The Price of the Past: Russia's Struggle With the Legacy of a Militarized Economy

by Clifford G. Gaddy

Release Date: February, 1998

Edition: Paperback

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Innovative and informative

Gaddy's study focuses on three important issues - the precise size of the Soviet military-industrial complex, the shape and effect of reforms targeting this sector under Gorbachev and Yeltsin, and the multifarious effects of the oversized defense sector on the present-day Russian economy. The first question is discussed in Chapters 1 and 2. Gaddy chooses to measure the relative size of the defense sector through estimating the number of people it employed. Unfortunately, Gaddy dramatically overestimates the economic importance of the sector as, surprisingly for an economist, he fails to recognize that any direct conclusion about size based on the number of employees has to take into account the fact that the Soviet economy was labor-intensive. Comparison of numbers of people employed in any branch of industry (not just the military-industrial complex) would have yielded similar results in comparison with the same figures in the US. Thus while 10 or, according to the most inclusive estimate, 15 to 18 percent of the Soviet labor force appears to have been employed in the defense sector, it is difficult to draw any meaningful conclusion about the relative burden of that sector on the economy. Chapter 3 discusses the evolution of the military doctrine of the Soviet Union as it pertains to the economy. The earlier view, elaborated in the 1950s, called for a massive defense industry, geographically remote from the front lines of a possible future conflict and for maximally self-sufficient enterprises that would be able to move to a full military mode of production at a short notice. In the absence of meaningful measure of costs in the Soviet economy which, in Gaddy's view, would have indicated the burden of implementing such a program, the Soviet economy did follow the imperatives derived from the doctrine. The costs, in Gaddy's view, were transferred downward in the hierarchy -- to the Soviet citizens themselves, who had to put up with the secondary status and shoddy quality of civilian production under the Soviet system. The more modern version of the doctrine emerged only in the 1980s and it called for a dynamic economy which could be readily adjusted to rapid technological changes. The weakness of this chapter, which surfaces elsewhere in the study as well, is that Gaddy falls victim to a view of decision-making capacity and bureaucratic capability of the Soviet system that has long been rejected. He gives the impression of systematic and rational (in the Soviet context) pursuit of goals without much conflict. In fact, the Soviet elite, we now know, was far from monolithic, and its grip on the bureaucracy progressively weakened thus impairing both its ability to formulate relevant policies (due to lack of information) and its ability to put any policies to work. Chapters 4 and 5 look at the fate of the military-industrial complex under Gorbachev's perestroika and, after 1991, under the various Russian governments. At the same time, Gaddy dispels the simplistic perception that conversion implies simply that enterprises making weapons begin producing civilian goods. The main theme for the Gorbachev's period appears to have been Gorbachev's illusion that the high quality of military production was somehow due to more efficient management, that the defense sector possessed the "secret of success" (p. 55) that could be applied to the rest of the economy. Thus until 1988 defense budgets continued to grow and Gorbachev made a numeber of personnel choices that reflected his belief in the managerial abilities of the defense sector. An attempt at a conversion from above in 1989-91 failed miserably and compounded the problem of the unwieldy defense sector. Under Yeltsin, the sector appeared to be losing ground as a special interest in the early stages of the reform, but especially after 1993 regained its special status and was largely protected from radical reform. Chapters 6 to 9 form the core of Gaddy's study. Focusing on thew human costs of demilitarization, he examines the legacy of the defense sector in several important aspects and demonstrates the painful adjustment of the defense enterprises to the conditions of market economy. In fact, at least until 1993/94 due to the soft budgetary constraint and a loophole in Russian law, enterprises could still produce vast quantities of weaponry even if noone was bying it, simply by accumulating mutual debt. The conversion that occurred was far from the dreams of Russian reformers - instead of building on the industrial capacity of the defense sector and turning it to civilian production, the market dictated incentives for direct export of raw materials previously used by the defense sector, such as aluminum and titanium. What is more, the civilian production of the defense sector (such as machines for the textile and shoe-making industry) declined sharply as Soviet producers faced the stiff competition of high-quality western commodities. Gaddy suggests that the defense sector's decline has resulted in an internal brain-drain (p. 125) whereby the most highly qualified employees leave the sector in pursuit of better careers and higher income. Another aspect associated with the decline of the defense enterprises is the related decline of company towns, or the so-called defense cities. Gaddy asserts that the Soviet-era enterprises provided numerous social services to their employees that they are no longer provided, resulting in an even sharper deterioration of living standards. He believes that the solution to these problems is, prosaically, a dynamic and aggressive regional leadership that will improve the investment climate and bring new jobs to their respective regions. The future, which Gaddy discusses in Chapter 10, is highly uncertain, as defense enterprises have largely been unsuccessful to adjust to the demands of market and find either marketable civilian products to replace their military production, or larger markets for their weaponry. It is in a way a vicious circle - their future depends on the overall future of the Russian economy, and yet, being a large and unwieldy part of that economy, this sector is, in effect, impeding its emergence from the valley of transition.