ABSTRACT
When Mikhail Gorbachev came to power in March 1985, he promised to first revive and then transform the creaking Soviet economy. Instead, he set in motion many of the forces that led to the unraveling of the centrally planned economic system and his own political undoing.
9Initially, Gorbachev set out confidently to clean house in the economic bureaucracy, restore discipline in the workplace, and curtail alcohol consumption. Soon afterward, he launched an ambitious program to modernize the Soviet industrial base by boosting investment, especially in high-technology machinery. While these policies met with some initial success in 1986–88, they were badly flawed in important respects. The sharp increases in investment required for modernization, coupled with a failure to cut defense spending, left few resources available for consumer needs. In addition, a rapid climb in the state budget deficit starting in 1986 pumped money into the economy at rates that outstripped the growth of real output. In 1987, moreover, Gorbachev announced an economic reform package that relaxed central controls over the production and distribution of output and the setting of prices and wages. The implementation of these reforms in 1988–89, when budget deficits had become massive, led to a combination of open inflation in some prices and shortages as a result of the extensive price controls that remained in place.
When consumers became increasingly frustrated over these worsening shortages and the erosion of their already low living standards, Gorbachev belatedly shifted resources toward consumption. He jettisoned his modernization campaign, finally began to cut defense outlays, and stepped up imports of consumer goods by incurring a large hard currency debt. As the condition of the Soviet economy deteriorated in 1989–90, the government and legislature began to consider a series of increasingly far-reaching reform programs, including the delegation to the republics of greater authority and financial responsibility for economic policy on their territories. The program endorsed by Gorbachev in October 1990—which was not the most radical alternative considered—called for the gradual removal of state controls over output and prices; the sale or transfer of property to owners other than the state; and the eventual convertibility of the ruble to hard currency.
This program was rapidly overtaken by events. Consumer frustrations—now aired openly thanks to glasnost—became a growing political burden for Gorbachev. Moreover, the central government’s willingness to delegate limited powers to the republics was quickly overwhelmed by republic demands for greater autonomy and, in some cases, independence. Meanwhile, the power of the traditional establishment—including industrial ministries, the Communist Party, and the military—was eroding rapidly. By the spring of 1991, Gorbachev had lost his battle to reassert central authority; only the terms of surrender remained to be negotiated.
