"Gorbachev Factor"

This 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.

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