Thursday, 17 July 2014

New EHES Working paper

Breaking the Unbreakable Union: Nationalism, Trade Disintegration and the Soviet Economic Collapse 

Why did the Soviet economy collapse so quickly in the late 1980s and early 1990s? A new EHES Working Paper argues that the reason can partly be found in the reemergence of nationalism to the territorial fringes of the Union.

Leaders from Ukraine, Belarus and Russia sign the Belavezha Accords on 8. December 1991, declaring the dissolution of the Soviet Union and the creation of the Commonwealth of Independent States. Picture credit: RIA Novosti Archive.

For decades, planners had striven to construct the Soviet economy as a tightly integrated system, where supply chains spanned domestic boundaries. The Union’s constituent parts- called republics in Soviet parlance- exercised little influence over the allocation of production and trade flows. This changed when Gorbachev took power in 1985. His new political course, which emphasized liberalization over repression, opened up the possibility of republics seceding from the Union. This set in motion a chain of events that ultimately dealt a death blow to an already stumbling system.

A central feature of the planned economy had been the fact that monitoring and control of local elites by the center was incomplete, which left local bodies some degree of discretion. This discretion could be used to tweak the plan, for example by restricting the export of particularly valuable goods to other republics. In normal times this did not happen very frequently, as the prospect of continual interaction placed a limit on the degree to which local elites could exercise their discretion profitably. Once secession became an option, however, it became profitable for local elites to limit the flow of goods between republics. The result was that domestic Soviet trade plunged, supply chains were broken and production plummeted.

The story is supported by a game-theoretical model as well as by data on domestic Soviet trade from 1987 to 1991. Using an adapted version of an empirical gravity model, it is shown that the more likely a republic was to secede- measured by the timing of official declarations of autonomy- the more domestic trade fell. The economic disintegration of the Soviet Union thus predated its official demise in December 1991.

This quantitative effect is strengthened if an instrumental variable procedure is used to account for the possible endogeneity of secessions, for example because republics badly integrated into the Soviet trade system may be more willing to secede. The instrument used is the proportion of textbooks printed in the republican language as opposed to Russian. This reflects the extent of linguistic nationalism present in each locality. Republics who used Russian to a lesser degree were more nationalistic and more eager to secede. They consequently witnessed a stronger fall in trade.

Marvin Suesse is a PhD student at Humboldt-Universit├Ąt zu Berlin
Finally, the fall in trade caused by a higher disposition to secede had a negative effect on output. On average, withheld trade can explain up to 30% of the variations in GDP growth between Soviet republics during the breakup period. In other words, nationalism in the Soviet and Post-Soviet world may have a strong role to play in explaining the mixed economic experiences of the region after the fall of Socialism.

The working paper can be downloaded here.