How Gorbachev created the world’s most unequal economy

During his time in power Mikhael Gorbachev took various strategic actions to democratise the Soviet Union’s political systems and opening its economy. Gorbachev was a major leader in the Perestroika political movement that encouraged the Soviet Union to adopt new economic reforms that were heavily influenced from free market economies. This movement resulted in a large number of changes to the Soviet economy. In 1988 Gorbachev successfully introduced “The Law on Cooperatives” as part of this strategy. This made radical changes to the Soviet economy and allowed for the private ownership of businesses and reduced the government control over business operations. In addition to this in 1990 the Soviet parliament granted Gorbachev the ability to privatize some of the large, state own enterprises, with shares being offered on the stock exchange. This was a radical change to the Soviet economy and they now resembled a market-based economy. However, it did not result in the economic revival of their economy as Gorbachev hoped for.

Gorbachev hoped that these actions would lead to greater economic growth for their economy and greater wealth for his citizens. Instead these changes resulted in Russia becoming one of the most unequal large economies in the world. The economic strategy that Gorbachev set in place was continued by his successor, Russian president Boris Yeltsin. When the Soviet Union collapsed in 1991 and Yelson gain power, he received control of the many state enterprises that were formally run by the Soviet Union. Under the control of the Union, these businesses where kept alive through a large number of subsidies by the government. To reduce the costs for the state, Yeltsin continued Gorbachev’s strategy of privatisation and decided to privatise these costly businesses with the hope that they would become profitable under private control. He created a voucher system where the Russian citizens were given vouchers to purchase stakes in many of the state-owned businesses. From the years 1992 – 1994 more than 15,000 businesses were privatized through this program. This was a radical change for the Russian economy. During the decade of the 1980s 8000 companies were privatised in the entire world (McLaughlin, 2004). This program almost doubled this amount in just 2 years. 144 million Russians received vouchers, with a face value equivalent to about $25 (McLaughlin, 2004). Many Russians were economically impoverished and required cash rather than vouchers to by shares. They decided to sell their vouchers and forgo their stake in these companies. The few wealthy Russians who could afford to purchase shares bought these vouchers and used them to buy shares in the privatised firms at a discount. This plan of distributing shares equally backfired and resulted in a few oligarchs owning a large section of the Russian economy.

Many Russians were disappointed with the failure of the Government to foster an efficient, equal free market system. This strategic failure is now commonly referred as ‘katastroika’ referring to the catastrophic effect of perestroika (Barrett, 2004). These effects of this failure can clearly be seen in the modern Russian economy. Today Russia is the most unequal large economy with over 40% of the nation’s wealth being help by just one percent of the population (Kuznets, 2019) (Figure 1).

Figure 1: National wealth owned by 1% (Kuznets, 2019)

While the intentions behind Gorbachev’s decisions were admiral, it still harmed the Russian economy due to flaws in his strategy. He had an overly simplistic view of the economy and did not take into account the side effects that this decision would have. In particular Gorbachev viewed his economy as one homogeneous group and did not see how this policy would mostly benefit a small group of people. But what if Gorbachev had access to today’s Information Systems? How could he use these technologies to formulate a better privatisation strategy, and how can Russia use advances in these systems to make economic reforms to reduce their current inequality.

One asset the Gorbachev did not have access to when making this decision is the vast amounts of data that is available today. Today there is vast amounts of economic data that Gorbachev could have used to aid in his decision making including quantitative data such as unemployment rates, average incomes, and poverty levels. While Gorbachev did have access to some data on the economy from census data, he lacked the ability to fully analyse specific groups in the economy. In addition, Gorbachev lacked the powerful information systems that are available today that can process vast amounts of data to find trends and cluster groups in the economy. This would provide Gorbachev with new insights when formulating his privatisations strategy. With greater insights on the different groups in the economy, Gorbachev could have implemented as strategy where some of the funds raise from selling shares could be redistributed back to the groups that could not afford to buy shares resulting in a more equitable distribution.

Todays Russian policy makers could also use this data when making future policy changes in order to tackle their inequality. Recent research has shown how access to big data on the economy can aid in constructing economic policies (Kennedy, 2019). This example shows how data on tax records of individual citizens can be used to formulate more appropriate tax policies and analyse the effects of existing taxes. This research analyses data provided by the OECD on tax records in Ireland and Slovenia. This data provides policy makers with more descriptive insights on how the income disparity effects different groups in the economy. Groups can be created based on similar characteristics such as profession, age, job status, etc. For example, this shows that in Ireland the greatest disparity between the top 1% of income earners and the median is greatest in the Professional, Health and Finance sectors (Kennedy, 2019) (Figure 2). By using this more descriptive measures of inequality by group rather than aggregate data on the entire economy (e.g. Gini coefficient) policy makers can implement a tax strategy that targets specific groups. For example, they can implement targeted tax strategies that aid those groups that are at risk of falling below the poverty line and generate revenues from the groups who are paying lower proportions of their incomes in tax

Figure 2: Income divide between the median and top the 1% by sector, 2015 (Kennedy, 2019)

If Russia implements this strategy of using big data to analyse the effects of economic policies, they can target the groups that are in greatest need of assistance and generate revenues from the groups who have benefited the most from Gorbachev’s privatisation strategy. This offers a way for Russia to bridge the gap between the richest and poorest in their economy.

References

Barrett, G., 2004. katastroika. [Online] Available at: https://www.waywordradio.org/katastroika/ [Accessed 1 2 2020].

Kennedy, S., 2019. The potential of tax microdata for tax policy, Paris: OECD.

Kuznets, D., 2019. The top 1% controls a third of the wealth, and the poor are getting poorer. How Russia became one of the most unequal places on Earth.. [Online] Available at: https://meduza.io/en/feature/2019/01/23/the-top-1-controls-a-third-of-the-wealth-and-the-poor-are-getting-poorer-how-russia-became-one-of-the-most-unequal-places-on-earth [Accessed 1 2 2020].

McLaughlin, D., 2004. Why privatisation is still a dirty word to Russians. [Online] Available at: https://www.irishtimes.com/news/why-privatisation-is-still-a-dirty-word-to-russians-1.1147197 [Accessed 1 2 2020].