Written By: Finn O’ Connor

Gorbachev was a complicated figure to say the least. He is as close as a Russian politician can be to a hero in the West. As the victors of the Cold War, the United States refer to him as the man who conceded defeat and brought an end to the tense superpower rivalry that spanned nearly half a decade. In former members of the Eastern Bloc, he is remembered for his brutal crackdowns in Lithuania and Estonia. His economic policy, one that contributed to the fall of the Soviet Union, leaves an equally complicated legacy. 

Russian nationalists mourn the demise of the Soviet empire, while liberals argue his reforms paved the way for the corrupt oligarchy that the Russian Federation became under Putin.  

Yet even on their own, Gorbachev’s economics are impossible to classify as a success or failure. His actions did indeed dismantle the repressive U.S.S.R., however that was certainly not his intention. And yes, he did implement reforms to liberalise the Soviet economy, but this was because he was left with few other choices, not because he believed capitalism to be the superior system. The story of Gorbachev and the Soviet economy is one of a man who, when faced with rotting structure, tried to rehabilitate it, only to discover that it was rotten to the core. One of Gorbachev’s biggest initiatives was his 1985 anti-alcohol campaign that demonstrates how constrained he was in his ability to bring about change and how in trying to reform the failing economy, he may have hastened its demise. 

 

The Soviet Economy before Gorbachev

From the late Tsar Nicholas, the Bolsheviks inherited an agrarian economy far behind the rest of Europe in terms of industrialisation. They first implemented the New Economic Policy (NEP), a mixed approach that led to mixed results. The NEP essentially balanced a market-driven agricultural sector with industry and foreign trade controlled by the state (1). But to compete with capitalist countries, the Soviets realised they needed to invest agrarian surplus into industrial production, a policy that would require coercing farmers (2). Enter Joseph Stalin, who infamously had no issue using coercion to achieve his goals. The result was a significant uptick in GDP, nearing 4 percent growth per year between 1928 and 1940 (3).

 

The Real GDP per head of Russia and the Soviet Union, 1885-2006. (4) 

 

Yet the Soviet Economy was always on borrowed time. As Boettke points out in his book Why Perestroika Failed, one of the great failures of both the politicians in Moscow and outside analysts was focusing too intensely on the aggregate indicators of the Soviet growth such as GDP and GNP (5). Likewise, in his assessment of Leonid Brezhnev’s Soviet Union, Thompson notes that the leaders of the U.S.S.R.’s centrally planned economy were obsessed with growth. They continually prioritised those indicators of economic output over building infrastructure to transport, distribute, and store products (6). So, even as the economy expanded at breakneck speed, it did so at the cost of living standards. The foundation of Soviet industry was commodity production, so much so that household goods only accounted for half of GNP (7). This growth was also unsustainable. The focus on heavy industry meant that by the 1980s, the Soviet Union was significantly behind the West in computer and automation technology (8). In 1983, the CIA estimated that Soviet GNP growth was unlikely to break 2 per cent in the next decade. Tellingly, the report attributed this prospective stagnation to two trends, resource shortages and a declining life expectancy (9). While shorter lifespans are an obvious consequence of a declining standard of living, the Soviet economy suffered from one specific ailment that Gorbachev sought to address upon coming into power, rampant alcoholism. 

The Alcohol Campaign 

Gorbachev’s anti-alcohol campaign is often remembered as a moral initiative, but there is an important economic dimension. The aforementioned CIA report pointed to two staggering facts; Soviet life expectancy in the 1980s was just under 62 years, compared to a peak of 67, and that nearly 50 per cent of hospitalisations were associated with alcoholism (10). Alcohol consumption at prior to Gorbachev’s campaign was about 15 litres a year. For comparison, Canadians consume about 6.2 litres of spirits (drinks over 20 per cent) per capita each year (11). Most concerning for Soviet economists was the way citizens drank. Another CIA report found stories from factory managers complaining about how many of their employees began their workday with some alcohol, and how workplace consumption became highly prevalent with workers being so drunk that they could not finish their shifts, not to mention the number of accidents that result from many people being drunk on the job. Statistically, this translates into a 10 per cent decrease in productivity (12). 

Of course, alcoholism was almost definitely a result of low living standards caused by the lack of consumer goods and worker welfare, so Gorbachev’s campaign is more akin to a “broken windows” initiative where the symptoms of social issues are prioritised over their causes. But in the face of such staggering statistics, it seemed a logical place to start the process of reforming the stagnating economy. In a vacuum the campaign was a success. Gorbachev’s government reduced liquor production by 40 per cent, restricted the times and places that alcohol could be sold and raised the legal drinking age to 21 all contributing to a 50 per cent reduction in alcohol consumption (13). 

While distributed during an earlier Soviet alcohol campaign in the 1950s, this poster by Viktor Gorvokov remains one of the most popular pieces of anti-alcohol propaganda that many contemporary sources often attribute to Gorbachev’s campaign. (14) 

 

Yet it soon became apparent that alcohol tax was one of the state’s most lucrative forms of revenue. In 1982, taxes levied directly on the sale of alcohol accounted for between 12 and 13 percent of government revenue plus an additional 0.6-0.7 percent gained from the production and trade of the stuff (15). The government also made bank off of the turnover tax (a Soviet scheme implemented in by the NEP reforms similar to a VAT tax) on ingredients used by places that make alcohol to produce liquor (16). In 1979, alcohol accounted for 25.4 billion out of 65 billion roubles in turnover tax revenue (17). So, as a result of Gorbachev’s campaign, state revenues plummeted. In 1986, government income from alcohol dropped by a quarter, translating to a 3.5 percent reduction in budget revenue, or equivalent to almost 60 percent of the Soviet health budget (18). In response to such a massive drop in revenue, governments have two options to balance their ledgers; cut government spending and raise taxes on other goods to shrink the deficit or print more money to make up the difference. Just about anyone can tell you that flooding your economy with cash is a dangerous game, critics of government spending love to point to Weimar Germany’s hyperinflation during the interwar years. Indeed, Gorbachev and his minsters knew this, but their hands were tied by intense Soviet politics. Take the Red Army for example. Military expenditures in 1987 (the first time the Gorbachev was able to publish military spending) accounted for 40 per cent of the state budget (19). However, since the death of Stalin and Khrushchev’s less violent approach to governance, key industries such as agriculture, energy, and the military accrued more and more political power, really taking hold of Moscow under Brezhnev (20). In short, the military was untouchable, even though its outsized spending drained a struggling economy of much-needed money. Finally, just to add insult to injury, OPEC crude production shot up between 1981 and 1986, sending the price per barrel plummeting nearly 40 per cent (21). With no valuable commodity to prop up their economy, the Gorbachev government was forced to run the printers. 

Of course, more money doesn’t always mean more inflation, government spending usually combines with shortages to hike up market prices. Luckily, the alcohol campaign had other consequences. Just as the United States learned during the prohibition era, reducing the availability of an item as popular as alcohol meant that more consumers turned to the illicit economy. Not only did this take money from state coffers and place it in the hands of criminals, but it also increased demand for the resources needed to produce bootlegs. Moonshiners began purchasing larger amounts of sugar, an ingredient in the popular homebrew samogon. Alongside shortages in sugar, Gorbachev’s publicity about the next massive reform program Perestroika (Russian for “restructuring.”) spread through the public. Although its policy of removing price caps was intended to combat shortages, Soviet consumers did not feel the effects until at least the 1990s, mostly due to fear over political backlash (22). Yet every time the politburo announced potential reforms, citizens flocked to the stores to stock up, exacerbating the very shortages and absurd waiting times (the time citizens wasted waiting in lines equalled 75 per cent of an average income) (23). 

The shortages snowballed. Even when supply was plentiful consumers bought as much as their ration cards allowed, fearing that they would not be able to afford staple goods the next time prices rose (24). This then became a self-fulfilling prophecy as consumer goods market fell victim to speculation.  

Conclusion 

As a result, the Soviet economy collapsed. The Berlin wall fell, and the Soviet empire disintegrated. The Russian Federation that rose from the ashes inherited an abysmal economy, that while liberal, lacked any of the controls against corruption and predatory capitalism required to sustain its market. The woeful transition that followed Gorbachev’s arrest and subsequent release is the subject of many papers and entire books but in short, the Russians performed the remarkable feat of killing short-term output through privatisation. But at the centre of this transition was a man who came into office hoping to revitalise the stagnating economy but ironically, only made it worse. Yet as opposed to outright negligence, Gorbachev’s policies appear more like a mercy killing, by no means were the issues he sought to address, whether it be alcoholism or mass shortages, sustainable, he just happened to be the one to finally attempt to fix them, to no avail.

 

 

 

 

Works Cited

1. Andrei Markevich and Steven Nafziger, “State and Market in Russian Industrialization, 1870–2010,” in The Spread of Modern Industry to the Periphery since 1871, ed. Kevin Hjortshøj O’Rourke and Jeffrey Gale Williamson (Oxford University Press, 2017), 42, https://doi.org/10.1093/acprof:oso/9780198753643.003.0003.
2. Markevich and Nafziger, 43.
3. Ibid.
4. Mark Harrison and Andrei Markevich, Russia’s national income in war and revolution, 1913 to 1928 (VoxEU, 2012), fig. 1.
5. Peter J Boettke, Why Perestroika Failed (Routledge, 1993), 21, https://doi.org/10.4324/9780203419472.
6. William Tompson, The Soviet Union under Brezhnev, First issued in hardback, Seminar Studies in History (London New York: Routledge, Taylor & Francis Group, 2015), 72–73.
7. Boettke, Why Perestroika Failed, 24.
8. Tompson, The Soviet Union Under Brezhnev, 77.
9. Ap, “C.I.A. Study of Soviet Sees Sluggish Economy,” The New York Times, May 31, 1983, sec. Business, https://www.nytimes.com/1983/05/31/business/cia-sees-stagnation-in-soviet.html.
10. “Spirits Sales Volume per Capita Canada 2021,” Statista, accessed September 30, 2022, https://www.statista.com/statistics/434436/sales-volume-of-spirits-per-capita-in-canada/.
11. Office of Soviet Analysis, “Gorbachev’s Campaign Against Alcohol” (Central Intelligence Agency, April 1986), 4.
12. Jay Bhattacharya, Christina Gathmann, and Grant Miller, “The Gorbachev Anti-Alcohol Campaign and Russia’s Mortality Crisis,” American Economic Journal. Applied Economics 5, no. 2 (2013): 4–5.
13. Daniel Tarschys, “The Success of a Failure: Gorbachev’s Alcohol Policy, 1985-88,” Europe-Asia Studies 45, no. 1 (1993): 10.
14. Viktor Govorkov, HET! (NO!), 1954, illustration, Michigan State University.
15. Daniel Tarschys, “The Success of a Failure,” 10.
16. Philip Hanson, The Rise and Fall of the Soviet Economy (Routledge, 2003), 180.
17. Tarschys, “The Success of a Failure,” 10.
18. Hanson, The Rise and Fall of the Soviet Economy, 180.
19. Chris Miller, The Struggle to Save the Soviet Economy: Mikhail Gorbachev and the Collapse of the USSR, The New Cold War History (Chapel Hill: University of North Carolina Press, 2016), 59.
20. The constant purges and paranoia-fueled assassination sprees under Stalin meant that no official could almost ever gain enough loyalty or connections to challenge the central government before being “replaced.”
21. Dermot Gately, M. A. Adelman, and James M. Griffin, “Lessons from the 1986 Oil Price Collapse,” Brookings Papers on Economic Activity 1986, no. 2 (1986): 238, https://doi.org/10.2307/2534475.
22. Miller, The Struggle to Save the Soviet Economy, 68.
23. Maxim Boycko, “Price Decontrol: The Microeconomic Case for a ‘Big Bang’ Approach,” Oxford Review of Economic Policy 7, no. 4 (1991): 38; Boettke, Why Perestroika Failed, 40.
24. Marshall I. Goldman, “Gorbachev the Economist,” Foreign Affairs 69, no. 2 (1990): 38, https://doi.org/10.2307/20044302.