The Puzzles of Fairly Fast Growth and Rapid Collapse under Socialism

Introduction

The national statistics and international comparisons based on purchasing power parities suggest that the Former Soviet  Union (FSU) in the years 1925-75 and Central and Eastern Europe in the years 1945-80 experienced economic growth comparable to that of many market-based economies of similar levels of development. This must be considered a puzzle given the incentive problems, the absence of proper prices, limited competition and resistance to innovation in economies dominated by a state sector. However, this fairly fast growth came suddenly to a halt in the 1980s. This phase of stagnation and limited reform is now followed not by a recovery, but by a phase of surprisingly deep collapse, indeed in some countries a near disintegration.

The paper discusses the three phases with the intention of establishing relationships between them and, in this way, of providing a better understanding of each of the two puzzles.