New Economic Policy

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For the Malaysian New Economic Policy, see Malaysian New Economic Policy.

The New Economic Policy (NEP) was officially decided in the course of the 10th Congress of the Russian Communist Party. It was promulgated by decree on March 21, 1921, "On the Replacement of Foodstuff and Natural Resource Assessment by a Natural Tax." In essence, the decree required the peasantry to give the government a specified amount of any surplus agricultural, raw product, and fodder, and allowed them to keep the remaining surplus to use as capital or to trade for industrial goods. Further decrees refined the policy and expanded it to include some industries.

The NEP restored some private ownership to small parts of the economy, especially farming. It replaced the policy of "War Communism" (mainly because War communism was failing, and decreased all sectors of the economy to below the pre-WWI output by about 27% (for coal). The worst sector was copper, which was at 1.7% of pre-WWI output), which had been used during the Russian civil war and which was deemed unsustainable in an underdeveloped country like Russia, with a kind of "Market Socialism", whereby nationalised (government owned) industries were allowed to operate autonomously, while a market system was introduced in agriculture. To explain the NEP, Lenin had said "We are not civilized enough for socialism", referring to the fact that Russia was still a primarily agrarian nation, with a very small urban population and a weak industrial base, and thus it did not meet the economic criteria necessary for full socialism. Lenin further justified the introduction of the NEP by declaring that the "commanding heights" of industry, that is, the large factories producing coal, iron, electricity etc., would still be under state control. The NEP also loosened trade restrictions, and tried to regain alliances with foreign countries.

Trotsky first proposed the NEP in 1920, but the idea was dismissed. In the following year, Lenin proposed the NEP, and the bill passed. This allowed peasants to lease and hire labor, which is more capitalistic that socialistic. This also created the Fundamental Law of the Exploitation of Land by the Workers, which ensures that the peasants have a choice of land tenure.

Results of NEP

Agricultural production increased greatly. Instead of the government taking all agricultural surpluses with no compensation, the farmers now had the option to sell their surplus yields, and therefore had an incentive to produce more grain. This incentive coupled with the break up of the quasi-feudal landed estates not only brought agricultural production to pre-Revolution levels, but further improved them. While the agricultural sector became increasingly reliant on small family farms, the heavy industries, banks and financial institutions remained owned and run by the state. Since the Soviet government did not yet pursue any policy of industrialization, this created an imbalance in the economy where the agricultural sector was growing much faster than the heavy industry. To keep their income high, the factories began to sell their products at higher prices. Due to the rising cost of manufactured goods, peasants had to produce much more wheat to purchase these consumer goods. This fall in prices of agricultural goods and sharp rise in prices of industrial products was known as the Scissor crisis (from the shape of the graph of relative prices to a reference date). Peasants began withholding their surpluses to wait for higher prices, or sold them to "Nepmen" (traders and middle-men) at high prices, which was opposed by many members of the Communist Party who considered it an exploitation of urban consumers. To combat the price of consumer goods the state took measures to decrease inflation and enact reforms on the internal practices of the factories. The government also fixed prices to halt the scissor effect.

The NEP succeeded in creating an economic recovery after the devastating effects of the First World War, the Russian revolution and the Russian civil war. By 1928, agricultural and industrial production had been restored to the 1913 (pre-WWI) level.

End of NEP

By 1925, the year after Lenin's death, Nikolay Bukharin had become the foremost supporter of the NEP. It was abandoned in 1928 by Joseph Stalin due to the Grain Crisis (where peasants sold grain to the Nepmen who bought their products at twice the government's price), and the need to rapidly accumulate capital for industrialization to the level of capitalist countries in the west (as Stalin famously proclaimed: "Either we do it, or we will be crushed.").

The NEP was generally believed to be intended as an interim measure, and proved highly unpopular with the strong Marxists in the Bolshevik party because of its compromise with some capitalistic elements. They saw the NEP as a betrayal of communist principles, and they believed it would have a negative long-term economic effect, so they wanted a fully planned economy instead. In particular, the NEP benefitted the Communists' so-called "class enemies", the traders (Nepmen), while being detrimental to the workers, whom the Party claimed to represent. On the other hand, Lenin is quoted to have said ""NEP is for real and for a long time" (НЭП - это всерьез и надолго), which has been used to surmise that if Lenin were to stay alive longer, NEP would have continued beyond 1929, and the controversial collectivization would have never happened, or it would have been carried out differently.

Lenin's successor, Stalin, eventually introduced full central planning (although this had originally been the idea of the Left Opposition, which Stalin purged from the Party), re-nationalised the whole economy, and from the late 1920s onwards introduced a policy of rapid industrialization. Stalin's collectivization of agriculture has been his most notable, and most destructive departure from the NEP approach. It is often argued that industrialization could have been achieved without any collectivization just by taxing the peasants more, much like it has happened in Meiji Japan, Bismarck's Germany, and in post-war South Korea and Taiwan. It is also argued, however, that such an industrialization would have taken much longer than Stalin's ultra-rapid version, leaving the Soviet Union far behind Western countries like Germany in terms of industrial and military output, thus possibly resulting in a victory for Nazi Germany in World War II.


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