited - gave conditional support to Bukharin; and ridiculed the

Left’s proposed policy of “Super-industrialization”.

Five Year Plans (1928-1941).

• The five-year plans for the development of the national economy of the Soviet
Union (USSR) consisted of a series of nationwide centralized economic
plans in the Soviet Union, beginning in the late 1920s. The Soviet state
planning committee Gosplan developed these plans based on the ideology of
the Communist Party for development of the Soviet economy. The plans
supposed very ambitious targets, but outcomes did not fulfill the expectations.

• GOSPLAN was a state agency that set economic targets and directed
economic activity from the center (central planning using targets set in physical
quantities). Prices were fixed to match the objectives of the plan.

• Development of planning: Use of input-output matrices – links within the

industrial sector. Input-output matrix is a representation of national or regional
economic accounting that records the ways industries trade with one another as
well as produce for consumption and investment. The idea is that commodities
are produced by economic sectors (for example cotton produced by agriculture)
and they serve as inputs in other sectors in order to produce their final products
also called outputs (for example, manufacturing industry such as textile industry
using cotton from agriculture as input to produce its own output, clothes in
cotton).

• Rapid growth of the “heavy industrial” sector (iron, engineering); slower

growth of consumer goods production. The initial five-year plans aimed to
achieve rapid industrialization of the Soviet Union and thus placed a major
focus on heavy industry.

• Bank credit expanded - use of “soft budgets” to encourage industrial growth.

• (With the 5 Year Plans Stalin would oversee an even more ambitious project.)

Collectivization (1928-1934)

• Siberian experiment. After supervising the application of “extraordinary”

measures in western Siberia during the winter of 1927-1928, Stalin hit on the
idea of organizing collective and state farms as potentially more effective and
long-term solution to the problem of extracting grain. Stalin’s enthusiasm for
collectivization was based on:
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- Large units of production, organized along the lines of industrial

enterprises and with access to mechanized equipment, were far more
efficient than the traditional farming practiced by Russian peasants.
- Kulaks represented a counterweight to Soviet power in the villages and
constituted a “class-alien” element that had to be eliminated. Then,
collectivization was to proceed in tandem with “dekulakization”.

• “Dizzy with Success”. The price of collectivization was so high that Stalin’s
article Dizzy with Success called for temporary stop to the process. After the
publication of the article, the pressure for collectivization temporarily abated and
peasants started leaving collective farms. However, by 1936, collectivization
was intensified again.

• Rapid rise in the number of collectivized farms – Then a retreat.

• Peasant resistance – large scale consumption of livestock. (Stalin’s reaction to

peasants – “economic sabotage”). Peasants who resisted the pressure of
regional party officials to enroll in collective farms were labeled as kulaks. The
most intense period of collectivization was during the winter 1929-1930. On
1930, the Central Committee called for collectivizing not merely the 20 percent
of arable land but the “huge majority of peasant farms”. Peasant resistance to
collectivization took many forms: theft, destruction of collective farms…

• Collectivization began again – a slower and more methodical process – use

of Tractors and MTS. Among the incentives to join collective farms was access
to mechanized equipment. In 1933, the party seized upon the MTS as it
spearheads in the countryside, attaching to them Political Departments to
“ensure political control and surveillance of the distribution and use of collective
farms and state-farm workers…

Other features
• Political purges – party members removed from key positions – economic
ministries and armed forces. It was a campaign of political repression in the
Soviet Union which occurred from 1936 to 1938. It involved a large-scale purge
of the Communist Party and government officials, repression of peasants and
the Red Army leadership.

• Famine – deportation of political enemies, “kulaks” and distrusted ethnic

groups

• GULAG – a planned economy within a planned economy?

• Increase in defense expenditure.

• Expansion of military arms production.

Figure 5. Production Possibility Frontier of

Soviet Development.
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Figure 6. Soviet GDP per Head

Figure 7. USSR. Inputs of labour & capital,

outputs and productivity.

Conclusions
• 1941 - Attack by Germany – USSR survived because of:
- Industrialization secured the material base that enabled the USSR to
resist and then defeat the Nazis.
- (Surprising) Flexibility shown at a local level – initiative of party officials
and industrial managers – when Stalin and CP leaders froze during the
early dates of the invasion.

• Preobrazhensky – his analysis was probably correct – and rapid

industrialization was possible – and possible without the social and political
consequences of Stalin.

• If so – then a negative verdict on Alex Nove’s question: “Was Stalin

Necessary?” Tsarist economy, would have achieved a rather similar structure
of the economy. However, this structural transformation would be achieved at a
significant cost in terms of economic welfare measured in consumption
equivalents. The short-run costs of Stalin’s policies are very significant for an
economy in a peaceful period. A comparison with Japan shows astonishingly
larger welfare costs of Stalin’s policies.

Bibliography

• Alec Nove, The economic history of the Soviet Union (1993: 3rd ed.: Penguin,
London)
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• Robert Allen, Farm to Factory: A reinterpretation of the Soviet Industrial

Revolution. (2003: Princeton University Press)
• Vera Zamagni, Historia económica de la Europa contemporánea: De la
revolución industrial a la integración europea.