Review Paper on Stiglitz
There was a debate on why did Russia suffered an economic decline and Dudrick et al.’s (2003:220) explanation revealed that people are more inclined to the Soviet Union in terms of economic stability. Some economists argue on what to use in the transition of economies, and one pointed “shock therapy” which was a sudden transition to adjustment and the market as well. The “shock therapy” imposes on using “the whole reform package at once”. However there are other people that disagrees with the kind of therapy, Wachtel (1992:46–48) said that the “shock therapy” can affect small time private-sectors, banks, market reforms for agriculture, and funds for a “safe” for social programs and employment. Poznanski (1996:xix) also made a statement about the therapy, the therapy is a little dangerous to implement since remaking institutions can be costly and destabilizing. Not all people would disagree with “shock therapy”, Sachs believed that the therapy should be used since the economy of the Soviet Union was declining and also pointed out the United States and IMF for slowly disbursing aid to Russia. Popov (1996:1) said that the “shock therapy” used was more of a Polish-type therapy since it focuses on deregulating prices but it also failed on macroeconomic stabilization, eliminating subsidies, and removing loss-making enterprises.
The Collapse of State Socialism and Problems with Subsequent Economic Reform in Russia
The Soviet Union experienced the economic decline during the 1980s and was struggling to get back to sustainability. The Soviet Union leader, Mikhail Gorbachev, answered why the Soviet Union was brought down and he said that the model that was based on command economy and dictatorship failed.
Distorted incentives and price signals
When the Soviet Union was taking over planning, firms produced low-quality products while avoiding preshrunk fabrics and impurities of metals since bonuses depends on the number of products. Soviet Planning involves material balance planning which would set to allocate the supply and demand for basic commodities however it is slow, difficult, etc. Since the prices are based on the Soviet Union’s decision then firms are uncertain on the best resources to use, thus making firms hoard labor and raw materials. Incentives are also given to managers who are maximizing the outputs and not efficiency nor profits. Prices are also a key factor when it comes to enterprise behavior, but during the 1980s in the Soviet Union it is a poor guide because of there are no reference to supply and demand and also the weak link of domestic and international prices erodes in identifying inefficient enterprises
The party and state monopoly
The communist party had a monopolistic control over political power and also the party would also shoulder the economic power as well. When there is dissatisfaction in the economic performance then it would be a test to the political power. The fusion of political power and economic power proved to be a bias against change, the Soviet Union did not use the ordinary decentralization so that there would be no competition when it comes to the economy. Kaminski (1992:18–37) said the state socialism is nonreformable, and most of the people are opposing reform since it would affect the power and ability in the market. Nomenklatura was used in order for the Soviet Union to control access in government positions, president Yetsin imposed a different kind of nomenklatura which is “commercialized nomenklatura” so that Russia would have a market of liberal authoritarianism. There was a centralized committee which consists of the General Secretary (the leader, the Politburo (policy-setting party), and Gosplan (the state committee) in order to assess what are the sectors to focus on to provide resources. When Gosplan was removed, cities, regions, factories etc. can now decision on their own and resulted into the destabilizing of the economy.
However, Gorbachev’s perestroika seemed to be out of sequence since there was no information on market mechanism and price reform. When the state enterprise law was implemented in 1968, central intervention declined while enterprises made high quality products and increased the overall output at the expense of reduced amount of machinery and raw materials used. Winiecki (1992:271–295) said that the soviet-type economy was in favor of powerful groups in distributing wealth, Goldman (2003) also stated that the nomenklatura that was used was “nomenklatura privatization” since the distribution of wealth was somewhat oligarchic.
Contradictions under decontrol
During the time of Brezhnev, there was stagnation in the Soviet Union which lead Gorbachev in determining the causes as to why there was an economic shadow during the 1970s up to the early 1980s. Gorbachev found that the reason of the economic shadow was “relaxation of discipline” or less attachment on to commands, Gorbachev made a thought experiment on other ideas rather than investing on the command system which became worse for the country since it made decontrol of the economy. During Yetsin’s period of presidency, there was a wide scale of mafia activity which affected the economy, and because of this unfortunate event.
Rules were not disseminated anymore when it comes to economic opportunities, feedback, etc. Ranked officials would then twist the information that was provided to evaluate. In further add on twisting of information, some officials in enterprises, farms, or ministries distorts information to avoid punishments and collect rewards. Because of this situation, there was a scarcity of information during the 1990s