general chaos and disorganization was precipitated further by the
relaxation of fiscal policy under Gorbachev. He put pressure on the
Gosplan to augment significantly industrial investment targets to
expand production and accelerate the rate of economic growth. This
strategy required substantial budget borrowing, which ran contrary
to the instincts of Soviet planners used to fiscal discipline.
However, a group of economists close to Gorbachev swayed the
argument in favor of borrowing by citing Western examples when
budget deficit and inflation were used to stimulate economic growth.
Beginning in 1988 the government debt grew and soon spun out of
control. The government resorted to printing money and turned to the
West for credits. In just two years after 1988, the USSR’s foreign
debt reached an unprecedented level of $70 billion.
However, the reform-minded leadership and pro-Western elements in
the Soviet elite saw nothing wrong with foreign loans. Western
credits were proof to them of the West’s support of perestroika, and
a factor that bound the Soviet Union and the West in partnership.
The experiment with budget borrowing inaugurated spiraling
inflation, which proved ruinous for the Soviet economic system.