The Postwar Growth Period
Soviet economic growth rates during the postwar period appeared impressive. Between the early 1950s and 1975, the Soviet gross national product (GNP--see Glossary) increased an average of about 5 percent per year, outpacing the average growth of the United States and keeping pace with many West European economies--albeit after having started from a much lower point.
However, these aggregate growth figures hid gross inefficiencies that are typical of centrally planned systems. The Soviet Union was able to attain impressive growth through "extensive investments," that is, by infusing the economy with large inputs of labor, capital, and natural resources. But the state-set prices did not reflect the actual costs of inputs, leading to enormous misallocation and waste of resources. In addition, the heavily bureaucratic economic decision-making system and the strong emphasis on meeting targets discouraged the introduction of new technologies that could improve productivity. Central planning also skewed the distribution of investments throughout the economy.
The aggregate Soviet growth figures also did not reveal either the generally poor quality of Soviet goods and services that resulted from the state monopoly over production or the lack of priority given the consumer sector in the planning process. Eventually, diminishing returns from labor, capital, and other inputs led to a severe slowdown in Soviet economic growth. Furthermore, the availability of inputs, especially capital, labor, and technology, was decreasing. Declining birth rates, particularly in the European republics of the Soviet Union, placed constraints on the labor supply. By the mid-1970s and into the 1980s, average Soviet GNP growth rates had plummeted to about 2 percent, less than half the rates of the immediate postwar period.
Although such rates might have been acceptable in a mature, modern industrialized economy, the Soviet Union still trailed far behind the United States, other Western economies, and Japan, and in the 1980s another challenge arose from the newly industrializing countries of East Asia. Furthermore, the standard of living of the average Russian citizen, which had always been below that of the United States, was declining. In the 1980s, with the advent of modern communications that even Soviet censors found impossible to restrict, Soviet citizens began to recognize their relative position and to question the rationale of their country's economic policies. This was the atmosphere in which the Gorbachev regime undertook serious economic reform in the late 1980s.