When Mikhail Gorbachev addressed the 27th Party Congress of the Soviet Communist Party in February 1986, the word on every delegate’s lips was perestroika — Russian for “restructuring” or “rearrangement.” The package of reforms he set out that year, including enterprise autonomy, cooperatives, foreign investment, profit retention, contested elections, and a reconstituted legislature, was the most ambitious attempt to reform the Soviet system in its history. It was also the last; the term had entered public use in 1985, and it acquired its modern meaning with that Congress.
The standard account is Archie Brown’s The Gorbachev Factor (1996). For a more skeptical economic treatment, see Mark Harrison’s work on Soviet industrial decline. The most useful single article is Brown, “Perestroika and the End of the Cold War,” International Affairs 75 (1999).
The Economic Crisis Perestroika Was Meant to Solve
By the early 1980s the Soviet growth model had stopped working. The economy had expanded rapidly through the 1930s, recovered strongly after the war, and grown at an average of roughly 5 percent a year through the 1950s. By the Brezhnev years, the so-called era of stagnation, growth had fallen to 2 percent or less. The reasons were familiar to anyone who read Soviet economists: the central planners were running out of extractable resources; the labor force was stagnant; investment in heavy industry had crowded out consumer goods; the incentive system rewarded meeting plan targets rather than producing what was actually needed. The 1979 Soviet decision to invade Afghanistan added an estimated 3–5 billion rubles a year in direct costs and accelerated a defense spending program the economy could no longer carry.
Gorbachev came to power convinced that the system could not survive without reform. He did not intend to introduce capitalism. He intended to introduce limited market mechanisms into a still-publicly-owned economy, in the hope of producing a more humane and more efficient socialism. The 27th Party Congress in 1986 set the agenda: “a decisive turn toward the intensification of the economy, the broad introduction of the achievements of science and technology, improvement of the management mechanism.”
The Reforms
The first major economic law, the Law on State Enterprises, took effect on January 1, 1988. It freed enterprise managers from detailed central planning, required enterprises to be self-financing, and gave them the right to keep a portion of profits. The State Bank was supposed to ration credit, no longer the ministries. The 1988 cooperative law legalized small private businesses for the first time since the 1920s; by 1990 there were more than 200,000 cooperatives, employing several million people. Joint ventures with foreign firms were allowed from 1987. A 1990 program, the 500 Days Plan, drafted by Grigory Yavlinsky and Stanislav Shushkevich, called for a rapid transition to a market economy. Gorbachev initially supported the plan, then retreated under pressure from the conservative wing of the Politburo.
The political reforms were equally substantial. In March 1989 the Soviet Union held its first contested elections since 1917. Roughly 1,500 of the 2,250 seats in the new Congress of People’s Deputies were reserved for the Communist Party and allied organizations; the rest were to be chosen in competitive races. The results were not what the organizers expected. Boris Yeltsin, recently purged from the Politburo, won 89 percent of the Moscow vote; Baltic and Ukrainian candidates defeated senior party officials. The Congress acquired a real legislative role. The article of the Soviet constitution guaranteeing the Communist Party’s “leading role” was repealed in March 1990, and Gorbachev was elected by the Congress to a new post, President of the Soviet Union.
Why Perestroika Failed
Perestroika failed for three reasons. The first was the institutional design. Partial price liberalization without competition produced inflation; partial privatization without the rule of law produced rent-seeking by party insiders; autonomy for state enterprises without a hard budget constraint produced bankruptcies the state then covered. The Soviet Union, in economist Joseph Stiglitz’s phrase, was trying to change a car’s tires while driving it at 80 kilometers an hour.
The second was the political coalition. The reform was not supported by the people it hurt most. The enterprise managers who had benefited from the old system resisted the new one; the workers who had been promised a more efficient socialism instead got shortages and inflation; the nascent business class became the target of a 1991 tax campaign that the reformers themselves designed. The losers of perestroika were the Soviet working class, which had nothing to gain from the destruction of the system it had been promised; the winners were too few and too new to defend the reforms politically.
The third was the nationalities. Glasnost had released the political energies of more than a hundred nationalities. Perestroika weakened central control without strengthening the union. The Baltic republics moved first, declaring independence in 1990; the others followed. By 1991, the political space in which perestroika might have been rescued no longer existed.
The Numbers
The economic results were catastrophic. The Soviet fiscal deficit reached 20 percent of GDP in 1991. Inflation, suppressed during the late Soviet period, became open. Consumer goods shortages, a chronic feature of the planned economy, became a political issue. Output fell by roughly 2 percent in 1990 and a further 17 percent in 1991. The collapse of the ruble zone in January 1992, after the dissolution of the Union, produced hyperinflation of more than 2,000 percent in Russia and far higher in some of the successor states.
The numbers should not obscure the human dimension. Life expectancy in the Soviet Union had been falling for men since the mid-1960s; perestroika did not reverse the trend, and the transition of the 1990s made it worse. The 1990s deaths of despair — alcohol, suicide, accidents, cardiovascular disease — are now a major research subject, and the political consequences of the demographic crisis in Russia are still being worked out.
What Perestroika Did Accomplish
It is too easy to remember perestroika only as a failure. The reforms were not designed to produce the Soviet collapse. They were designed to prevent it. They failed in their own terms but, by failing, opened the way for changes that the architects did not anticipate. The 1989 revolutions in Eastern Europe, the democratization of the Soviet Union, the abolition of censorship, the INF Treaty, the end of the Brezhnev Doctrine, the emergence of civil society in the republics — none of these were intended outcomes of the program. They were also not possible without it.
Perestroika’s deepest failure may have been conceptual. The Soviet system could not be reformed by introducing limited markets and limited democracy. The market needs property rights; the democracy needs parties; both need institutions the Soviet Union did not have. The 500 Days Plan recognized this; Gorbachev’s diluting of the plan did not. The 1990s transitions in Poland, the Czech Republic, and the Baltic states succeeded only by doing what the Soviet Union had not — building the institutional preconditions of a market economy and a constitutional order at the same time as they dismantled the old.