PROBLEMS FACED BY SOVIET UNION DURING SHIFT FROM

PLANNED TO MARKET ECONOMY:

The Soviet Union has experienced serious financial problems during their shift
from planned to market economy:-

 The new economic openness created even greater economic inefficiency due
to the double direction that these policies went.

 Initially, some segments of the economy were freed; namely wages, while
other segments of the economy were still being planned or regulated; namely
prices.

 There arose the problem of producing profitable and unprofitable goods. Since
prices were fixed centrally and did not reflect the real balance of supply and
demand, whether it was advantageous to an enterprise to produce any given
product bore no relation to whether or not that product was really wanted.

 The main problem was inflation (rise in prices).

The reason for this was that during World War II the Soviet Government
directed all its resources towards producing goods for military use and did not
concentrate on the production of consumer goods. This lead to supply
shortages which the government overlooked during the era of planned
economy. When the price mechanism was implemented, the demand of basic
goods was high and supply low, this lead to rise in prices.
Also, many price control measures and subsidies on basic consumer goods
were removed which led to inflation rates of 2,520%.

 Agriculture and the food supply system have to work now in a completely new
economic situation which very negatively affected this sector of the economy
and serious financial difficulties arose which do not permit to subsidize this
industry and food prices at the previous level.

 Unemployment also rose following the introduction of market reforms; the

very notion of unemployment was not something many Russians were used to
under panning system. The market system meant that other countries can now
seek to invest in Russia, engage in trade and equally Russia has to find its way
into a financial and trading world which many Russians simply did not have
any experience of. The Soviet people did not have entrepreneual or marketable
skills. The notion of marketing products was alien.

 The Soviet economy suffered from both hidden inflation and pervasive supply
shortages.

 The combination of high inflation, unemployment and low incomes lead to

poverty. 25% of the population lived below the poverty line, life expectancy
had fallen and birthrates were low.

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 The GDP (Gross Domestic Product) was halved.

 Due to shortage of supplies there were surplus imports and there were no
quality goods to export in order to balance imports. Despite the mass import of
consumer goods, shortages on the consumer market continued to worsen.

 The Soviet Union lost approximately $20 billion per year, money without
which the country simply could not survive.

 Other problems that have been a feature of the transition involve the removal
of all manner of restriction on trade both within and outside Russia

 There was drop in economic output as productive resources reorganize and

there was also a loss in tax revenues as the need for social expenditure to
alleviate poverty grew. Tax revenues declined as republic and local
governments withheld tax revenues from the central government under the
growing spirit of regional autonomy. This strife caused economic dislocation
as supply lines in the economy were severed, and caused the Soviet
economy to decline further.

 The foreign investors in Russia lost their confidence in both the currency and
bond markets.

 There was economic stagnation and the Soviet government was running a
budget deficit.

 The economy was in ruins. The demographic catastrophe had been immense
with some pre- mature deaths from famine, disease, civil war, and terror—and
some emigrated.

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