Question

What are the main structural inefficiencies in the Soviet economy resulting from its industrial organization What would be the main problems resulting from having very large enterprises during the transition process to a market economy? I. 2.

Answer 1

1. The economy of integrated Soviet Union known as USSR was once very strong till 1980s. The Soviet economy was predominantly a socialist and closed economy and did not accepted the market liberalization. Between 1900-1950, Soviet Economy rapidly grew due to heavy industrialization and urbanization. But GDP growth of Soviet Union become standstill by 1970 and after 1975, the GDP growth of Soviet economy started falling. Even revival plans of Soviet government were not successful in restoring the Soviet economy. The structural inefficiencies of Soviet Union were absolute government control of production and distribution in the economy and lack of advanced technologies in manufacturing and service sectors. The average GNP of Soviet Union was 3.7% in 1970 that further slipped down to 2.6% in 1980. The Soviet president Michael Gorbachev initiated measures to decentralize Soviet economy and also open up certain sectors for foreign companies. But all these measures failed to restore Soviet economy back to its earlier position.

2. Transition of an economy is transformation of an economy from one state to another such as from free to liberalized economy. Generally transition of economy is considered as an economic reform measure in which government ends up existing tax subsidies, reduce import duties on certain items and cut down planned budgets on education, health and infrastructure development. Such strict measures actually yield some negative results such as high inflation, unemployment rate and low industrial output in short run but reduce external debts of government in the long run. The government of a country may also transform its economy from socialist to a capitalist or mixed economy. Under socialist economy, large enterprise such as heavy engineering, mineral exploration and metal industries are controlled and run by the government and therefore, transition of economy affects the business of public sector enterprises. The lowering of import tariffs on certain goods also adversely affects production of large manufacturing units in a country. The economic transformation in many countries has completely failed and resulted collapse of many large business houses.