Government failure and national breakdown

Today (July 4^th) is not only the anniversary of the accession of the current UK government, but it is Independence Day in the US. For that side of my family, this is an opportunity to reaffirm traditional American optimism and virtues. On this side of the pond the outlook is much darker.

In an article for Unherd, Aris Roussinos offers an analysis of the current Labour government’s first year in office as a case of potential national breakdown, drawing heavily on the breakup of the former Soviet Union in 1990. While there may be similarities, I think that his arguments reflect the biases of a foreign correspondent and entirely neglect the economic background to the collapse of the regimes in Eastern Europe and the Soviet Union.

While I was not what was then regarded as a specialist in planned economies, I spent a lot of time between 1986 and 1993 working in many countries of Eastern Europe and the former Soviet Union. Initially, my work focused on the energy sector but then I devised a way of analysing the competitiveness of a wide range of industries, which led to much broader work on the economic prospects of these countries.

The progressive failure of the regimes across the region was not the consequence of nationalism as described by Roussinos. That played a role in the former Soviet Union, especially in shaping attitudes in the Central Asian republics. However, even there the underlying economic failure was crucial, because it undermined the capacity of the centre to sustain the transfers which had tied the Soviet Union together.

For three decades from 1950 to 1980, the Warsaw Pact governments were able to maintain a significant degree of public support despite resentment of Russian domination and the restrictions on daily life imposed by the Communist regimes. That support rested on rising living standards supported by economic growth. People had better housing, televisions, cars and other material improvements in their living standard. At least in urban areas, they had jobs, life expectancy, and opportunities far beyond those a generation earlier.

While the economic growth was not completely an illusion, it rested on two very fragile pillars. First, consumption was repressed to fund heavy capital investment, initially in infrastructure and then in industrial sectors. Productivity growth was low and relied upon the import of capital goods from the rest of the world. Technological development focused on a few favoured sectors – defence, space, and energy – but the rest of the economies relied on imports of new capital equipment.

Second, the Soviet bloc relied on trade in energy and natural resources. These were heavily under-priced in internal trade, both within and between countries, but generated most external revenue in trade with the rest of the world – either directly or indirectly.

The prospects for the Soviet bloc in the 1970s would have been dire had they not been bailed out by the commodities boom of the early 1970s followed by successive oil price shocks from 1973 to 1980. Inside the Soviet Union, high oil prices allowed the government to invest heavily in natural gas infrastructure. Initially, that offset the decline in oil exports due to a combination of under-investment in developing new oil production and an increase in domestic consumption.

Other Soviet bloc countries relied on transfers via below-market prices for energy and natural resources. These were used to underwrite loans to fund capital investment and modernisation of technologically outdated and uncompetitive industries, but there were few incentives to ensure such investments were properly managed.

The whole house of cards began to fail in the early 1980s as oil prices started to fall sharply after the market stabilised in the aftermath of the shock caused by the outbreak of the war between Iran and Iraq. Some may remember the outbreak of unrest in Poland following the formation of the Solidarity trade union at the Gdansk shipyard in 1980. Poland was the canary in the mine because it had an economic recession in 1979 and was heavily indebted. Moscow was very reluctant to bail out Poland, both because it had got involved in a very expensive war in Afghanistan and because it too was facing the prospect of a debt crisis.

When I started to work in Hungary and Poland, the signs of economic stress and national breakdown were becoming increasingly visible. The work was funded by the World Bank, which the two countries had joined in 1982 and 1986 respectively, because it was clear that major reforms in the energy sector were a necessary element of any strategy for economic recovery.

Many of the senior people I knew and worked with were contemptuous in private about their governments, while public services were failing. The primary goal of the nomenklatura, the Soviet version of the Blob, seemed to be to maximise what they could extract from the system. Among academics there was a tendency to retreat from involvement in government policy and a focus on collaboration with organisations outside the country. This was an indication that politicians and senior bureaucrats were largely isolated from what was going on in the wider economy and, often, the rest of the world.

The economic state of countries in Eastern Europe got progressively worse in the second half of the 1980s. This led to what amounted to a collective mental breakdown among the governments of the region in 1988-89. The hyperinflation in Poland in 1989-90 illustrated the consequences of the breakdown in the previous economic model.

In some countries, including Poland and Hungary, there was a very strong desire to gain independence from Russian or Soviet control and its association with communist governments. The tensions between the economic interests of the Czech and Slovak parts of Czechoslovakia led to their separation. Still, in these cases the driving force behand the national breakdowns was economic failure. This was reinforced by the decline in the direct and indirect transfers from the Soviet Union which had held Comecon together. A different story could be told for the former Yugoslavia but similar economic failure in the 1980s doomed what was, at best, a simulacrum of a unified state.

In the case of the former Soviet Union, the nationalist tensions described by Roussinos fed on economic failure. We should remember that several of the republics were pushed out rather than actively seeking to leave the union. Once the breakup became inevitable, ambitious local apparatchiks took advantage of the change – notably Leonid Kravchuk in Ukraine. The national identity that is now recognised as Ukrainian was, at the time, largely restricted to the west of the country in Galicia - centred on the city now called Lviv.

For the first 15 years after independence Ukraine was dominated by the industrial region in the east of the country. It was run by people who were previously senior managers at defence and heavy industrial plants that had been – and remained – closely linked to Russia. These industries suffered greatly from the withdrawal of support from Russia with the consequence that the Ukrainian economy declined for nearly a decade after its separation from the Soviet Union. This economic stress fed tensions between the eastern and western regions of the country, fuelling political instability.

The lesson from the national breakdowns in Eastern Europe and the former Soviet Union is that the key driver was prolonged and increasingly severe economic failure. This destroyed the credibility of the ruling elites and fed the nationalist sentiments which reinforced the pressure to eject the communist regimes as well as to dissolve central governments. In several cases the national breakdowns exacerbated the underlying economic failures and created further revolts against the governments that emerged after the initial breakdowns.

What does this all mean for the UK? The country seems to be suffering from many of the discontents that were obvious in Soviet bloc countries. Public services are deteriorating and appear to be run to suit insiders rather than the public. There is widespread contempt for an incompetent and self-serving nomenklatura. Governments of all types have a record of promising a lot and doing very little, and what they do seems deliberately intended to favour small but well-connected groups at the expense of everyone else. GDP per capita has stagnated for nearly 15 years, while its distribution has skewed heavily towards the top end and the richest region of the country. Moreover, the national debt is reaching the point where it can neither be serviced nor reduced without incurring high social and economic costs.

The sense that we are close to the conditions that caused the national breakdowns between 1985 and 1995 is overwhelming. Perhaps politicians and senior bureaucrats – not just in London but in Belfast, Cardiff and Edinburgh – see their duty as looking away and passing by. For the rest of us the decay and incompetence are so visible and inescapable that the contempt will only grow. Economic growth accompanied by improvements in real incomes for the majority, not small minorities, would limit the pressures but the likelihood of that is small to zero.

Roussinos is not wrong to draw a parallel between the UK today and the Soviet bloc in the late 1980s. [As a side observation, the accompanying picture of the Prime Minister is remarkably akin to the photos of East European leaders that were spread across newspapers and public buildings at the time.] However, he should have emphasised the critical role of persistent and severe economic failure in undermining the legitimacy of both Soviet bloc countries and the UK. The accumulation of public debt and a complete failure to increase labour productivity lies at the heart of that failure.

No one who observed the consequences of the national breakdowns that occurred in Soviet bloc countries – the hyperinflation, loss of private and social assets, and the sheer despair – could want to repeat this in the UK. The turnaround was extraordinarily painful. Some thrived but most experienced either deprivation or extreme disappointment over extended periods. Still, the sheer blindness of an elite that neither understands nor is interested in the daily lives and experiences of the general population makes a variant of such breakdowns more likely in Britain.

As Roussinos correctly emphasises, the issue is not one of personalities but structures. Who remembers or cares about the rulers of East European countries before their breakdowns? They were little more than sock puppets, symbols of failing systems without the capacity or nous to change. Mikhail Gorbachev was the best of the lot, in some ways a tragic figure overwhelmed in trying to save a system that was dying. The current PM has nothing like Gorbachev’s intellect or understanding. He is the captain of a boat that he doesn’t understand, and which is heading rapidly for the rocks.

In the spirit of the apocryphal Chinese curse “May you live in interesting times”, Britain has a bureaucracy and governments overwhelmed by forces outside their control. They are in office but not in power. How this ends is very uncertain, but the notion that the existing system can survive for long seems implausible.