U.S. Assessments of the Soviet and Post-Soviet Economy: Lessons Learned and Not Learned

"What was and remains at stake in how we talk about our assessments is not so much an old debate about what did and did not happened a quarter-century ago, but a much more current need to come to terms with how we Americans think and analyze Russian reality," stated Kennan Institute Director Blair Ruble in opening the conference. The three conference panels focused on the assessments of the Soviet economy, U.S. understanding of post-Soviet economic reform in Russia, and the underlying social conditions of Soviet and post-Soviet Russia.

The single greatest criticism of Soviet watchers in general, and experts on the Soviet economy in particular, was the failure to recognize the true weakness of the Soviet economy and consequently foresee the collapse of the Soviet Union. The task facing the Sovietologists inside intelligence agencies and academia was a daunting one. Official economic data and statistics from the Soviet Union was unreliable, forcing U.S. experts to measure the Soviet economy with little direct evidence. Discussion during the panel revealed that weaknesses behind the CIA estimates in particular included underestimating the distortions caused by the militarization of the Soviet economy (which resulted in overestimating economic growth rates); a failure to sufficiently discount economic strength based on the low quality of Soviet goods; and an underestimation of the depreciation of assets and distorted investment in infrastructure and factories. Another mistake recognized during the panel was an over-reliance on comparing U.S. and Soviet GNP in gauging relative economic size and strength. These acknowledged shortcomings raised the question among the panelists of when anecdotal and observational evidence can or should outweigh statistical information.

The second conference panel focused on the post-Soviet economic reform in Russia during the 1990s and U.S. policy. The panelists agreed that the early economic reforms, known as "shock therapy", were often implemented by decree and were part of a political struggle to destroy the previous communist system. The shock therapy reforms were advised and encouraged by the West and by the IMF and World Bank throughout the 1990s. The U.S. government sought to engage the Russian leadership during this time with technical assistance and aid packages that faced an increasingly hostile reception from Congress. The reforms succeeded in transferring economic activity from the state to the market, but they also resulted in severe economic and social dislocations. The reforms also led to the emergence of a class of wealthy business elites who used their government connections to privatize the crown jewels of the Soviet economy. Following a collapse of the ruble in August 1998, the Russian economy finally posted its first sustained growth from 1999 to present, buoyed by a low exchange rate that spurred import substitution and high prices for energy exports that bolstered Russia's coffers.

There was also agreement among the panelists that the reforms of the 1990s demonstrated that economic reforms must have popular support if they are to succeed, and that foreign technical assistance is no substitute for domestic political will in implementing reforms. Disagreement centered on whether the social damage in the wake of shock therapy has eroded the legitimacy of those reforms and the Russian government itself. One panelist commented that the "concentration of financial resources among the lucky few…combined with the concentration of political power in a single pair of hands, lays the ground for an economic system whose sole purpose is to collect and redistribute natural resource rents." The counter-argument was that a gradual path to reform would have meant no reform in Russia, and that Russia's alternative model is the stagnation of Belarus, not the economic growth of Poland. The panelists, however, were in general agreement that neither the U.S. nor the IMF/World Bank would influence Russian economic policy in the future to the same degree as during the 1990s. The model for reform in the future will come from within Russia as it seeks to join institutions such as the WTO and European Union.

The third panel examined the underlying social aspects in Russia during the Soviet and post-Soviet period. For the post-Soviet period, Russian and American survey research agree that large majorities of the population would like to return to the Soviet past, but realize that it is impossible to do so. Surveys also show a continued high opinion rating for Russian president Putin, but a very low rating of his government. The conclusion behind this discrepancy is that Putin is a figure of hope, not results. For the Soviet period, the panelists discussed the relative strengths of intelligence analysts and academics in measuring social factors in Soviet Russia. The conclusion drawn by the panel was that academics performed very well in documenting the various pathologies of the consumer economy, the difficult conditions for Soviet women, infant mortality rates, crime rates, and housing; however, academics in general failed to draw broader conclusions from individual studies. Intelligence analysts did a better job in drawing conclusions about social conditions, but nevertheless failed to forecast the collapse of the Soviet system.

The conference concluded with a keynote address from James Schlesinger, Chairman of the Board of the MITRE Corporation and former Director of the Central Intelligence Agency and former Secretary of Defense and Energy. Schlesinger commented that intelligence and academic analysis, while useful in understanding and tracking evolutionary changes, is not very useful in predicting sudden, major changes. Intelligence is produced by institutions, and over time institutions harden themselves against new and different information. It is especially difficult to go against institutions, Schlesinger noted, when evidence is skimpy, or the new information challenges existing beliefs. To counter this resistance, it is important to engage in scenario building to plan for low-probability outcomes and treasure mavericks that bring different perspectives. Schlesinger noted that during his tenure at CIA and the Defense Department, analysts relied on a computer model to calculate Soviet economic production. Those figures estimated that Soviet military expenditures were at a level of 6-7% of their GDP and were relatively equivalent to U.S. spending in absolute terms. But if the computer model indicated that those figures were accurate, observation clearly demonstrated that they greatly underestimated military spending in the Soviet economy. Even though clearly inaccurate, it was difficult to change the reliance on the computer model for estimating Soviet production, according to Schlesinger: "An institution is vested in its previous products, and when it is challenged it tends to evade or hide." The record for U.S. policy during Russia's transition from the Soviet system was similarly mixed. "Market ideology was sent to replace Soviet ideology," declared Schlesinger, without mention of the necessary underpinnings. The U.S. was exhausted at the end of the cold war, and was ready to believe in the idea of an easy transition. For the future, Schlesinger repeated that our ability to forecast is limited, and scenario building will continue to be an important tool in preparing for different outcomes. We have not adequately recognized that attitudes in institutions and society can harden and resist new ideas. "Will we do better?" Schlesinger concluded, "I wish I could be optimistic, but I do not think so. We are missing the forest for the trees again."