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Life cycle of the centrally planned economy: Why Soviet growth rates peaked in the 1950s

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  • Popov, Vladimir

Abstract

The highest rates of growth of labor productivity in the Soviet Union were observed not in the 1930s (3% annually), but in the 1950s (6%). The TFP growth rates by decades increased from 0.6% annually in the 1930s to 2.8% in the 1950s and then fell monotonously becoming negative in the 1980s. The decade of 1950s was thus the “golden period” of Soviet economic growth. The patterns of Soviet growth of the 1950s in terms of growth accounting were very similar to the Japanese growth of the 1950s-70s and to Korean and Taiwanese growth in the 1960-80s – fast increases in labor productivity counterweighted the decline in capital productivity, so that the TFP increased markedly. However, high Soviet economic growth lasted only for a decade, whereas in East Asia it continued for three to four decades, propelling Japan, South Korea and Taiwan into the ranks of developed countries. This paper offers an explanation for the inverted U-shaped trajectory of labor productivity and TFP in centrally planned economies (CPEs). It is argued that CPEs under-invested into the replacement of the retiring elements of the fixed capital stock and over-invested into the expansion of production capacities. The task of renovating physical capital contradicted the short-run goal of fulfilling plan targets, and therefore Soviet planners preferred to invest in new capacities instead of upgrading the old ones. Hence, after the massive investment of the 1930s in the USSR, the highest productivity was achieved after the period equal to the average service life of fixed capital stock (about 20 years) – before there emerged a need for the massive investment into replacing retirement. Afterwards, the capital stock started to age rapidly reducing sharply capital productivity and lowering labor productivity and TFP growth rates.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28113.

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Date of creation: 2006
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Handle: RePEc:pra:mprapa:28113

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Keywords: Centrally planned economy; growth cycle; retirement of fixed capital stock;

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References

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  1. Sergei Guriev & Barry W. Ickes, 2000. "Microeconomic Aspects of Economic Growth in Eastern Europe and the Former Soviet Union, 1950-2000," William Davidson Institute Working Papers Series 348, William Davidson Institute at the University of Michigan.
  2. Easterly, William & Fischer, Stanley, 1995. "The Soviet Economic Decline," World Bank Economic Review, World Bank Group, World Bank Group, vol. 9(3), pages 341-71, September.
  3. Young, Alwyn, 1994. "Lessons from the East Asian NICS: A contrarian view," European Economic Review, Elsevier, Elsevier, vol. 38(3-4), pages 964-973, April.
  4. Yan Wang & Yudong Yao, 2001. "Sources of China's economic growth, 1952-99 : incorporating human capital accumulation," Policy Research Working Paper Series 2650, The World Bank.
  5. Martin L. Weitzman, 1968. "Soviet Postwar Economic Growth and Capital Labor Substitution," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 256, Cowles Foundation for Research in Economics, Yale University.
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Cited by:
  1. Popov, Vladimir, 2010. "The Long Road to Normalcy," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).
  2. Vladimir Popov, 2010. "Development theories and development experience: half a century journey," Working Papers w0153, Center for Economic and Financial Research (CEFIR).
  3. Vladimir Popov, 2009. "Why the West Became Rich before China and Why China Has Been Catching Up with the West since 1949: nother Explanation of the “Great Divergence” and “Great Convergence” Stories," Working Papers w0132, Center for Economic and Financial Research (CEFIR).

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