Monetary Policy in the Yasushi Nakamura in the Soviet Union

Empirical Analyses of Monetary Aspects of Soviet Economic Development Yasushi Nakamura Yokohama, Japan

ISBN 978-1-137-49416-0 ISBN 978-1-137-49418-4 (eBook) DOI 10.1057/978-1-137-49418-4

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This Palgrave Macmillan imprint is published by Springer Nature The registered company is Nature America Inc. The registered company address is: 1 New York Plaza, New York, NY 10004, U.S.A. Preface

A quarter of century has passed since the Soviet economy collapsed. Interest in the Soviet economy seems to be waning, although the new Russian economy is attracting continuous attention. I started studying the Soviet economy as a postgraduate student in 1980 when the Socialist system was still towering despite ominous signs of stagnation and disin- tegration. Over the next 10 years, the entire socialist system abruptly fell apart; the subject of my study disappeared. Frankly, my interest in the Soviet economy had also been waning after its collapse, even though I always felt that I had only partially fnished my study. Important ques- tions, such as whether the Soviet economy was inherently unsustainable, whether the Soviet strategy for economic development was applicable to other economies, and what determined the timing of the systemic col- lapse of 1990, did not seem to have been fully answered. Although these questions lingered in my mind, it seemed diffcult to empirically investi- gate these questions, because relevant Soviet economic data was lacking. The opening-up of Soviet archives was indeed a revelation on the ways to study the Soviet economy further. To a scholar who had been strug- gling with scant, unsystematic Soviet economic data, the archives, now open to the public, seemed like a veritable treasure trove. Later, I under- stood that the Soviet archives are comparable to a huge treasure island where it was diffcult to locate the treasures. However, I may have had beginner’s luck as I found data both from original archive materials and from publications collecting archive materials to build a minimum data set for the analyses in this book.

v vi Preface

This book approaches the Soviet economy from a monetary perspec- tive and uses new data and methods. I do not believe that the different approach and new data and methods have fundamentally changed the previous understanding of Soviet economy; rather, they have strength- ened and supplemented this previous understanding. In addition, this book sheds new light on the image of the Soviet economy: The Soviet economy was fundamentally unsustainable because it lacked a function- ing mechanism to manage fat money. It seems almost impossible to establish a mechanism to manage fat money, which can coexist with an administrative command economy that is functioning by material plan- ning. Soviet authorities and economists had never been successful in answering how to manage fat money under material planning. I do not have any idea how to manage fat money without using market mecha- nism either. If more data become available, it would be possible to analyze the Soviet economy more thoroughly using rigorous methods; even quan- titative studies that compare long-term economic development in the Soviet Union with that in other countries might become possible. The Soviet economy was a huge experiment that used an entire socioeco- nomic system as the test bed. I believe that the potential of Soviet eco- nomic studies to contribute to the advancement of general economics is still large. This project on Soviet monetary management was, in a way, a spin-off of a larger project on Russian historical statistics. This larger project is, in turn, part of an even larger project by Hitotsubashi University on Asian historical statistics, which includes 10 Asian countries, the Central Asian region, and . I am deeply indebted to the head of the Russian his- torical statistics research group, Masaaki Kuboniwa, and the members of the group, Ken Ishikawa, Kazuhiro Kumo, Sadayoshi Ootsu, Masayoshi Shida, Manabu Suhara, Shinichiro Tabata, Tomoko Tabata, and Akira Uegaki, for discussions, comments, data, and information. I am grate- ful to Kyoji Fukao, Konosuke Odaka, and Osamu Saito, the project leaders of Asian historical statistics, for their comments and supports. I also thank Iikka Korhonen, director of the Bank of Finland Institute for Economies in Transition (BOFIT), for hosting me as a visiting fel- low and for discussions and comments, and Laura Solanko of BOFIT for helpful comments and advice on Soviet foreign trade. Discussions with Prabir Bhattacharya, Phillip Hanson, Paul Hare, Stefan Hedlund, and Byung-Yeon Kim were indispensable. Special thanks go to Vice-Director Preface vii

Dr. Sergei Deogtev of the Russian State Archive of Economy (RGAE) and Dr. Elena Katasonova of the Russian Academy of Science for their kind support for my work at the RGAE. This book is partially based on my previous papers: Chap. 3 uses “Productivity versus elasticity: a normalized constant elasticity of sub- stitution production function applied to historical Soviet data,” Applied Economics, 47, pp. 5805–5823, 2015; Chap. 4 uses “Did the Soviet command economy command money? a quantitative analysis,” Europe- Asia Studies, 63(7), pp. 1133–1156, 2011; Chap. 5 uses “Soviet bank- ing, 1922–1987: an analysis of Gosbank balance sheets,” Comparative Economic Studies, 55(1), pp. 167–197, 2012; and Chap. 6 uses “Money supply and foreign trade taxes in the Soviet Union: an international com- parison using new Soviet data,” Journal of European Economic History, XLIV, pp. 85–120, 2015. Readers who are interested in the techni- cal details of the methods and the data used in this book may consult the papers. I thank the publishers for their generous copyright arrange- ments. This work was fnancially supported by the Japan Society for the Promotion of Science (JSPS) Grants-in-Aid for Scientifc Research (KAKENHI), Grant Number 15H01959.

Yokohama, Japan Yasushi Nakamura Contents

1 Introduction 1

2 Historical Background of the Soviet Monetary Policy 13

3 Soviet Productivity Growth 45

4 Performance of Soviet Cash Money Management 75

5 Soviet Banking and Non-cash Money Management 99

6 Money Supply and Soviet Foreign Trade 125

7 Soviet Monetary Policy and Government Debts 151

Appendix: Soviet Data 191

Notes and Sources 199

References 213

Index 219

ix Abbreviations

General Terms CBR the of the Russian Federation CES Constant Elasticity of Substitution CIA the Central Intelligence Agency CMEA the Council for Mutual Economic Assistance DIC Deviance Information Criterion FTO Foreign Trade Organization FYP Five-Year Plan GARF Gosudarstvennyi Arkhiv Rossiiskoi Federatsii (the State Archive of the Russian Federation) GNP Gross National Product GOF Gross Output of Foreign trade IMF the International Monetary Fund MCMC Markov Chain Monte Carlo NEP the OECD the Organization for Economic Co-operation and Development PNI Produced National Income RGAE Rossiiskii Gosudarstvennyi Arkhiv Ekonomiki (the Russian State Archive of Economy) RSFSR the Russian Soviet Federative Socialist Republic SFEs Special Foreign Trade Earnings SNA the System of National Accounts SSSR Soyuz Sovetskikh Sotsialisticheskikh Respublik (the Union of Soviet Social Republics) TFP Total Factor Productivity

xi xii Abbreviations

TsSU Tsentral’noe Statisticheskoe Uplavlenie (the Central Statistical Administration) TsUNKhU Tsentral’noe Uplavlenie Narodonokhzoiaisvennogo Ucheta (the Central Administration of National Economic Accounting) Abbreviated Labels of the Data Series BL All bank loan CC Cash in circulation CE Credits to the economy CFG Credits to the foreign governments CG Credits to the government CH Change in cash held by the household sector CNS Consumption expenditure of the household sector CTT Custom tax

Ed Export in domestic Ef Export in foreign trade ruble FA Foreign assets FL Foreign liabilities GBSF Secret fnancing of state budget through Gosbank’s purchases of government bonds GIPa Actual gross industrial production GIPp Planned gross industrial production GOF Gross output of foreign trade HDP Household deposits at HGB Government bonds held by the household sector ILPa Actual industrial labor productivity ILPp Planned industrial labor productivity LE Liabilities to the economy LG Liabilities to the government MI Monetary income of the household sector MIWa Actual average monthly industrial wage MIWp Planned average monthly industrial wage

Md Import in domestic ruble Mf Import in foreign trade ruble NPNI Nominal produced national income RPNI Real produced national income RSa Actual retail sales RSp Planned retail sales SBE Actual state budget expenditure on the economy SBEp Planned state budget expenditure on the economy SBFI Planned state budget expenditure on the state capital investment SCI Planned state capital investment Abbreviations xiii

SF All secret fnancing of state budget by Gosbank TCI Planned amount of the total capital investment TGB Total stock of government bonds TSBe Actual total state budget expenditure TSBr Actual total state budget revenue TTL Gosbank’s balance sheet total WFa Actual wage fund WFp Planned wage fund WGNP Soviet real GNP estimated by the Western scholars List of Figures

Fig. 2.1 State budget funds and capital investments (%) 20 Fig. 3.1 Offcial and Western data 59 Fig. 3.2 TFP estimated by the extended Solow residual (ESR) method 60 Fig. 3.3 Estimated TFP level 62 Fig. 3.4 Estimated TFP annual growth 63 Fig. 4.1 Correlations between cash, bank loan, and state budget expenditure 87 Fig. 4.2 Unexpected issue and absorption of cash (% and billion ) 92 Fig. 4.3 Planned and actual wages (%) 94 Fig. 5.1 State budget fnancing and Gosbank fnancing 102 Fig. 5.2 Structure of Gosbank’s assets and liabilities (%) 103 Fig. 5.3 Contribution factors to the changes in Gosbank loans (%) 116 Fig. 6.1 Foreign trade, net foreign assets, and SFEs (%) 134 Fig. 6.2 SFEs tax rates and cover ratios (%). 140 Fig. 7.1 Government borrowing and household saving (%) 162 Fig. 7.2 Overall ftness of the estimated models 177 Fig. 7.3 Cumulative impulse responses 178 Fig. 7.4 One-period impulse responses 179

xv List of Tables

Table 3.1 TFP growth and trends (%) 66 Table 6.1 Summary of the international comparison 142

xvii