What if… Gorbachev had succeeded?

On 7 October 1989 Mikhail Gorbachev visited Berlin for the celebration of the GDR 40th-anniversary, and said: “History punishes those who come too late” (Childs 2000): the statement criticised Honecker but was best suited as his own epitaph. 

But let’s try and imagine what might have happened if Gorbachev’s perestroika had actually succeeded.  Five years ago I wrote a paper developing this theme and presented it at a Conference in Warsaw. The paper illustrated how Gorbachev might have succeeded in achieving the radical reform of the Soviet political and economic system, the construction of market socialism, the re-structuring and acceleration (uskoreniye) of the Soviet economy, and the possible though unlikely continued existence of the USSR.

I should stress that this was not, or at least was not meant to be, an exercise in 20/20 hindsight. Alternative courses can be formulated without the possession of perfect foresight of the state of the world in 1985-1991.  Nor is a change in Gorbachev’s initial conditions required, of the kind “If only he had come to power in 1974, at the height of the fourfold rise in the oil price ...”. This exercise was meant as a genuine counterfactual alternative. Its purpose is that of damning Gorbachev’s disastrous economic strategy and showing that he and his economic policies, more than anybody else’s doings, are ultimately responsible for the collapse of  socialism in the Soviet Union, for the failure of an alternative design of market socialism, and for the immense human cost of post-socialist Transition.  A similar exercise, considering counter-factual alternatives to the actual course of Transition in Cental-Eastern Europe, is only outlined to suggest that Transition might have been handled at a lesser human cost. 

In order to succeed, Gorbachev would have had to act swiftly, instead of practically wasting his first two years in power (1985-87), and lay down sound economic foundations for perestroika: eliminate repressed inflation, preferably through a confiscatory currency conversion; break state monopoly of foreign trade, introduce rouble convertibility on current account, liberalise trade, foster competition. By 1991 he would have also legalised private ownership and enterprise, given state managers bonuses geared to market performance, implemented small privatisation, commercialised state enterprises, begun some privatisation of large enterprises and banks. On Christmas Day 1991, instead of resigning as President of the Union, he could have celebrated the victory of economic perestroika.

What next? There would have been still thorny choices and therefore possible mistakes to be made, before completing Transition and after. Gorbachev would have needed continued vigilance and sound economic advice, for instance to avoid too rapid dis-inflation at inordinately high real interest rates, as happened in 1994-95, and the consequent recession; to avoid an unsustainable combination of overvalued exchange rate, high interest rate to support it, and a public debt increasing as a result of high debt service, as happened in 1998 under the IMF’s watch; to avoid the unnecessary cost to the budget of switching the pension system from PAYG to a funded system.

As a result of the good economic foundations of economic perestroika, and the avoidance of these kinds of subsequent pitfalls, income losses from the Transition recession would have been lower, and growth would have accelerated earlier and faster than it actually was and did. The welfare of Russians would have improved significantly and continuously as a result. The same reasoning applies to all other Transition economies that to a greater or lesser extent followed stabilisation and Transition paths out of sequence or to excess. It is impossible to have unanimity about whether the measure taken were or were not mistakes, and how serious, let alone quantify the gains. But pretending that there were no serious unnecessary mistakes in the Transition is neither reasonable nor respectable. 

The improved economic performance would have generates political consensus, but not necessarily to the point of providing permanent democratic support for a political regime associated with significantly large state ownership and associated political values (of equality, solidarity, participation, etc.). In some Transition countries post-communist parties were returned to power in democratic elections (e.g. Poland, Hungary, Slovakia) after being defeated,  but only intermittently, not permanently; some party alternation in power is an integral part of democracy. But non-persistent, intermittent market socialism cannot deliver its expected economic and social advantages. When democratic support for an ecomic system is lacking or is not permanent, then its maintenance over time requires necessarily forms of political repression. There is a high political price to pay for an economically successful and persistent market socialism – as confirmed by "market socialist" countries such as China, Vietnam, Belarus, Uzbekistan. 

Would an economically successful Gorbachev have been able to hold together the Soviet Union? There would be economic advantages to be shared out, from holding it together.  A continued Union would maintain and promote intra-Union trade volumes thanks to the single currency, and sustain inter-republic imbalances through transfers within the All-Union budget and inter-republic credits.  An early initiative and widespread economic success, including internal and external convertibility of the rouble, would have lessened centrifugal forces. If some political and administrative autonomy was granted to the 15 republics as well, the chances of retaining the Union would have improved. But the Soviets had seldom solved ethnic conflicts, mostly they had only suppressed them (just as they had done with inflation). Independence aspirations would have made it difficult for Russia to retain close ties even with republics that economically had most to gain from continued integration, like Ukraine. The probability of holding together the Union would have been greater than zero, but not significantly greater. 

Would a successful market-socialist Russia have been able to hold together CMEA/Comecon? Arguments similar to those for holding together the Soviet Union would apply, but would be much weaker. The international socialist division of labour had a bad name, in spite of Soviet subsidisation of its Comecon partners since 1974, by supplying oil and raw materials at below world prices. Memories and accusations of earlier Soviet exploitation through trade were still deeply ingrained. In January 1990 Comecon partners de facto destroyed it by trading freely rather than continue the old trade arrangements, even at the cost of paying higher prices for oil and materials. By September 1991 Comecon was officially dissolved. Comecon Soviet trade partners were already negotiating European Association Agreements and aid programmes with the European Community (now the European Union).

Gorbachev's hypothetical successful perestroika would not have led to Comecon survival.  At most, perhaps, a couple of years earlier he might have been able to extract economic assistance from the West in exchange for his acquiescence to the re-unification of Germany – for which he got nothing at all – and for the Finlandisation of Eastern Europe – a prospect overtaken by events in 1989.   

What difference would Gorbachev’s hypothetical successful perestroika have made in Russia? Only an alleviation of the pains of Transition in the 1990s; there would have been not very much difference in the 2000s, considering that in his second presidential term Putin had already reversed enterprise ownership trends, re-acquiring greater state control in many sectors and a majority stake in energy (Hanson, 2008). By comparison with the sensitivity of Russian performance to the price of oil, probably Gorbachev’s success would have been equivalent to a ten-year-long rise of $10 on the price of a barrel. (According to the Bank of Finland Research Department a $10 permanent increase raises Russia’s growth rate by 1%). The recent implosion of the US and global financial system had a far greater effect on Russia’s prospects.

What difference would Gorbachev's hypothetical successful perestroika have made to modern geopolitics? An earlier economically stronger Russia would have probably contained USA bids for the "American Century", thus sparing them the humiliation of their century ending so soon after it had barely begun.  Certainly Georgia would not have responded to encouragement by George W. Bush and Dick Cheney to attack Russia. But the Twin Towers had nothing to do with Russia, and it is impossible to tell whether the major armed conflicts that followed their attack – in Afghanistan and Iraq – would have been prevented by an economically stronger Russia. Most probably not.

Gorbachev’s and the whole Transition’s economic débacle clearly reduced the demand for socialism on a world scale, but his success would have made no difference for European social-democracy, as it would not have prevented the disintegration of the Italian left or the degeneration of British Labour into New Labour, nor favoured Zapatero’s victory in Spain. Probably both the European Union and NATO would have been smaller than they are now.

A Russian economy made stronger by an efficient Transition would have been less vulnerable to the contagion of global financial turmoil, both in the South East Asian crisis of 1997 (that was an important factor in the Russian crisis of 1998), and today. But a stronger Russia would have neither prevented such global financial crises, nor contributed much to their resolution. 

We should leave the future to futurologists. In 1989 Fukuyama’s conjecture  about The End of History was falsified before the ink had dried. All we know for sure, whether Gorbachev had or had not been successful in implementing economic perestroika, is that – as prophesised by a wall graffiti in London in 1991: "The future is not what it used to be".    

UPDATE

I have been asked where the paper referred to above was published and whether it is available on line. "A counter-factual alternative for Russia's post-socialist transition" was presented at an international conference on The Great Transformation, 1989-2029, TIGER at Kozminski University, Warsaw, 3-4 April 2009, published in Conference proceedings, as Grzegorz W. Kolodko and Jacek Tomkiewicz (Eds), 20 years of Transformation Achievements, Problems and Perspectives, Nova Science Publishers, New York, 2011, https://www.novapublishers.com/catalog/product_info.php?products_id=17656.  

The typescript can be downloaded here.

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Cuba’s Pre-Perestroika

On 16-19 April 2011 the Cuban Communist Party PCC held its sixth Congress since the 1959 revolution, the first since 1997. The date is historic: on 16 April 1961 Fidel Castro proclaimed the socialist character of the revolution, the next day a contingent of Cuban exiles attacked the Bay of Pigs, two days later they were routed. The timing of this year’s Congress might be taken to suggest that Cuban socialism is in danger now as it was then; on Christmas’ Eve last year the party paper Grandma stated that «it [was] no longer the coming year but the coming country».

If so the frequency of Party Congresses leaves a great deal to be desired: one every almost-nine years, 14 years since the last one, in a period that saw the fastest and most complex changes on the planet, do not say much about the quality of democracy under Cuban socialism, even in its diluted form of «democratic centralism», prevailing on the island. Especially since the Cuban population is aware that Fidel Castro has transferred the Presidency of the country to his brother Raúl in 2008, but discovered only on 22 March 2011 that he had transferred to him also the direction of the Cuban Communist Party five years earlier (Renaud Lambert, «Ainsi vivent les Cubains», Le Monde Diplomatique, April 2011). A Party secret secretary seems bad form, to say the least.

Cuba today – mutatis mutandis - has reached the stage of economic and political development that the Soviet system had reached on the eve of Gorbachev coming to power in March 1985: a gerontocratic leadership, moreover transferring power within the family in North Korean style; an authoritarian political system; much talk of price liberalisation but continued generalised shortages of goods in excess demand at state prices, with rationing for the last 52 years; a dual currency, an unconvertible peso and a convertible one that replaced the dollar in 1994 (something that the Soviets thought of but fortunately refrained from doing); special economic zones to attract foreign investment; long-term leases of state assets in the tourism sector; leases of uncultivated land to landless farmers (about 140,000 leases in the last year); and endless talk about free private enterprises, still in practice restricted largely to self-employment (200,000 new licences since last October) and family firms in the service sector.

Inevitably, at the beginning of September 2010 even Fidel Castro recognised and stated, in an interview to the US monthly The Atlantic, that the Cuban model «does not work anymore». In mid-September the Cuban Workers Union CTC announced the suppression of 500 thousand public sector jobs by March 2011 (as already anticipated by Raúl on 1 August 2010). This was justified by «the need to raise production and the quality of services, to reduce the enormous social expenditures, to eliminate free benefits and excessive subsidies». The half a million are only 12% of public sector workers (who make up 80% of the active population, i.e. 4,400 thousand) one out of each four of them being regarded as redundant by Raoul, thus making total re-deployment from the public sector affect as much as 20% of active population (the figures are provided by Janette Habel, «Changement de cap a Cuba», Le Monde Diplomatique, October 2010; they add up only approximately. The FT of 24 April puts public employment at 85%, i.e. about 5 million). But bureaucratic impediments, lack of credit and of necessary material supplies, crippling turnover taxation, remain the main obstacles to the absorption of redundant workers through the growth of small scale private sector. The quality of education has suffered as a result of teachers leaving underpaid jobs; only 14% of the population uses Internet.

“We are convinced that the main enemy we face and will continue to face is our own shortcomings,” Raúl Castro said at the end of the Congress, echoing what Gorbachev might have said in 1985. The preliminary lineamientos (over 300 directives) of the Party Congress aimed at legalising what was already discrete current practice, such as price-fixing according to market principles (there has been a free peasant market for agricultural products since 1994, promoted by Raúl in spite of Fidel’s opposition), links between wages and productivity, greater autonomy for state enterprises. Above all there is a perceived urgency to open the economy, following the example of Vietnam and China. With the economic collapse of the Soviet economic and political system, Cubans lost their former benefactor and GDP fell by 35% during the «Special Period» of 1991-2000; today Venezuela’s subsidised oil in exchange for Cuban teachers and doctors is not enough to replace former Soviet support. Cubans now have to contend with the harsh reality of global markets, though they prefer to blame their aggravating economic backwardness not on globalisation but on their being denied access to it by the US trade embargo - perhaps the most myopic and counterproductive policy ever adopted by the United States towards a weak opponent.

There are bright spots. Since 1950, average life expectancy has risen from 58 to 77 years (as it did in Russia under Gorbachev). A recent issue of Foreign Affairs stressed that «Cuba is the only poor country in the world that can claim that health does not represent a fundamental problem for its population. Its success in this field is unrivalled». But tourism and nickel, the most dynamic sectors of the economy, were severely hit by the 2008 crisis; in the same year three successive hurricanes destroyed infrastructures worth $10 bn, equivalent to 20% of GDP. In 2009 agricultural production fell by 7.3%; the country imports 80% of its food, up from 50% in 2004, a growing vulnerability given the volatility of food prices over the last couple of years. Lending to Cuba by international financial institutions has been falling over the last four years, but total debt has been accumulating fast, from just over $16bn in 2006 to $20bn today, mostly towards China. (FT, 24 April 2011)

























The ration card (tableta de abastacimiento) had some egalitarian merit in the distribution of basic goods, as an exceptional, temporary measure during short emergencies when established supply channels are suddenly disrupted by wars or natural calamities. Otherwise its continued persistent use since 1962, and the associated black/grey/multicoloured markets in which scarce goods are re-traded (whenever this is physically possible) at a premium, is a tragic misunderstanding of socialist values. Socialist planning ought to be capable of balancing supply and demand at stable prices, but if it fails it is much preferable to let prices do the rationing through price rises, at the same time subsidising the monetary incomes of the poorer groups of the population in order to support their real consumption levels. Yet the redistributive effects of market-clearing prices – in the absence of re-distributive, compensatory measures – are clearly undesirable. Urban poverty – i.e. inability to cover basic needs - is said to have risen from 6.3% in 1988 to 20% in 2000 (Mayra Espina, quoted by Jeanette Habel, «Cuba en quête d’un modèle socialiste renouvelé», Le Monde Diplomatique, January 2009).


Raúl recognises that the tableta is «irrational and unsustainable» but expresses vocal concern for the dangers of inequality, growth of the informal sector and the black market, themselves being generated in part by the rationing system: such concern should lead to generalised income subsidies rather than place a major drag on price-liberalisation. For without market-clearing prices you cannot imitate China and play with markets, with private entrepreneurship, hard budgets and export-led growth. A set up only too familiar from the last days of the Soviet régime.

o O o

In December 1969-January 1970 (the year of the 10 million tons of sugar) I visited Havana from Cambridge to lecture on investment planning at the Institute of Economics, following up on Richard Stone who had just been there to lecture on input-output models. In my course I tried to legitimise the use of an interest rate in investment selection, which was regarded then by Cuban economists as an exploitative bourgeois practice to be rejected. I pointed out that even Soviet Academician Stanislav Strumilin had advocated an interest rate within the Marxian Theory of Value, as the growth rate of labour productivity that reduced the labour value of future goods. I also argued that there was an implicit, shadow interest rate in investment choice in Soviet-type systems in the form of a minimum «recoupment period» within which additional investment costs had to be recovered by yearly savings in current operating costs.


I was curious to see what had been discussed in Cuban journals in the years immediately after 1959, and did some research in the Institute library. I was surprised to discover that the peak of the debate was a discussion between Che Guevara and Charles Bettelheim on whether or not the concept of value required a contradiction (sic). Bettelheim might as well have been sent to Cuba by the CIA, and perhaps he had been, to divert Cuban energies from the real tasks of building a socialist economy.

It was a memorable trip. Cubana Airlines from Madrid, stopover in Zander, Newfoundland, 17 hours on a propeller plane to Havana, stopover in the Canaries in the 17 hours on the way back to Madrid. Staying at the Hotel Nacional, together with large numbers of Russians and of the most gigantic multicoloured insects; lobster at every meal for a while, until I would have given anything for a sausage. Privileged access to free meals on a card and subsidised hotel shops, also for the spy-chaperon who was shadowing me all the time.

I visited Barradero beach (then deserted and to die for), Hemingway's house, a cigar factory, the most luxurious villa formerly belonging to the Rockefellers, with vast expanses of Carrara marble, beautiful succulents exotic flowers and colibri birds. I saw parts of the Cuban interior, including the Sierra, Santiago and its open sewers, sugar cane plantations where students and professors cut cane painfully and inefficiently at week-ends with dangerous looking machetes, a crocodile farm and the most over-built over-expensive cattle farm.

Empty shops everywhere, which two Italian town planners working there were planning to convert into cultural centres, and were horrified at my suggestion that it would be desirable to fill them with goods. Rationing for everything, not even tropical fruit was available for sale, though everything was available on the black market. An amazing display on the public roads of ancient-antique US cars, often cannibalised into the most curious hybrids. Buses (uauas) were driven around at terrifying speed, but I had a chauffeur-driven Alpha Romeo at my disposal, which Cuba had imported directly from Italy through a barter deal for nickel. I asked to be taken to the Bay of Pigs and, faced with vague promises, I went on strike i.e. refused to go on any other local trip until they did take me.

In Havana I met by chance an interesting young man, Carlos Vidali, a personal guest of Fidel’s being the son of Vittorio, the prominent Italian Communist who had traveled extensively in Cuba before and after the Revolution. Carlos arranged for me to meet the economy supremo Carlos Rafael Rodriguez, who firmly criticised my starry-eyed égalitarianism on pragmatic grounds. Only after my return to Europe did I learn that Carlos’ father was reputed – rightly or wrongly – to have had a role in organising Trotsky’s assassination.

According to Wikipedia Vittorio Vidali – also known as Enea Sormenti, Jacobo Hurwitz Zender, Carlos Contreras, "Comandante Carlos" – was a colourful figure, a founding member of the Italian CP, Comintern agent and finally Communist MP in the Italian Parliament. He «was definitely involved in the May 24, 1940 failed frontal assault on Trotsky's residence in Mexico City, along with [Iosif] Grigulevich and Mexican painter David Alfaro Siqueiros. Vidali is thought to have been involved with the insertion of assassin Ramón Mercader into Trotsky's inner circle – Mercader was to kill Trotsky later that year», though the Italian version claims that Vidali’s presence in Mexico at the time of Trotsky’s assassination may have been «a sheer coincidence».

o O o

The shocking thing is that in over forty years since my 1970 visit not much has changed in Cuba by all accounts; not much is different from the Soviet days just before and just after the beginning of Perestroika, and a self-selected self-perpetuating small group of dogmatic and decrepit old men have been repressing the development of an entire country and its people for over half a century without having the slightest idea of what they are doing and why, heading for total and unmitigated disaster not only for themselves but also for the people they have taken it upon themselves to rule.