The Struggle to Save the Soviet Economy, by Chris Miller April 19, 2019

So how come Deng Xiaoping succeeded so spectacularly in reforming socialist China but Mikhail Gorbachev failed so disastrously to save the Union of Soviet Socialist Republics? Deng’s a superhero for just about everyone here now, but Gorbachev trails the butcher Stalin in contemporary Russia’s most-adored leaders lists. Why the hell didn’t Gorby, arriving in the top job in 1985, almost a decade into Deng’s experiments, look East and just simply copy it?

It’s a common criticism that Moscow ignored what was going on in China, did not prioritize agriculture and allow farmers to grow their own crops, and dived instead for “shock therapy” over Chinese gradualism. Chris Miller’s excellent book takes these three myths out into the backyard, puts a sack over their heads and shoots them cold. In short, Gorbachev and his people studied Deng’s reforms intently and understood exactly what was going on in the East, they tried to push Soviet farms and firms into similar ‘dual-track’ systems, and they only resorted to radical Perestroika attacks on the political system after their gentle efforts had been, ‘scuz my language, rat-fucked by the bureaucracy.

Miller argues that powerful interest groups fought, delayed and then handicapped all the Chinese-style reforms that Gorbachev tried to push through, in agriculture, for state-owned enterprises and in foreign trade. He makes the stunning point that by the end of the 1980s, Soviet and PRC laws in these three domains looked very similar. But it didn’t work for the USSR, clearly. Why?

Miller’s answer: political power - Gorby simply did not have enough of it.

For starters, unlike Deng, Gorbachev did not enjoy undisputed power in his Party. After Yuri Andropov’s and Konstanin Chernenko’s sickly and empty rules, he was the only committee member with an once of charisma. But in Politburo meetings Gorbachev was hardly even first among equals. He had to go toe-to-toe with conservatives like Yegor Ligachev, and fight drawn-out battles for every minute step in reform. (As Party Secretary, he was not even allowed to see the military budget until the late 1980s.) Ideological unease over private ownership mixed, of course, with baser interests. Ministries == industry, and vice versa; the agro-industrial complex, the fuel-energy complex and the military-industrial complex, had all become independent kingdoms, jealous of their budget money and power. No one, from the minister down, liked the sound of budget cuts or the loss of control that even moderate autonomy for farmers or enterprises would entail. Oppose it all they did. And when they lost the legislative battles, they simply did not implement policy. Gorbachev eventually fell to a coup organized by those same groups in 1991. Its a testament to their inability to organize anything properly that it took them so long.

Comrade Xiaoping never had to worry about a coup. Hua Guofeng was the sort of guy who thought decisions were made in meetings. A sort-of-peer competitor, Bo Yibo, was too hated in the Party’s upper echelons to raise a decent band of brothers. Conservative Johnny-come-latelys like Li Peng could be handled and bought off. (A friend who worked at the National People’s Congress when Li ran it (1998-2003) told me he never wanted to talk about anything but the Three Gorges Dam project - you get one guess why)). Ditto the People’s Liberation Army - many of whose top generals had fought alongside Deng. Gorbachev, in contrast, was this young, rather idealist chap from the countryside, with weird western sympathies, whose go-to weapon seemed to be hectoring the old guard to reform already.

Even if Gorbachev had managed to neutralize his enemies, the way the Soviet state was set up fated him to fail. It was horribly centralized - as economist Xu Chenggang argued it was “U-shaped” (here’a a brief intro). This meant that all decision-making authority was in Moscow, in the ministries, where reforms could be vetoed, whereas in China, “M-shaped” institutions meant regions could experiment and run with successes. Thus, Zhao Ziyang’s farm reforms in Sichuan in the mid-1970s, Shenzhen’s go-go capitalism in the 1980s. Gorbachev signed off on special economic zones in Vladivostok and elsewhere, but the ministries successfully limited private ownership and tax breaks. To boot, the USSR was a middle-income country, where the elite had a relatively comfy life. Why reform?

Miller also points out, which I thought was a great point, that after the unsleeping firing squads of Stalin, the Soviet bureaucracy was stable and grew duck-plump in the peaceful 1960-70s. In contrast, Deng stood on top of a bureaucracy that had been decimated in 1960-70s’ Cultural Revolution. Beijing had no uber-powerful Agricultural Ministry et al., and, to boot, the tens of thousands of recently-rehabbed cadres owed Xiaoping their new lives. Without Mao impoverishing the place, Deng would have had a much tougher time rebuilding.

Faced with elite opposition Gorbachev had to make a huge bet; he decided to sacrifice budgetary discipline to buy off some of the opposition, push forward with reforms, and hope they would ignite growth and fill the fiscal hole. SOEs and state-run agriculture wanted more money; they got it. Capital investment (called ‘acceleration funds’) increased by 5ppts of GDP during 1985-88, mostly all wasted. Agriculture accounted for some 50% of the budget deficit by 1989. Gorby was scared of even raising the prospect of military cuts (he finally figured out they were taking 40% of the budget).And he knew that reducing massive food subsidies (some 10% of government spending) would be his political suicide on the street. And as Moscow’s authority imploded, everyone gave up paying taxes too.

Reforms were too-delayed, too undermined, growth did not kick off, and the bet failed. By 1989, the deficit was 10% of GDP, and 30% by 1991. Meaning Moscow had to print money, which in turn led to inflation, and in an economy with fixed prices, that led to shortages (why would you produce when you weren’t going to get paid?).

Theres’s a paradox here too, though. When inflation hit in the 1980s-90s, Beijing was powerful enough to clamp down and enforce austerity for a year or too (the famous fang/shou cycle). They did it in 1989, for instance. So, China’s central government was not so powerful as to damp down on market reforms in the good times, but not so weak as to be unable to shut down the party when inflation hit. The USSR had none of that luck. Gorbachev was doomed, is Miller’s conclusion. I’ll leave it to the experts to judge that, but ruling out Gorby pulling a Xi Jinping (somehow capturing the security apparatus and throwing Ligachev et al. to the KGB wolves) it seemed persuasive to me.