The Economics of Disintegration in the Former Soviet Union

The wave of political revolutions sweeping eastern Europe in 1989 wreaked havoc on the established economic arrangements for production and trade. Central planning, price controls and managed trade collapsed. Contrary to initial expectations, private initiative was often slow to fill the vacuum. The shift towards markets, in consequence, proved far more costly than initially expected: industrial production in the transition economies has fallen by 30%–40%. While a considerable fraction of the decline reflects the discontinued production of unwanted shoddy products, the shift to markets has undoubtedly lowered the living standards of sizeable social groups, in particular recipients of fixed incomes with limited outside employment opportunities.1