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Yakovlev, "Trends in the Development of the Postwar Soviet Economy," _Problems of Communism_ , 23 (1974), pp. 29–47. ## _Chapter 12_ ## The Transition to the Market: The Industrial Policy of the Russian State, 1985–1990 BORIS KAGAN In the long run, there are only two possibilities for the economy of the Soviet Union. One is to continue along the path of central planning and central regulation, with a gradual increase in price control and import substitution; the other is to move toward a market economy based on private property, free choice of consumer goods, and competition. In the immediate future, however, a "first phase transition" between these two alternatives seems to be on the agenda. The roots of the transition lay in Gorbachev's thinking in _Perestroika_ , particularly in the new orientation in foreign policy: openness to the West, democratization in Russia, and _perestroika_ in the economy. This change of orientation was aimed at removing the pressure of confrontation and stagnation in the Soviet Union. At the same time, it aimed to save socialism by adopting some of its features. Gorbachev's _perestroika_ brought about a shift in the economic strategy of the state; hence a new type of policy was needed. In this study, the concept of the "transitional economy" will be used to characterize the period of transition. According to this concept, a change is to be understood as the outcome of a sequence of measures, rather than as an abrupt shift in strategy. Rather than the existence of alternatives between _continuity_ and _discontinuity_ , a more appropriate concept is _nonlinearity_. The present chapter deals with the second aspect of the transition, namely, the character of the political economic mechanism used to implement _perestroika_. An analysis of the Soviet policy from the perspective of economic theory—a subject not easy to tackle because of its complexity—serves to clarify the specific features of _perestroika_ in the Russian system. This study will, first, provide a description of the postwar transformation of the Soviet economy in order to identify its most prominent features. It will then present the conceptual apparatus that permits an understanding of the political economy of the transition. Then, the present state of the transition will be examined and its key features revealed. The conclusion will summarize the main results and evaluate the prospects for the future. ### The Dynamics of Soviet Growth In the course of almost seventy years of development, Soviet society was subjected to an unusually large number of changes. Nevertheless, there is a relatively narrow range of issues within which Russian development can be organized and understood. Thus, for example, we may speak of some basic features of the Russian political system. The present-day social system is also not likely to change radically, at least in the foreseeable future. This is partly a consequence of social self-perpetuation, but also a result of the absence of some major crisis in the economy, combined with the presence of a growing national income. To make an objective judgment, a comparison with the development in other states may prove useful. In particular, Soviet economic development can be compared with what happened in the capitalist countries and with the conditions in socialist countries. The Soviet Union was not a socialist state in 1945. It did not yet possess all the major features of the socialist system—for example, the absence of the market mechanism, the state management of the economy and the economy's self-sufficiency. The Soviet Union possessed only two-thirds of the features of socialism: collectivization of agriculture, monopoly of foreign trade and an oversized military-industrial complex. There were also a number of features that were typical of capitalism: private ownership, private consumption of consumer goods, and a market-based labor market (Bushnell 1977, pp. 26–29). Russia was not yet a developed country. The standard of living was still far below that of most other industrial societies, the per capita consumption of energy was less than in Great Britain, the level of investment in technology was negligible, and a number of indicators of social well-being were the lowest in Europe. The postwar period, therefore, did not mark a complete and final transformation. In particular, it did not mark a drastic change in the state ownership of the economy. Although the process of collectivization, launched in 1929, was completed in 1930, by 1936 the process was basically completed only in Soviet agriculture. The second Five-Year Plan adopted in 1948 was designed to move toward collectivization of industrialized agriculture. The plan assumed an increasing role for collective farms, yet in the mid-1950s it was possible to declare that this had been achieved (Zemskii 1983, pp. 34–38). Thus, the socialist type of the organization of economic activity, including the use of the labor force, was not fully established. There was no full transfer of power to the state, and workers, farmers, and collective farm managers were able to express their dissatisfaction. The postwar years were characterized by a tendency toward the development of an internal market that made the industrial sector of the Soviet economy increasingly dependent on the market: the first Five-Year Plan of 1928–1933 increased the volume of industrial production by 20 percent. This growth rate, however, was not sufficient to allow for full collectivization of agriculture. As a result, the industrial sector was forced to rely on foreign trade. The second Five-Year Plan (1936–1938) saw a decline in the dependence of industry on foreign trade; but it still remained the case that agriculture was not yet collectivized (Zemskii 1983, p. 35). The most important feature of this period of transition was the process of "socialization" ( _sozrealizatsiia_ ), that is, the extension of socialist relations over the whole of society. Until the late 1930s, the basic features of socialism were only partially achieved. Socialism did not yet exist in an absolute sense. Social relations were not fully collectivized in industry, and the basic principles of collective farming (the existence of the collective farm, a single tax payment, common distribution of consumer goods, etc.) were not established in agriculture (Hosking and Kallistratov 1991). Moreover, social control and social organization were weak and incomplete. In the 1930s, the situation was much closer to that of a fascist regime in agriculture than to that of socialism. Indeed, one of the functions of collectivization was to reduce the autonomy of agricultural production (Kollontai 1924). A large part of Soviet agricultural activity remained to a large extent tied to market mechanisms. Collective farms were obliged to buy industrial raw materials in order to supplement their own production. Some farmers managed their own