Democracy and Innovation – A Cold War Case Study
Posted by democratist on March 9, 2011
March 9th 2011,
So we have established a liberal theoretical model of the interrelationship between democracy and innovation.
But before we look at how a lack of democracy and rule of law have effected contemporary Russia, let’s take a step back, and explore to what extent the historical presence/absence of democratic government, the market economy, competition and property rights might be considered as factors in US-Soviet economic competition during the Cold War, and in the eventual collapse of the Soviet Union.
Fortunately, we have some very high quality research close at hand; Professor Niall Ferguson gave a talk on “The Political Economy of the Cold War” at the LSE in October last year. The aim of this lecture was to chart the competition that existed between the US and Soviet economic systems, and assess how far the fall of the USSR was economically pre-determined.
As Ferguson points out;
- Soviet growth rates declined dramatically after Khrushchev’s period in office, and more importantly, total factor productivity (a measure of the efficiency of the utilization of economic resources) plummeted to the point that Soviet factories eventually became value subtracting (the raw materials were worth more when they went into the factory than when they came out as finished products).
- Price controls and a planned economy fundamentally did not work, because in the absence of market signals resources were grotesquely misallocated, so that for example, steel consumption was four times higher in relation to GDP in the Soviet Union than in the United States. Monstrous inefficiency was in fact a predictable consequence of economic planning.
- The only thing that kept the Soviet show on the road after 1969 was the rise of the oil price on international markets.
- Corruption was endemic to the planned economic system because incentives were completely misaligned. As Paul Kennedy correctly argued at the time, the Soviet Union crippled its economy with its excessive defence expenditure. Even in 1991 the USSR was still spending 14% of their GNP on the military in an attempt to keep up with the US (which was spending 5%).
- Comparing the rate of Soviet growth in total factor productivity with the major Western economies, and particularly with the West European economies, where productivity grew rapidly even in the 1970’s, it’s clear that the USSR was in serious trouble after 1973. By the end of the Cold War Soviet GDP was probably about 36% of the US level.
- In order to match the (three or four times larger) US economy in an arms race that was conducted at every level, from space to espionage, the Soviets had to spend a significantly larger portion of GNP on the military. A reasonable figure is that even on the eve of collapse the defense budget was 14% of GDP, while the US was averaging about 5%.
The Soviet experience after the late 1960’s therefore shows the devastating impact of autocratic government, a command economy, along with no competition or property rights on the economy of the USSR.
It also demonstrates that how by the early 1980’s, as a result of economic stagnation (combined with a huge temporary cash injection from oil exports in the early 1970’s), the USSR came to spend an unsustainable proportion of its GDP on military competition with the US.
At the same time the United States and Western Europe were able to maintain economic growth while keeping military expenditure comparatively limited (as a proportion of GDP). The USSR had to spend so much on their military to keep up, that this further compounded their already serious economic problems, leading inextricably towards eventual collapse.