THE SOVIET ECONOMIC COLLAPSE: New evidence of the potentially harmful consequences of state break-up

01 Nov 2018

The dissolution of the Soviet Union in 1991 was one of the largest instances of state break-up in history – and it led to very large losses of economic output for the newly independent successor states. New research by Marvin Suesse of Trinity College Dublin shows that the Soviet economy collapsed not only because it was inefficient, but because the geographical space on which it had been built disintegrated.

His study, published in the November 2018 issue of the Economic Journal, highlights the importance of anticipation effects in state break-up. As the Soviet Union disintegrated, the increasing possibility of member states leaving the Union was enough to lead to collapsing trade and output within the Union, even before any exit took place. Indeed, those member states that moved first towards independence registered the largest decline in trade volumes and output in the early 1990s.

For many decades the Soviet Union was a closely integrated economic space, where final products were assembled using inputs from many of the Union’s constituent republics. This changed with the liberalising political reforms of Mikhail Gorbachev, who led the Union from 1985 until its demise in 1991.

Liberalisation opened up the possibility of member states leaving the Union, setting in motion a chain of events that was unforeseen by the Soviet leadership. As member states attempted to gauge the likelihood of their trade partners leaving the Union, they cut back their exposure to those members they deemed most likely to secede. Trade with the most secessionist member states therefore fell severely – even before these members had formally declared independence.

Falling trade volumes implied disintegration of supply chains, which had immediate adverse consequences for the Soviet republics. With the institutions of a market economy not yet built up, there was no way to replace the old Soviet trading relationships quickly. The result was partial self-sufficiency, lasting until the newly independent countries could reintegrate themselves into the world economy.

Alongside calling for a revision of previous explanations of the Soviet output collapse, this research casts new light on the long recessions that many former Soviet countries experienced in the early 1990s. In particular, it helps to explain why these recessions were so severe.

Breaking the Unbreakable Union: Nationalism, Disintegration and the Soviet Economic Collapse’ by Marvin Suesse is published in the November 2018 issue of the Economic Journal.