Yeltsin’s willingness to sacrifice the USSR as a federal state if necessary to bring Russia to “radical reform”—capitalist restoration—made him the leader favored by counterrevolutionary partisans at home and abroad. So long as Gorbachev controlled the all-Union institutions, his continual vacillations impeded full capitalist restoration. From August 1991 to December 1991, events developed in unforeseen and dramatic ways, and Yeltsin got his chance to seize power and dismember the USSR. Then, in January 1992, he started the economic shock therapy from which Gorbachev always shrank. A year and a half later, in October 1993, meeting legislative resistance to his policies, this leader of the “democrats” would order the artillery bombardment of the Russian parliament, killing and arresting hundred of legislators and citizens.526
Deepening economic confusion and crisis stemmed only partly from the madcap debates and wild zigzags that occurred under Gorbachev’s plans for transition to a market economy. The overthrow of socialism in Eastern Europe also damaged the Soviet economy. Separatism disrupted economic links among Soviet republics and harmed production. Gorbachev’s promotion of the second economy and his attack on the centrally planned state-owned sector also sharpened the crisis. Boris Kargarlitsky noted the enormous irony of a powerful campaign in support of privatization unleashed in 1990 by television, newspapers and magazines in most cases still controlled by the Communist Party. “Anyone who doubted the new wonder-working recipe was not allowed to be heard.”527 The Soviet media monopoly was now capitalist.
Columbia University Sovietologist, Marshall Goldman, concluded that the Soviet economic decline actually began before 1989: “By mid-1987 the damage had already been done. After two years or so of poor results, he [Gorbachev] had lost much of his credibility, at least on economic matters.” Thereafter, the crisis grew more acute. By mid-1988 the deterioration began to feed on itself, and “important economic institutions were starting to disintegrate.”528
A Soviet decision that pushed the ex-socialist states to re-direct trade into Western markets magnified the impact of the Eastern European political collapse. For decades the USSR had provided oil, gas, and raw materials on easy terms to Eastern Europe in return for manufactured goods. According to Jerry Hough, the Soviet Union’s abrupt decision to end the subsidy amounted to shock therapy for Eastern European states. Eastern Europe had to move toward Western markets as quickly as possible. By 1990 and 1991 the loss of Eastern European trade, however, was worsening Soviet economic and social problems. The sudden loss of Eastern European medicine imports, for example, was a major factor in the rapid decline in the Soviet health system.529
After what Ligachev dubbed the “fateful error,”530 the drastic and hasty reduction in the state orders in 1987, shortages—meaning lines, rationing, empty shelves531 and the resort to black markets—dominated the economic bad news in 1988 and 1989. Production for most consumer goods did not drop in 1988 and 1989, “but the increase in wages and the failure to control the food subsidies meant the population had progressively larger amounts of money at its disposal.”532 With too much money chasing too few goods, inflation began. In 1988 declining food production led to food shortages and price increases.533 With the weakening of central economic authority, confidence in the stability of supply diminished. Private hoarding by consumers and, more important, public hoarding by republics and cities, spread dramatically, first with respect to food, then other consumer goods.534 Empty food shelves, the most glaring and most resented shortage, drew sharp public anger and had widespread political, psychological, and economic results. A psychology of shortage and hoarding spread throughout the economy. Thus, even before production declined, lack of confidence in economic stability was creating shortages. Moreover, as the erosion of confidence spread and light industry could not get allotted inputs from its suppliers,535 the output of consumer goods fell further, and shortages intensified. It was vicious circle.
More than any other factor, Party withdrawal from running the economy caused the worsening hardships from 1989 on. In 1990, production went down. “Economic production was down 2 percent in the first eight months of 1990 and inflation was rising rapidly.”536 Then the bottom really fell out. In early 1991 in Der Stern, the German mass circulation news magazine, Gorbachev appealed to the Germans for help: 500,000 tons of meat; 500,000 tons of vegetable oil; 100,000 tons of noodles. By then inflation had reached an annual rate of about 80 percent.537 In mid-1991, analysts spoke of a Soviet “depression.”538 In July 1991, Gorbachev shocked the world by asking for Soviet membership in the International Monetary Fund. One superpower was going down on bended knee before the other.
In 1990-91 an immense rightward shift occurred in the economic policy debate. The Soviet leadership’s focus on the economy had waned in 1988 and the first half of 1989. In that interval Gorbachev turned his attention to political reform. Economic debate became the center of politics again in late 1989. This time the whole character of the debate changed. The contrast between two books by Abel Aganbegyan, who was Gorbachev’s chief economic braintruster in the early days of perestroika, The Economic Challenge of Perestroika (1988) and Inside Perestroika (1989),539 reflected the change. Unlike the first, the second book favored an unregulated market.
Many factors caused the rightward shift of economic debate in USSR, but two stood out: the death-throes of the CPSU and the growth of the second economy. In the table below, two U.S. economists, Michael Alexeev and William Pyle, have estimated of the share of the second economy in the GDP of most Soviet republics midway through the Gorbachev era, and compared it to its size about three years into Yeltsin’s rule. The comparison yields a rough indicator of the rate of growth of the second economy in 1989-91 and beyond. By the 1990s the conventional terminology becomes problematic. Scholars originally chose the label “second” economy to suggest the Soviet private economy’s subordination to the centrally planned, state-owned ”first” economy. By 1995, however, in at least three republics, the second economy, already swollen in the Gorbachev era, had become the “first economy,” i.e., the dominant economic reality. In the biggest republic, Russia, the second economy output was close to half the Gross Domestic Product (GDP). In the Ukraine and the Caucasus, the second economy had truly become the first.540
Estimates of Unofficial Economies
Percentage Share of GDP
1989
1995
Azerbaijan
32.8%
69.9%
Belarus
28.6
34.5
Estonia
22.1
21.9
Georgia
32.8
71.4
Kazakhstan
32.8
49.8
Latvia
22.1
40.9
Lithuania
22.1
30.6
Moldova
28.6
47.8
Russia
18.0
45.6
Ukraine
25.3
56.5
Uzbekistan
32.8
28.5