World economic performance

The 1960s was a decade of high global economic growth, perhaps the highest decadal growth in history. US growth was interrupted by recessions - declines in total production - in 1960-61, 1970-71, and 1975. The rest of the world continued to grow during the first two US downturns, but global output declined following the nearly fourfold increase in world oil prices in 1974, resuming in 1976. Inflation increased in the major economies in the late 1960s but remained modest compared with the acceleration of inflation associated with the two sharp oil price increases of 1974 and 1979-80.

Continental Western Europe and Japan, in particular, experienced extraordinary growth in the 1960s and early 1970s. This performance was no doubt influenced, in the case ofEurope, by the formation ofthe European Economic Community (EEC) in 1958 and the trade liberalization that ensued within Europe, as well as by the global trade liberalization brought about by successive GATT rounds of negotiation. In particular, imports of merchandise into the United States, the world’s largest national economy, grew by 170 percent during the 1960s, from $15 billion in 1960 to $40 billion in 1970. Both the fact and the prospect of selling into the large US market stimulated growthenhancing investment in Europe, Japan, and elsewhere.

The USSR and its Warsaw Pact allies were also growing rapidly during this period. There are serious measurement problems for any growing economy whose structure of production is changing rapidly, and those problems become acute for an economy, such as the Soviet Union, where resource allocation occurs on the basis of quantitative targets rather than through market-determined prices. Moreover, official Soviet growth figures are known to have an upward bias, due partly to some double counting, partly to the exclusion of the (slower growing) service sector. For all these reasons, considerable disagreement surrounds estimates of Soviet growth rates during this period. Thus, official Soviet figures, which undoubtedly influenced the perceptions and the self-confidence of Soviet leaders, show growth of io. i percent a year during the 1950s, declining to a still high 7.0 percent during the 1960s and to 5.3 percent during the 1970s. America’s Central Intelligence Agency (CIA), in contrast, basing its analysis on work by Abram Bergson and other American scholars, estimated Soviet growth rates at 6.0, 5.1, and 3.7 percent, respectively, during these three periods.43 On either measure, the USSR in the early 1960s was on a roll, reflected in the frequent exuberant boasts of the Soviet premier, Khrushchev. Growth gradually declined on both measures, and the USSR had increasing difficulty in maintaining its economic growth, and particularly its growth of oil production, the major source of hard currency export earnings as well as a critical input into the Soviet economy and military machine. Inability to innovate, or even to absorb foreign innovations, loss of discipline among Soviet workers, and failure to maintain installed equipment and to scrap obsolete equipment have all been given as explanations for the gradual but steady decline in economic growth.

Foreign trade did not fit comfortably into national central planning. In 1949, the Soviet Union formed the Council for Mutual Economic Cooperation (Comecon) with its Eastern European satellites, and over time developed a concept of the "socialist division of labor." But it was never received enthusiastically by many of Comecon’s members, there was no effective mechanism for multilateral trade or for balancing trade over time, and trade was not thoroughly integrated into the five-year planning process. As a consequence, trade within Comecon was limited (compared, for example, to that within Western Europe), although the Soviet Union was the major source of oil for East European countries and Cuba. Trade with non-Communist countries, sometimes occurring within the framework of barter agreements (for example, with India), sometimes carried on in "hard" currency (mainly US dollars), was even more limited - partly because of the unfavorable treatment of Soviet exports, to be discussed further below, partly because ofthe cumbersome and awkward institutional arrangements for trade within the Soviet Union.

Trade with non-Communist countries gradually increased during the i960s and especially after Germany’s Ostpolitik and the promulgation of detente in

Table 1. Annual percentage-wise growth in gross domestic product

Source: calculated from Maddison, The World Economy, 275, 298, 329.

The 1970s. Exports by industrialized countries to the Comecon countries, partly on the basis of credits, grew from $2.8 billion in 1960 to $8.7 billion in 1970 to $34 billion in 1975 to $58 billion in 1980, before a cutback in the early 1980s following the Soviet invasion of Afghanistan.44 The share of market-oriented countries in total Comecon imports grew from 27 percent in 1960 to 34 percent in 1970 to 46 percent in 1975. World trade grew modestly more rapidly than total Comecon trade, but trade within Comecon grew more slowly. The main earner of hard currency for the Soviet Union was exports of oil, whose price rose gradually in the early 1970s and sharply in 1974, thus improving its export earnings and its terms of trade. Prices of oil exports to other Comecon countries were raised only gradually, thus implying a subsidy to those countries, but oil exports over allotment were priced at world prices and payable in dollars, a practice that did not please the Soviet Union’s fraternal allies.

Table 1 provides estimates of annual average growth rates in gross domestic product (GDP), by decade, for the USSR, Eastern Europe, the United States, Western Europe, and Japan. Several points are noteworthy. First, the USSR grew faster than the United States to 1970, raising Soviet GDP on one estimate from 35 percent of the US level in 1950 to 44 percent in 1975, before declining to 34 percent in 1990.45 Second, economic growth declined over time in all countries, but especially sharply in the Soviet Union and Eastern Europe, less markedly in the United States. Third, these measures are for total output, not consumption or standards of living. In the Soviet Union, 15 to 17 percent of GDP was devoted to equipping and supporting the military, and an even larger and growing portion was devoted to investment, which by all accounts was used very inefficiently. Thus, the high growth in output was not always reflected in equally high growth in consumption. After the Hungarian revolt of 1956, in which workers conspicuously participated, Khrushchev worried that the standard of life of ordinary Soviet citizens was not improving sufficiently. He therefore tried to cut down on military spending and redirected resources into consumer goods, particularly food production. Without formally reversing this emphasis on agriculture, Leonid Brezhnev increased military spending in the mid-1960s. However, Soviet standards of living increased respectably during the 1960s.

Fourth, a division of GDP by population yields output per capita, which showed Soviet "productivity" growing from 30 percent of the US level in 1950 to 38 percent in 1975, and declining to 30 percent by 1990. These figures are based on purchasing power parity calculations for the Soviet Union, which have always been problematic and contentious because of the absence of meaningful prices for Soviet-produced goods and services; it is now believed that they overstate the quality of Soviet goods and services, hence of Soviet GDP and output per capita.

Finally, post-1991 work by Russian economists has judgmentally lowered growth rates during the Soviet period even below those estimated by the CIA, from which the growth rates reported in Table i have been adapted.46 But Soviet leaders in the 1960s and early 1970s may not have been aware of this weaker performance, since production in sectors in which they were especially interested, such as steel, cement, and oil, were continuing to grow rapidly, and indeed by i975 had overtaken that of the United States.

In any case, during the period covered by this chapter the Soviet economy was performing reasonably well, although market-oriented economies in Europe and Japan were growing even more rapidly, and in the case of Europe from a significantly higher base. Soviet leaders had reason to be confident in their economy - serious weaknesses showed up later - but also to be concerned about the long-term prospects of Communism as a method for organizing production compared with market capitalism.