On the Threshold of New Mercantilism

13 february 2017

The Impact of the Soviet Union’s Collapse on the Global Economy

Alexander Losev is the CEO of the Sputnik-Capital Management Company.

Resume: Not only in totalitarian societies is the economy subordinate to ideology. Socialism, conservatism, and liberalism are certain sets of ideological, political, and economic programs.

The Soviet Union broke up twenty-five years ago, therefore it does not make much sense to explain in detail how much has changed since then in the public mind, in politics, and in the economy. Any anniversary is an occasion to look back in an attempt to find answers to questions such as: What trends have prevailed? What have we, Russians, lost and what have we gained? And what impact has the disappearance of the Soviet superpower had on the rest of the world?

What has the world gained?

To understand what impact the Soviet Union’s collapse has had on the world economy, what global economic transformations the breakup caused, and if the aftershocks are still felt today, it is essential to not just distinguish between the correlation and casualty of the events that followed, but also to find out (in strict conformity with ancient Roman law: post hoc ergo propter or post hoc non est propter hoc) what happened after a certain event and what was the consequence of that development.

The theory of relativity postulates that the results of observation depend on the position of the onlooker, the speed of the object observed, and the moment of observation. To a certain extent this rule of modern physics is very true in relation to macroeconomics. Russian pundits and economists, especially those adhering to the old Soviet political economic school, believe that the world economy over the past twenty-five years has undergone colossal transformation in terms of revolutionary changes that have occurred in the structure of property and the mode of production, in politics and in the social sphere, entirely confirmed the dialectic link between the base and superstructure in full conformity with the theory of historical materialism.

Yet many of my Western counterparts argue that the disappearance of the Soviet Union from the world political map has changed nothing in the way the global economy works. Indeed, the Soviet Union in its day was a giant provider of hydrocarbons, rolled stock, commodities, timber, pulp and paper, a variety of firearms and heavy weapons, trucks, and farm machinery to the global market. So is the case for Russia today. The structure of Russian exports in 2015 was practically the same as that of the Soviet Union in 1986. AvtoVAZ, the manufacturer of Lada cars in Togliatti, has never been a great rival of BMW, General Motors, or Toyota. Nor will it ever have the slightest chance of offering worthy competition to the world’s recognized automotive giants.

Even though the Soviet Union managed to create in the first post-war years the world’s third operating computer (after Germany’s Z4 and the United States’ ENIAC), and despite the fact that domestic programming and cybernetics have always remained at a fairly high level, Russian equipment has not become a trendsetter in the global IT industry. U.S. technological giants such as Intel, AMD, and IBM have convincingly proven numerous times that Moore’s Law is right—every two years they double the quantity of transistor elements in microchip crystals, thus increasing the capability of their processors. In fact, the overseas giants of digital industry—such as Apple and Microsoft, and not OJSC Kvant in Moscow’s remote suburb of Zelenograd—have outperformed traditional corporations and banks in terms of capitalization. A successful company owes its place in the modern world to multi-billion investment, effective production, resourceful marketing, and global demand, and not the achievements and scientific priorities of the past. Indeed, such arguments put forward by Western economists are really hard to counter.

With the collapse of the Soviet Union, the wholesale decay of industrial production and farming, and the disruption of production chains, Western producers gained access to new markets. But in the segment of mass-produced goods China remained the leader because the population of CIS countries, including Russia, were customers of moderate means and could only afford consumer goods of equally moderate quality, labeled “Made in China.” Essentially, the European Union remains Russia’s largest trading partner, accounting for 45 percent of Russian foreign trade. But when it comes to statistics illustrating relations with individual countries, China has no equals.

Exporting labor resources to the West has proved to be a far more tangible factor of direct economic influence resulting from the breakup of the Soviet Union than the emergence of a new configuration of the consumer market. When the Iron Curtain fell and the borders opened widely to labor migrants, the bulk of the workforce that rushed westwards came from those Central European countries that had just left the Eastern Bloc’s orbit and from the limitrophe states—all former parts of the Soviet Union. According to recent IMF estimates, some 20 million Eastern Europeans, mostly young specialists, have moved to Western Europe and the United States in search of a better life over the past quarter of a century, which, in turn, has added to the imbalances in economic development between the European Union’s old-timers and new-comers. The gap continues to widen in labor productivity and income per capita between industrialized countries and the former Soviet bloc, including the Soviet Union’s fragments.

Yet emigration from Russia proper to North America and the European Union has been quite small. According to statistics provided by migration services, about one million people left Russia from 1991 to 1998, while some eight million resettled to Russia on a permanent basis from the former Soviet republics during that same period. If one leaves aside the migration of labor resources and the so-called “brain drain,” at first sight it might seem that the breakup of the Soviet Union caused no considerable effect on the global economy and that global development has followed its due course. New technologies have emerged, industrial leaders have changed, markets have undergone transformation, capital flows are following new routes, the effectiveness of resources, including labor, is growing, and so is the overall well-being of the global population. In the meantime, unable to adjust themselves to the changing environment, economically ineffective systems are becoming unviable and obsolete in full conformity with the fundamental laws of a free market economy. And all this is happening after, and not due to, the disappearance of the Soviet Union.

Has anything changed considerably with the natural course of events after 1991? Odd as it may seem, a lot actually has. The world has undergone fundamental transformations, and not just from the standpoint of historical materialism. And it has changed precisely because the Soviet Union has disappeared from the political map. Moreover, some of these changes are still going on and they may still bring about the most unexpected consequences for the world economy and the world order in general.

Ideology and economics go hand in hand

Economic science is keen to separate economic knowledge from ideology. It painstakingly sidesteps many aspects of human activity and invariably attempts to measure every little thing under the sun with a monetary yardstick. To understand and assess the global transformations that have occurred since the Soviet Union broke up, one should review the geopolitical and geo-economic processes and pay attention to the role of philosophy and ideology, as well as the world economy theory and the world systems analysis.

Not all economic collapses bring about a change of political models or even a collapse of statehood. Moreover, a thousand-year-long historical experience indicates that the economy and natural needs of the people are not always primary for societies and states. Philosophy constitutes the core of political and ideological doctrines, of the understanding of the world, and of the system of knowledge, values, and relations. It is philosophy that generates goals, ideals, and rules.

Philosophy is above any economic laws and also shapes ideology. In turn, ideology produces systems of values, social imperatives, and mechanisms of control and means of achieving goals—in other words, political doctrines. Totalitarian ideologies may speed up the development of some countries and regions, or they may act contrary to economic laws and bring about considerable imbalances. Not only in totalitarian societies is the economy subordinate to ideology. Socialism, conservatism, and liberalism are certain sets of ideological, political, and economic programs.

When Marxist-Leninist philosophy triumphed over one-sixth of the earth and then spread to territories that fell into the Soviet Union’s sphere of influence, an ambitious project was launched to build a bright Communist future (in defiance of any costs and suffering) and to struggle for ideological hegemony in the world. Anti-Communism, right, and ultra-right doctrines, such as Nazism and later McCarthyism, emerged in response. The philosophy and ideology of national socialism plunged the Old World countries into the abyss of a bloody war. The Cold War between the Soviets and the West and the arms race followed. The economy still existed, of course, but at certain moments in the history of the last century it ceded first place to politics and ideology. Today one can only deplore the appalling number of casualties (in the millions), the economic, cultural and spiritual losses, and the missed opportunities.

The balance of power that emerged after World War II established geopolitical rules and conditions under which none of the rival blocs was able to achieve one-hundred-percent hegemony in politics, the economy, world trade, or in the military sphere and ideology. The Soviet Union was one of the centers of power, but with the passage of time its effectiveness in the economy and politics dwindled and the country lost its original foothold. As for the competition of philosophical, cultural, and scientific ideas of the capitalist and socialist worlds, over a greater part of the 20th century it encouraged global progress in science, engineering, and economic development, although amid a very risky confrontation.

Politicians, who in their youth had experienced the horrors of war, ruled the postwar world. After repeated attempts to test each other’s strength, at a certain point the principle of peaceful coexistence was proclaimed and the easing of tension began between the two systems. Neither party was planning to stage a world revolution or, on the contrary, to wipe out Marxism-Leninism by turning cities and countries to rubble any more. But many things had to be made independently, because far from everything could be taken or purchased from the rival party. There were incentives to make scientific discoveries, invent technologies, manufacture goods, and transform the socio-cultural space. Forced import substitution in a bipolar world triggered industrialization in one camp and created motives for qualitative development in the other. One can say that achievements and breakthroughs in science and engineering in the second half of last century, including space exploration, nuclear power, and information technologies, were a result of sound competition, and not just such market economy factors as supply and demand.

Although it has to be admitted that the role of the state and the ruling party was huge in the Soviet economy. Amid the scarcity of resources, it was not free market economic laws, but economic dirigisme that guaranteed the achievement of certain goals. Whether achieving those goals was worthwhile is now a matter of the past.

Whatever the case, the Soviet Union played a significant role in the civilizational development of humanity. But in 1991 that center of power vanished and the bipolar world became monopolar. In physics, a magnetic monopole exists only hypothetically in theories postulating the unity of all fundamental interactions. In the sole remaining world center of power, the idea of absolute hegemony emerged.

The heyday of liberalism

The history of capitalism and the economic practices of the past few decades show that having achieved world hegemony, some countries instantly embark on a global crusade of liberalism that is naturally to their own benefit. The United States advocates the same liberal approach and principles of free movement of capital, goods, and labor resources that the Netherlands began to profess after the Thirty Years’ War (1618-1648) and which Britain followed when it achieved world hegemony in the middle of the 19th century.

Having surpassed other countries in terms of economic effectiveness and obtained world financial control, the United States has taken an extremely negative attitude towards any restrictions on world trade, precisely as Britain did during its global supremacy. In pursuit of its own selfish interests, the U.S. does not hesitate to support liberal forces through overt or covert interference in the political processes taking place in other countries. The aim of such actions is to achieve economic advantages in exchange for political and ideological support the U.S. provides for liberal governments and parliaments of both individual countries and associations of states.

Ideologically, this drive for economic profit may rely on universal humanitarian and moral values, such as the international slave trade in the middle of the 19th century, when European and U.S. naval ships stopped for inspection all ships sailing from West Africa to the Americas. Other examples are the American Civil War and the abolition of slavery. Abolitionism also spread to the British and French colonies, Brazil, and Indochina. But few know that the real driving force behind the British Empire-led campaign to abolish slavery lies in the mercantile interests of the British East India Company, which produced cotton in India. The American Civil War ended the flow of slaves from Africa to cotton plantations in the southern U.S., but also allowed Britain to turn itself into one of the world's largest cotton producers and a textile industry leader. As for the ruthless exploitation of the local population in India’s cotton fields, nobody in civilized Europe seemed to care.

One hundred and fifty years later “the entire civilized world” is lauding the ideas of democracy, universal humanitarian values, political correctness, and tolerance towards the LGBT community and migrants’ clan laws (adats), as well as the struggle against “bloodthirsty dictators,” such as Slobodan Milosevic, Saddam Hussein, Muammar Gaddafi, and Bashar al-Assad, and the sanctions that curb Iran’s and Russia’s “aggressive ambitions.” But very few stop to think about the price of victory in such a struggle for universal democracy and the economic losses that sanctions entail.

The world systems theory shows that as soon as one of the world powers achieves hegemony, the global economy experiences a freeze on the free movement of production factors and independence of markets. Subsequently, the hegemon’s political and monetary authorities implement a policy of controlled interference in global economic processes. The Soviet Union’s disappearance from the global scene and the breakup of the bipolar system of international relations was the main factor of influence on the global economy.

The United States firmly retains world leadership in the economy and politics. Although the overall nominal GDP of the European Union is slightly larger than that of the United States and the Chinese economy has grown four-fold over the past two decades, the United States still accounts for 22.5 percent of global GDP. In addition, some U.S. corporations run manufacturing operations in third countries. These corporate giants have budgets that greatly exceed the financial capabilities of a majority of countries.

The struggle for ideological hegemony, too, has ended in a U.S. victory. Since 1991 the prevailing global ideology has been U.S. neo-liberalism—a concept that declares the principle of democracy, open markets, free competition, and social justice, but at the same time supports harsh protectionism, social interventionism, government meddling, and major non-government actors in the operation of markets, as well as substitution of international law and inter-state institutions with such abstract criteria as tolerance, human rights, and liberal morality.

The geopolitical expanses of the twenty-first century include the economic and information spaces that the hegemon controls through a system of economic and political relations and mechanisms to distribute resources and production factors. The doctrine of neo-liberalism also implies that the hegemon and its corporations control advanced technologies and establish their international standards in the context of trade globalization and free access to consumer markets around the world. This explains the successes of the Apple and Microsoft corporations.

If the concept of neo-liberalism is to be believed, “the invisible hand of the market” will decide who is to produce a certain type of product, when, and where, who is to provide the raw materials and labor resources, and who will eventually have the surplus value and profit. The periphery of the globalized world will be destined to focus on providing raw materials and mono-cultural production in full conformity with “free market economy principles,” which put emphasis on certain “competitive edges” (for instance, large oil and gas reserves or unemployed labor resources) and substitute for the economic policies of countries that are weaker than the United States. Dictating this neo-liberal doctrine has pushed to the sidelines the classical approaches of Keynes and Schumpeter, who maintained that individual countries consciously create incentives for innovation and industrial development in their territories and whose ideas were successfully implemented in the bipolar world of the past. Only those in developing countries who have managed to say “NO” to recommendations issued by the International Monetary Fund and the World Bank (the so-called Washington Conensus), have demonstrated noticeable economic successes.

As for neo-liberalism, oddly enough it has actually slowed the development of a number of countries and regions, exacerbated inequality and imbalances, and worked as a trigger for recurrent regional and global economic and financial crises. Stemming from the problems of the U.S. mortgage system, the crisis of 2008 alone has cost the world economy about $4 trillion. This is also the price that had to be paid by all for the breakup of the Soviet Union and the disappearance of the bipolar world order.

The show must go on

The Soviet Union failed to transform itself and reorganize its economy, but just bowing out of the world scene may still have far more perilous effects. Global liberalism is beginning to lose its foothold. Asymmetric division of labor and unfair exchanges between the hegemon that created this new world order and the peripheral states are breeding tensions and shaking loose the system established over the past twenty-five years. Economic crises, the overall slowdown of growth, and shrinking investment in developing countries steal away many of the potential benefits from globalization and lead to protectionist policies and transition to neo-dirigisme and Schumpeter’s neoclassical model. The Asian region is demonstrating strong economic growth rates and considerable mobilization capabilities. The struggle for strategic domination and the creation of new world institutions is ahead.

New centers of power and new economic leaders are emerging already, and at a certain point they will be able to challenge U.S. hegemony. The factors of long economic cycles and changing waves of innovation (Kondratiev cycles) will come to the fore. As long as the world exists in the current financial and economic system, the dominating power sets the rules of the game and ensures that all other countries follow them. But, as Immanuel Wallerstein said in his world systems theory, the state ceases to be hegemonic not because it loses strength, but because others become stronger.

As soon as the world economy’s further progress starts another Kondratiev cycle and capital flows and production factors begin to be redistributed again, new aspirants to world domination will show up virtually in no time. The era of triumphant globalization will give way to national egoism, and the collapse of previous alliances, the system of international relations, and global security. The contender countries will form new military and political blocs, and limitrophic entities and the world will be in a situation similar to that on the eve of World War I. Wars for the redistribution of geopolitical spaces have already begun, but they are being waged away from the great powers’ mainland theories and by proxy, including the use of radical terrorist groups.

But nuclear weapons are still a factor. Whereas the Soviet-U.S. nuclear parity achieved in the 20th century guaranteed peace with 100-percent certainty, and the task of mutual control was to prevent the proliferation of nuclear weapons and technologies to third countries, today, when countries around the world suddenly begin to declare their ambitions and their own security requirements, the risks of a new world arms race and nuclear conflicts are soaring again. And it is very hard to say if modern politicians and economic systems are prepared for such risks. This is yet another effect of the Soviet Union’s collapse.

There is only one thing Russia can do in this changing world: in the early days of what may become an era of new mercantilism, it must focus on its own national interests and retain at any cost its crucial place in the system of international security it has inherited from the Soviet Union.

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