18 February 2018
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How did communism influence Lithuania's economic development?

A report by: Valdas Samonis
The Institute for New Economic Thinking, USA


In 1940, independent Lithuania produced per capita 1.9 times more meat, 2.8 times more milk, had 1.9 times more cattle and 2.7 times more pigs than Soviet Union. After 50 years of allegedly astounding economic progress, Soviet Lithuania had become dependent on subsidies from Moscow. To the extent that this assertion is true, how is this possible if not for the inefficiencies caused by the forcefully imposed system of central planning with its associated distortions?

Noncommunist Lithuania fed and clothed its citizens without any assistance from abroad during the interwar independence period. And the levels of agricultural production were high by comparison to the Soviet Union;

Following its forceful incorporation into the Union of Soviet Socialist Republics in 1940, Lithuania was subjected to the Soviet development model based on Marxism-Leninism, as interpreted by the Communist Party of the Soviet Union, as its theoretical underpinning; the first "scientifically based economic system in human history", as Bolsheviks claimed. The Bolshevik interpretation of economic processes and development goals was made obligatory in both the theoretical and practical dimensions. New methods of economic management /central planning/ were introduced which deeply changed the entire decision-making processes. The country's economic administration was completely overhauled. The Soviet occupation of Lithuania lasted nearly half a century.


Valdas Samonis

"I believe that the abject failure of Western experts (economists, political scientists, sociologists, etc) to foresee the impending USSR's total collapse under the weight of the communist system's own inefficiency (like an old mushroom in Lithuania's forest) was largely due to Western anti-anti-communism; it grossly exaggerated the Soviet communist regime's stability and legitimacy. The so called "scientific-based system" lie repeated by the Soviets with Goebbels efficiency and force, gave rise to that Western anti-anti-communism and it was the greatest Bolshevik deception (brilliant, indeed!) that all those "good-heart" Western intellectuals fell for.

What an intellectual shame to Western universities and other elites!"




Valdas Samonis

The Institute for New Economic Thinking, USA


Dedicated To Those Dead or Alive Whose Blood and Brains Made Free Lithuania Possible

ABSTRACT. Even if it brought some peculiar kind of economic growth /rather of cancer type/, the communist system imposed by the USSR has taken Lithuania's and other formerly oppressed countries' comparative economic development levels at least two-three decades back. This essay  gives the first approximation of direct, roughly measurable retarding effects of communism /sovietization/ on economic development /summarily captured by the proposed Communist Retardation Indicator (TM), CRI/. It leaves out various kinds of negative indirect effects, e.g. huge human costs. The essay serves as a reality check on inflated expectations regarding the welfare effects /living standards/ of the transition processes in former communist countries some twenty years after the start of transitions to markets and democracy. The growth slowdown and the rise in unemployment in such countries as Lithuania, other Baltics, Poland, etc, are due in a large part to the legacies of the communist system catching up with and neutralizing considerable efforts at continued reforms. Such a reality check is useful for shaping further transformation policies so that they are better grounded in what is possible and advisable under the circumstances. Clearly, it will take a long time to fully recover from the "benefits" showered on Lithuania and other formerly communist countries by the “scientifically based” Soviet communist system. 

1. Introduction

Following its forceful incorporation into the Union of Soviet Socialist Republics in 1940, Lithuania was subjected to the Soviet development model based on Marxism-Leninism, as interpreted by the Communist Party of the Soviet Union, as its theoretical underpinning; the first “scientifically based economic system in human history”, as Bolsheviks claimed. The Bolshevik interpretation of economic processes and development goals was made obligatory in both the theoretical and practical dimensions. New methods of economic management /central planning/ were introduced which deeply changed the entire decision-making processes. The country's economic administration was completely overhauled. The Soviet occupation of Lithuania lasted nearly half a century.

After the period of heroic armed resistance during 1945-1953, the Lithuanian struggle for freedom adopted less dramatic methods and more covert forms. However, with the advent pf Gorbachev’s perestroika, the Lithuanian drive for independence intensified and adopted open forms since 1988. This provoked a harsh reaction in Moscow. Among a number of the lines of criticism, the alleged economic irrationality of such ambitions stands out. Soviet officials maintained that Lithuania has gained a lot from its "accession" to the USSR: what in 1940 was an underdeveloped, agricultural country, by 1990 was transformed into a developed, industrial Soviet republic. This essay sets out to verify such claims.

The main problem is that after the forceful incorporation, most formerly used market economy based yardsticks and indicators of economic development were replaced by the new ones, adversely affecting the comparability in time and space. The matter has been further complicated by the secretive and distorting nature of Soviet statistics. All in all, the shortage of reliable data makes it all but impossible to come up with precise figures. However, some first approximation can be made.

The aim of the article is to examine claims regarding economic development under communism in some detail permitted by the availability and quality of data.

The main goals of the article are:

·         To evaluate direct, roughly measurable effects of communism on economic development of Lithuania and propose the Communist Retardation Indicator (TM), CRI;

·         To analyze the effects of communism by the sectors of economy;

·         To indicate the main problems to be dealt with shaping further transformation policies for Lithuania, other post-Soviet countries.

The methods applied are the main methods of economic analysis and synthesis, management theories.

2. The Primary Sector

With three quarters of its labor force employed in agriculture, Lithuania was a predominantly agricultural economy in 1940. Half a century later, the agrocomplex still occupied a special role in the Lithuanian economy, providing about a quarter of jobs and more than half the national income [Zinkus 1986, 186; How Will... 1990]. As in 1938-1940, basic crop and milk yields in Lithuania were in general considerably lower than in neighboring Western countries /see Table 1/:

Table 1. The Comparison of Yields in Several Countries: Crops /in centners per hectare/ and Milk /in tonnes per cow/:

                         Rye               Wheat            Barley               Milk























































Source:. [Lithuania's ... 1990].

Even more important and telling is a considerable lag behind the West in the indicators measuring the efficiency of agricultural production. In 1981-87, Lithuania reached roughly one fourth of the American labor productivity in agriculture [Lithuania's ...1990]. Generally, Lithuanian agricultural production costs were two to three times higher than in Western countries [How Will ...1990]. Yuri Maslyukov, Chairman of the USSR State Planning Committee /Gosplan/, claimed that the Lithuanian agriculture was running at a loss of rb172 million to the central budget [A Discussion ...1990, 37]. How was this possible?

Noncommunist Lithuania fed and clothed its citizens without any assistance from abroad during the interwar independence period. And the levels of agricultural production were high by comparison to the Soviet Union; in 1940, independent Lithuania produced per capita 1.9 times more meat, 2.8 times more milk, had 1.9 times more cattle and 2.7 times more pigs. After 50 years of allegedly astounding economic progress, Soviet Lithuania has become dependent on subsidies from Moscow [Terleckas 1990]. To the extent that this assertion is true, how is this possible if not for the inefficiencies caused by the forcefully imposed system of central planning with its associated distortions?

For decades, the mainstream of the Soviet economic literature attempted to present the system of central planning as perhaps not yet perfect in some respects but certainly - for the first time in human history -based on scientific foundations. Many authors claimed that because of the planned nature of the system – an embodiment of the scientific truth in economic management - it is capable of fully harnessing objective laws of science to work for the benefit of broad masses, thereby avoiding distortions and costs characteristic of the chaotic play of market forces under capitalism.

The reality has been diametrically opposite, however. Let's take just one example. The Soviet-style indicator of technological progress is the power of machines, their size,  and their numbers: the larger, the better (“chem bolshe, tem luchshe”). The apocryphal story has it that, to prove their technological superiority, the Soviets were intending to build the world’s largest microcomputer!

The communist penchant for size led to the overproduction and overuse of very heavy machines like  the Kirovets tractor K-700. The use of such a tractor is not only ecologically  damaging  but causes the hardening of soil, destroying its structure, drainage systems, and leading to the wheat harvest reduction by 30-50%! Similarly, it has been proved that such tractors, their excessive numbers, and other distortions have been detrimental to the agricultural production in Lithuania as well as the USSR in general [Aganbegyan 1988, 35-36; Wolfson 1988; Duda 1990]. It is estimated that just between 1961 and 1988 the losses in the Lithuanian agriculture as a result of systemic inefficiencies were more than rb90 billion [Lithuania's ...1990].

What is more important than the above losses is the impact of the sovietized economic structure and  work ethic in agriculture on the prospects for a radical reform undertaken in Lithuania over the last decade. The forced collectivization and statization has been accompanied by a thorough and indeed criminal destruction of farmsteads and family farming in general. Privatization including the restitution of property is therefore the necessary precondition for the introduction of market forces [Hinds 1990; Balezentis 1990]. This proved to be difficult for at least two reasons. First, although  collective farm lands can be distributed among individual families, there are no buildings nor machinery with which to work the land. Second, the whole way of life /family farming/ has been subjected to a "fifty-year moratorium" [Kazenas 1990]. The qualities of a farmer, proud and wise lord of land are close to extinction. There are agricultural workers instead, with little or no initiative and  poor work ethic. The magnitude of change can only be compared to the transforming of feudal land laborers into peasant farmers. Family farming was criminally destroyed in a couple of years, its rebuilding will take decades [Vel ..1990; Laird 1990].

3. The Secondary Sector

The secondary sector in Lithuania is dominated by industry since mining is nonexistent due to the almost complete lack of natural resources. Soviet sources claim that Lithuania's industrial output has increased an impressive 84 times in the period of 1940-1990 and such industries as machine tools, ship-building, electrical engineering, etc, were created from zero [On the "Lithuanian ... 1990].

In light of rather recent revelations concerning the growth and relative size of the Soviet economy, it is hard to see how this figure could be taken at face value. For example, two glasnost era authors, Vasilii Seliunin and Grigorii Khanin [1987], argue pretty convincingly that in the 1928-85 period Soviet national income grew only 6-7 times and not some 90 times as officially claimed. The mystery may never be entirely solved. Central to the problem of separating inflation from real growth is the measurement of qualitative change in the absence of market verification which was the case under the Soviet system. It can be concluded at the very least, that the Soviet-style measurement of  qualitative progress /using such "objective" characteristics as capacity, size, and weight/ may be at the root of a substantial upward bias in the official Soviet statistics [Kushnirsky 1989; 294-301].

There are some additional specific problems with the assertion about the rate of industrial growth in Lithuania. First, the latter part of the assertion provides explanation for the former one: such a high growth rate was recorded largely because the base year output was low or even zero.

It is a well-known statistical effect that base year quantities close to zero make it "easy" to achieve impressive growth rates. Second, most of this growth is of a peculiar, Soviet-type variety. For systemic reasons, the Soviet Union used much more input for a given quantity of output than is the case in the West. For instance, steel, oil, and gas were used in the USSR about three times less efficiently than in France or United Kingdom [If Gorbachev ...1985; Aslund 1989, 16-17]. Similarly, relative to Sweden or Finland, Lithuania consumed 1.5-2.0 times more energy, wood and  metals per unit of output. Heating one square meter of living space in Finland requires about 20 kg of  fuel, whereas in Soviet Lithuania - 60 kg [How Will ... 1990].

What this boils down to is growth for the sake of growth: more coal is mined to produce more metal which is used to build more mines so more coal is mined and so this environment-degrading "development" cycle goes on. To use a medical metaphor, it's a cancerous growth. Although their populations were forced to make huge sacrifices for development /20-40% or more of all the goods and services produced went to investment - a good measure of the rate of exploitation/, centrally- planned economies seemed never to mature, exhibiting features of permanently developing countries [Winiecki 1999; Zwass 1987, 172-176]. Third, the Soviet-type industrial growth forced on Lithuania disregarded the structure of its economy and human resources and produced excessive dependence on Soviet inputs, particularly raw materials. It is primarily Union-subordinate industries which were growing rapidly, using mainly /some 60-80%/ imported raw materials and shipping large parts /50-60%/ of their output out of Lithuania [Lithuania's ...1990]. This pattern of the division of labor may have well served Moscow's military and other imperial interests but hardly those of the Lithuanian people.

Indeed, the so called social efficiency of development which captures its welfare effects/the impact on living standards and quality of life/ has been very low in Soviet Lithuania and the USSR [Vasiliauskas 1990]. One Soviet economist estimated that in terms of per capita consumption of goods and services the USSR ranked between 50th and 60th among countries of the world [Jones & Moskoff 1989, xx]. Even if' there initially were some positive welfare effects of the Soviet-type industrial growth, very soon they were cancelled by the negative ones. It can therefore be concluded that what took place in Lithuania /and elsewhere in the communist world/ is the Soviet version of immiserizing growth [Bhagwati, Brechter and Hatta 1984]. Such a growth led to the pauperization of the country and its people, not unlike a cancer devastates a biological organism.

And just like the modern cancer therapy aims at cutting off supplies of essential nutrients to the cancerous tissue in order to starve it and liquidate the cancer, so communist-style economic growth stopped and the system entirely collapsed as soon as it exhausted the “easy” supplies of natural resources /oil, coal, etc/ and human resources /human patience, tolerance of communist serfdom and  exploitation/ at the beginning of the 1990s.

All in all, labor productivity in the Lithuanian industry was much less than half the American level in 1988. It is estimated that just between 1960 and 1989 the losses in the Lithuanian industry as a result of systemic inefficiencies amounted to rb88 billion [Lithuania's ... 1990].

For the reform decades since 1990 and for the future, what may be more important than the absolute losses incurred under the Soviets are the legacies of communism /sovietization/ in the area of industrial structure and the economy and society in general. The Lithuanian industry was dominated by large, technologically /as opposed to economically/ specialized enterprises, usually enjoying a  mono- or oligopolistic position. Such large, communist-style enterprises did not add economic value in the production process as the value of the output was in most cases lower than the value of raw materials, labor, other inputs, if both sides of the production equation are expressed in world prices. 

This paradox is known under the term of “value subtraction” coined up by the famous Harvard economist Janos Kornai. As the Central European /and Lithuanian/ reform experience suggests, they are likely to use every means to oppose or sabotage demonopolization and market-oriented reforms in general. In Poland, the existence of a "hard core" of state-owned value-subtracting monopolies has proved to be one of the toughest problems to crack [Samonis 1990a]. Also, everywhere in the postcommunist world they proved to be a fertile breeding ground for the ex-communist nomenklatura /”red directors”/ who beyond a reasonable doubt proved their qualifications in distorting and/or subverting the  necessary market-oriented reforms, especially at the microeconomic level [Samonis 1995].

Furthermore, world manufacturing is undergoing a revolution. The mass production model /economies of scale/ is being replaced by a model of a flexible, multi-product firm that emphasizes quality and speedy response to market conditions /economies of scope/ while using technologically advanced equipment and new forms of organization brought about the digital revolution [Milgrom & Roberts 1990; How to ... 1990; Winiecki 1987, 22-23; Samonis 2000]. In Lithuania, progress along these lines may be seriously hindered by the monopolistic "hard core" and a paucity of small-and mid-sized firms exhibiting high adaptability and innovativeness suitable for today’s global digital economy [Samonis 2000].

4. The Tertiary Sector

One of the salient characteristics of a modern economy is a rapid growth in the provision of services. The tertiary sector usually employs some 60-80% of the labor force in the West. A service gap therefore provides one of the important measures of relative backwardness or retardation [Schroeder 1987; Aslund 1989, 19].

In Lithuania, the Moscow-imposed growth pattern /especially industrial hypertrophy/ has resulted in the development of a sizable service gap to the West. Based on communist ideological motivations, most services /so called nonproductive ones/ were treated as a second-rate activity.

Consequently, the allocation of resources for the tertiary sector was governed by the residual principle. Around 1980, some 37% of the Lithuanian labor force was employed in services, almost exactly the Soviet average. Most Western countries have reached this level around 1950 [Zinkus 1980, 25; Schroeder 1987; Parkola 1980]. By this important measure, both the Soviet Lithuanian and the Soviet economies lagged behind the West some 30 years if not more. They even fell behind many Third World countries [Aslund 1987, 19].

The sorry state of Soviet Lithuanian services was evident from even a cursory look at the health care, housing and communal services, transportation, and especially communication and financial services so crucial for a modern economy. With regard to the latter, the reign of abacus was unchallenged in most places [Uosis, Terleckas, Baldisis 1989, 16]. For the future, the biggest problem will precisely be the underdevelopment of communication and financial services where the gap between the USSR and the West was judged to be growing [Schroeder 1987]. The transition to a market economy is conditional upon a sufficient progress in the development of the financial sector which will have to replace the allocative functions of state bureaucracy.


5. The External Sector: Foreign Economic Relations

For smaller countries like Lithuania /population over 3 million/, international economic cooperation is of predominant importance. The nature and profitability of bilateral Soviet-Lithuanian relations and in general Soviet-Baltic economic relations have been a subject of much controversy.


5.1. Who Subsidized Whom and Whose System?


As soon as the Baltic drive for independence gathered momentum, the Soviet propaganda machine floated a multitude of comments and assertions designed to demonstrate the political and economic irrationality of independence movements. In particular, it was alleged that the Baltic republics have not been able to balance their current account vis a vis the rest of the USSR and have therefore been in a need to accept "the selfless and generous aid", that is subsidies, from other republics. Explicitly formulated or not, the obvious corollary of this type of assertions was that, in order to fulfill their ambitions for political power, Baltic leaders have not only been biting a feeding hand of "fraternal help" extended from Moscow but have been blindly pushing their people towards economic catastrophe [Borisov & Mikhailov 1990; Hammer 1990; Smulders 1990; On the "Lithuanian ... 1990; Maniusis 1976].

The issue has both the systemic and the quantitative aspect /quantity of development/. The former centers around the impact of communism  /sovietization/ on the nature of economic development /its quality/ of the Baltic states during the postwar period of occupation. It has been analyzed above and also in Samonis [1991a]. Let's try to look at the quantitative aspect of development.

Moscow's propaganda machine has been constantly drumming up the fact that Soviet Union/Russia supplied Lithuania with cheap raw materials, natural gas /rb28 as opposed to $97 for 1,000 cubic meters on the world market/, and oil /rb30 as opposed to $110 a ton on the world market/ at the beginning of the Lithuanian independence [How  Will ...1990]. At the same time, Lithuanian exports to the USSR /mainly food and manufactured consumer goods/ were seen as overpriced. It was argued that goods of comparable quality can be bought cheaper in the West. These distortions in relative prices affecting the terms of the Lithuanian-Soviet trade are interpreted as "the selfless and generous aid of the Russian people" /subsidies/ to Lithuania [Maniusis 1976, 102; Hammer 1990; et al.].

It is impossible to fully prove or disprove this sort of claims. Such is the dubious "beauty" of the centrally-planned economy that nobody really knows the rationale or the real value of internal flows of goods and services. The system of arbitrary, bureaucratic pricing and decision-making effectively clouds the issue. However, for at least three reasons it is hard to see how the subsidy interpretation could be based on anything more than vague impressions.

First, it is useful to keep in mind a simple truth rooted in the classical economics that if the productive factor endowment of the integrating countries /e.g. Lithuania and the USSR/ is different from the rest of the world, relative prices within the “union” will differ from relative prices in the world market [Brada 1985]. It is obvious that the Soviet Union --as the natural resource-richest country in the world -- should sell its resources at the relative prices lower than the rest of the world. For the highest technologically developed countries /e.g. Japan or USA/, the same is true for sophisticated manufactured goods. Enter a restrictive, autarkic, trade-diverting, and genuine trade-destroying “union” between Lithuania and the USSR: Lithuanian TV sets of comparable quality will necessarily be priced higher than Japanese ones on account of a difference in the development level causing productivity differentials. Relative prices in the Lithuanian-Soviet trade reveal nothing more than different conditions prevailing in the union [Holzman 1987, 187-201; Desai 1985].

Second, superimposed upon the quantity of development factors are systemic inefficiencies /described above/ working in the same direction. Production of the highly processed goods /like TV sets/ is exposed to more and larger systemic inefficiencies than the exploitation of natural resources under communism. Combined with the usual Soviet-type formula for price formation based on the cost-plus principle, this distorts relative prices even further.

Third, the Lithuanian labor productivity consistently topped the Soviet averages: the level by some 7% and the rate of growth by about 8.6 percentage points. Never during the entire postwar period has Lithuania used up its extra wealth /compared to the USSR/. The bigger portion of the extra value created thanks to better economic management never found its way to the consumption or savings funds [Terleckas 1990; Aleskaitis 1990].

The above three reasons are inconsistent with the Soviet subsidy interpretation. Rather the opposite is suggested by the third one. What happened to some of the extra value created in Lithuania and how? Let's try to answer this question below.

The Gosplan chairman Yuri Maslyukov claimed that investments in the Lithuanian economy were close to rb50 billion between 1966 and 1989 [A Discussion ... 1990]. Soviet sources often quote this and other figures within the context suggesting Moscow's assistance to Lithuania. However, 19% of this amount were funds of kolkhozes /collective farms/ and residents of Lithuania, according to the Lithuanian State Committee for Statistics. Of rb14.8 billion which were allocated to agriculture, central state funds account for only 60% [Lithuania's ...1990].

According to the Lithuanian Ministry of Economy, in the last 25 years preceding independence Union-subordinate enterprises and organizations transferred rb8.9 billion to the Union budget or 2.3 times the amount received in centralized capital investments. Additionally, they transferred to centralized Union funds more than 1 billion in foreign exchange rubles and almost rb99 billion in turnover tax. On top of these open transfers come hidden forms of resource withdrawal from Lithuania. One of them is the withdrawal of credit resources at the discretion of the USSR Council of Ministers. Just in 1988, the increase in credit resources withdrawn from the republic was rb854 million, and in 1980-88 the sum of these funds left under the USSR Council of Ministers authority increased from rbl.2 to rb4.1 billion. It is estimated that in 1980-88 Lithuania's economy lost rb728 million in revenue /rbl.6 billion when recalculated at compound interest/ [Lithuania's ... 1990]. As of July 1, 1989, credit resources created in Lithuania reached rb10.5 billion, of which about rb6 billion were disposed of by Moscow. Although Lithuania accounted for only about 1.3% of the Soviet population, its credit resources covered 9.5% of the budget deficit gap filled with borrowed funds in 1989. At the same time, Lithuanian people suffered from the shortage of credit funds, receiving only rb86 million, whereas their savings exceeded rb6 billion. The Soviet-type credit system was turned into the most important channel for the unilateral transfer of income from Lithuania to the USSR [Uosis, Terleckas, Baldisis 1989, 13-15].

To illustrate the above with some microeconomic data, let's look at the flows of capital resources to and from the Vilnius "Elfa" Production Association which was quoted by Gosplan's Maslyukov as  receiving 77% of its five-year plan investment funds from Moscow [On the "Lithuanian ...1990, 56]. In a quarter of a century ended in 1988, “Elfa” received rb34 million and 3 million worth of foreign exchange rubles in centralized capital investments and transferred rb86 million of profits to the Union budget and additional rb74 million to the Union ministry. The profits created at "Elfa" and transferred to Moscow were therefore 3.3 times higher than the central funds allocated.  In a classical “double standard” mentality, contributions to the central funds were mandatory but allocations of money from them are conveniently interpreted as “assistance” or “aid”  [Lithuania's ...1990; Zinkus 1986, 186].

From the above confrontation of figures, it is evident that Moscow has received handsome returns on its investments in Lithuania. In most cases, the rate of return has been higher than in other, less developed republics. Therefore, to talk about "the selfless and generous aid of the Russian people" where a normal for profit investment activity is carried out is a cardinal misunderstanding or rather the intentionally misleading propaganda.

The flip side of the forced reorientation towards the USSR has been a complete destruction of Lithuania's economic ties with the West /mainly United Kingdom, Germany and Belgium/, painstakingly developed during the interwar independence period. The interwar Lithuania's per capita foreign trade was rising almost continuously and reached levels three times higher than those of the USSR. Its share in the world exports more than doubled while its currency was among the two or three strongest in the world [Terleckas 1990; Ten Years ... 1938, 72-78; Vaisnoras 1990]. As a result of occupation, Lithuania had to forego multiple benefits flowing from foreign trade in general and the cooperation with the advanced market economies in particular. Only about 2% of  its trade was with the West at the start of post-Soviet independence. 

One more point needs to be addressed here. Soviet and even some Western literature emphasizes bigness of the internal market /country size/ as a fundamental strength in economic development; therefore advocates of the Lithuanian independence are often accused of  encouraging the formation of a state that is to small to be economically viable. At best, this is an outdated, 19th century thinking. According to the latest research conducted by the University of Pennsylvania economist Prof. Robert Summers, the average annual growth in per capita income in the bottom 50% of countries as measured by the population size was faster than in the larger countries from 1960 to the mid-1980s. Per capita incomes also tend to be higher in smaller countries.

Being a part of the "vast homeland", quite apart from its specific nature, was therefore more of a liability rather than an asset. Among the reasons are: smaller countries tend to be more active traders in the world market which is the same whether you live in the large   USSR or smaller Lithuania; they tend to specialize in the growing number of products that do not require large domestic markets; small homogenous economies tend to suffer less from the inefficiencies created by a heavy-handed government intervention aimed  at mediating regional and sectoral conflicts of interest [Becker 1990].

A distorted structure of incentives under the Soviet communist-style central, inward-oriented development strategy, and the emergence of two separate markets (undemanding  internal Soviet and COMECON markets and the demanding world market) interacted in generating a peculiar dual export structure of communist economies with adverse implications for the prospects of successful reorientation of exports to the demanding world market [Winiecki 1999].


5.1.1. Looking into the Distorting Goskomstat Mirror: An Exercise in Meaninglessness


An exercise in analyzing the static aspect of Baltic-Soviet economic relations has been presented by the European Economic Community [Stabilization ...1990]. Based on the Soviet /Goskomstat/ merchandise trade statistics for 1988, the European Union (European Economic Community or EEC at the time) paper paints a picture of large negative Baltic trade balances with the USSR. It takes a pretty strong faith in the reliability and completeness of the Goskomstat data to undertake such an exercise, and especially to treat it seriously. After some three decades of studying the Soviet-type economies from the comparative perspective, I must admit I do not have this kind of faith. Why?

First of all, merchandise trade constitutes only part of the current account balance. The Baltic states have not been paid by Moscow for the use of their transit services; Baltic sea ports have for centuries been Russia's very important window to the world. Generally, whatever proceeds have been generated in the service sector, including tourism, have been channeled directly to Moscow with no credit to Baltic current accounts. Second, supplies for the 400,000 or so strong Soviet army stationed in the Baltics have been counted as imports. Moreover, Moscow has not paid for the use or pollution of the Baltic territory by its military. There is no information whatsoever on several very important aspects of Baltic-Soviet relations, like financing and supplies for the Communist Parties, KGB, and other bodies alien and harmful to the Baltic interests.  

Moreover, a snapshot of inter-republican trade provided by the EEC paper may not be representative for the whole Soviet period. This is certainly true for the Baltic states. Some of them may have indeed slipped into merchandise trade deficit with the USSR in some years towards the end of the 1980s. First of all, this has to do with a general decline in the Soviet economic activity, particularly with the worsening Soviet foreign trade balance exacting a differential impact on Baltic trade flows in and out of the USSR. However, a totally different picture may be true for the entire Soviet period. According to alternative data, which provide a fuller account of, for example, cross-border shopping, Latvia achieved a cumulative merchandise trade surplus of over 9% for the period of 1961-1988; the surplus rises to more than 23%, if services are included to complete the current account picture [Smulders 1990, Table III]. 

With some qualifications /page 77/, the ECE paper maintains that, since data on the external trade of the republics are available in both domestic and foreign trade prices /a proxy for world market prices/, it is possible to compute the gain that a distorted Soviet price structure confers on certain republics. However, great statistical uncertainties and inaccuracies of the transformation of what is essentially an arbitrary set of prices into world market prices make such an exercise rather meaningless. This is seen not only by Western authors [e.g. Schroeder 1992] but also, in the article entitled "Let's Return Trust to Statistics", by the Goskomstat chairman himself [Kirichenko 1990]!   

In the absence of any system of national accounts at the republican level, the Baltic-Soviet current accounts are heavily influenced by what can be termed the Soviet-type capital account. The evidence coming from the Baltic sources suggests that inequitable financial relations with the USSR introduce still more distortions. Due to the Soviet practice of levying subsidies at the location of production rather than consumption, the presence of subsidies reduces the value of exportables. Consequently, export volume for large net agricultural exporters /Lithuania, Estonia/ is downwardly biased due to the high percentage of subsidies contained in the retail price. In Lithuania, these subsidies represented 30-40% of the product's value [Karlsson & Van Arkadie 1991, 213; Hanson 1991b].

More generally, distortions arose via the unified Soviet banking system. The central banks used to continuously redistribute cash and credit resources between the republics and the center. In the 44 postwar years, Latvia transferred to the center nearly twice as much in cash and credit resources than it received which has resulted in about 34 billion rubles subsidy to the USSR. Similarly, union-subordinate enterprises in Lithuania transferred to Moscow more than twice the amount of centralized capital investments received. The Soviet banking system served as the most important channel for unilateral transfers of capital resources from the Baltic states to the USSR. In particular, redistribution of proceeds from exports reduced the gains from Soviet trade while worsening the notorious shortage-type economy. Under the conditions of normal, equitable financial relations with the USSR, additional resources would have been available to Baltic states for imports of oil and/or other natural resources [Smulders 1990; Samonis 1991a]. This latter observation may be irrelevant from the current accounting point of view but it surely bears on who subsidized whom and whose system.  

The above outlined distortions in the Baltic-Soviet economic relations are only part of the problem but I believe this is enough to convey the magnitude of the entire problem. Consequently, it is very difficult to see how assertions of subsidizing the Baltic states by the USSR could have possibly been based on any merits. To the extent that central investments in the Baltics could be regarded as autonomous, e.g. profit-seeking, rather than compensating flows, these assertions cannot be true even in the absence of distortions [Hanson 1991b].  I am in a complete agreement with the Economic Survey of the Baltic Republics undertaken under the auspices of the Swedish government; the survey, which contains a calculation similar to one described in the EEC paper, concludes that such exercises are of dubious value. [Karlsson & Van Arkadie 1991, 193]. They certainly cannot be taken as any approximation of what would Baltic current accounts look like under the conditions of full de facto independence.

Indeed, the evidence for 1989 and later years seems to point to the possibility of a balanced Latvian current account even with realistic Russian energy prices. The two other Baltic governments also maintained they were approaching a balance [Buchan 1991; Hanson 1991a & b; Department of ...1991].

6. The Comparative Development Levels: In Search for a Measure of Communist Retardation

Gross national product per head of the population /GNP per capita/ is the most comprehensive measure of the economic development level. In Europe, Lithuania was a lesser developed country during the interwar period of independence. This fact has to be put into perspective, though. 

From 1795 until the World War I /for 120 years/ Lithuania was under Russian colonial yoke and suffered brutal repressions for its numerous attempts to free itself. During the World War I it had to carry the bur­den of German occupation. The occupying Germans dismantled Lithuania's productive capacities and destroyed them with pedantic precision. The ensuing war for independence wreaked even more economic havoc. According to one estimate, total losses incurred as a result of  the German occupation and the war for independence amounted to 5 billion litas /Lithuanian  currency, US$1 = approx. 10 litas at the time/ or 3.5 times more than the Lithuanian national income in 1924. A national cohesion was almost nonexistent. Arguments were advanced that Lithuania could not survive as an economic entity [Terleckas 1990; Simutis 1942, 19].

Yet the Herculean task of reconstruction was undertaken with steadfast determination. The growth of the Lithuanian economy averaged 10% annually, a rate impressive by any standards [Terleckas 1990; Ten Years ...1938, 4]. Moreover, unlike during the Soviet period, the social efficiency of development was pretty high. Suffice it to say that the average industrial wage could support a family of four [Maciuika 1955]. Something like this was impossible after 50 years of the Soviet-style "scientifically based system". It can be argued that by 1940 Lithuania has been brought within some 10 years distance to advanced Western countries, e.g. Scandinavia.

Official Soviet sources claim that the USSR national income grew about 90 times in 1928-85. Perhaps the most sensational product of glasnost is the publication an alternative estimate by Vasilii Seliunin and Grigorii Khanin [1987] who put the growth at only 6-7 times. So far, independent Western estimates could not come up with anything more convincing. The history of Western attempts at calculating the Soviet GNP in dollar terms is littered with what subsequently invariably turned out to be rather substantial overstatements [Marer 1985; World Bank Atlas 1980-1983; various CIA assessments; et al.].

The Soviet GNP per capita has been put by some at about $2,000 in 1990 [Grossly ... 1990]. In all probability, this is still on the high side given that the International Monetary Fund /IMF/ estimated  Poland's figure to be only $1,100 in 1990 [Lipton & Sachs 1990]. There are no good reasons to believe that the Lithuanian GNP per capita figure should not be on the order of magnitude of those of  its neighbors. In fact, it was put by Soviet sources at rb 2,427 in 1988 or some 10% above the Soviet average of that year [On the "Lithuanian ... 1990, 7]. In 1990, it may therefore lie somewhere in the range of $1,000-2,000 which places Lithuania far below Western countries, particularly its Western neighbors. The Lithuanian State Committee for Statistics calculated that Lithuania produced rb128.6 billion of national income less than Finland and rb155.8 billion less than Sweden in 1960-89, and the gap continued to widen. Almost the entire volume of the national income produced during this period was rb154 billion [Lithuania's ... 1990]. Most Western countries reached or surpassed Lithuania's post-Soviet development level /that of 1990/ in the immediate postwar decade [World Tables 1971]. So Lithuania’s lag behind the West was at least three decades in 1990.

As a way to quantify all the above assertions, I hereby propose the Communist Retardation Indicator™ (CRI), summarily capturing the retarding effects of communism on economic development:

1. CRI = TDL – IDL; where:

CRI =            Communist Retardation Indicator™

TDL=             Total Developmental Lag to leading Western countries

IDL =             Initial Developmental Lag prior to the imposition of communism

In the case of Lithuania:

2. CRI = 30 years – 10 years = 20 years

Taking into account interwar Lithuania's relative underdevelopment /IDL/ by a decade, the imposition of communism on Lithuania  /sovietization/ resulted in NO LESS THAN TWO DECADES OF DEVELOPMENTAL  RETARDATION during the fifty-year occupation period /40%/. Taking the CRI of 40% as the departure point, calculations can be made how much wealth Lithuania lost in dollar terms with regard to the reference Scandinavian  country (e.g. Denmark) due to the Soviet communist occupation. This is not the aim of this essay, however.   

Admittedly, this is a rough and ready measure and a very optimistic assessment. Other estimates /e.g. by French Government/ are a bit less optimistic and put the developmental retardation of more advanced Central European countries /e.g. Bulgaria, Romania, Poland/ at about a full generation or more, e.g. some 30 years  [Mocilnikar 1999]. This would result in CRI closer to some 50-60%. 

7. Conclusions

Even if it brought some peculiar kind of economic growth /rather of cancer type/, the communist system imposed by the USSR has taken Lithuania's and other formerly oppressed countries’ comparative economic development levels at least two-three decades back; they were held back in their development by the USSR. This essay gives just the first approximation of direct, roughly measurable retarding effects of communism /sovietization/ on economic development /summarily captured as the Communist Retardation Indicator, CRI/. It leaves out various kinds of negative indirect effects, e.g. huge human costs.

Since 1990, Lithuania is trying to implement radical political and economic reforms designed to restore its statehood and a market-type economy [see for example Samonis 2000b]. The overcoming of the legacy of the communist system will be hard, however, especially so that this essay leaves out some other significant costs, e.g. various kinds of negative indirect effects, e.g. human costs like killings, imprisonments, deportations, ensuing emigration, etc. The essay serves as a reality check on inflated expectations regarding the welfare effects of the transition processes in former communist countries some twenty years after the start of transitions to markets and democracy. The growth slowdown and the rise in unemployment in such countries as Lithuania, other Baltics, Poland, etc, is due in a large part to the legacies of the communist system catching up with and neutralizing considerable efforts at continued reforms. Such a reality check is useful for shaping further transformation policies so that they are better grounded in what is possible and advisable under these unfavorable circumstances.

Clearly, it will take a long time to fully recover from the "benefits" showered on Lithuania and other formerly communist countries by the Soviet communist system.  As a highly distinguished Polish dissident economist [Winiecki 1999] put it, "the curse of the by then long extinct Soviet-type system would be felt by post-centrally planned economies-for decades to come. They are not only permanently crippled by system-specific distortions but the rehabilitation process – even after a change of system and strategy -would be exasperatingly long".

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Category : Featured black / Historical Lithuania

  • […] Read more… Category : Front page […]

    December 29 2011
    • KRS

      This article is certainly worthy of:
      — some re-reading …
      — and, close(r) examination(s) …
      — and, attention of scholars / academics …
      — and, study by students — especially in the fields of politics and communication(s) and history / historiography / pseudo-history …

      * * *
      And, this article deserves:

      1) some comments … extended comments … discussion(s) … debate …

      2) some analysis (i.e., 'critical analysis'), and, 'extended' analysis

      2a)– including 'academic analysis' :
      — very notably as to the use of alleged 'statistics' …
      — methodologies …
      — the role of the NGO (non-governmental organization) in today's society …
      — the role of corporate culture in society …

      * * *
      For now,
      let's be informed:
      'The Institute for New Economic Thinking'
      is a New York City-based (USA) non-for-profit 'think tank'
      founded in October 2009,
      with a $50 million pledge by billionaire George Soros.

      July 01 2011

      • […] How did communism influence Lithuania's economic development? […]

        June 29 2011


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