Michael De Groot. <i>Disruption: The Global Economic Shocks of the 1970s and the End of the Cold War</i>

Maintaining what Michael De Groot calls a “welfare empire” can be a costly endeavor, especially if economic mismanagement forces members to take on debt that drives a wedge between them. The story of the Soviet Union’s demise has been told many times, be that through the detailed and personal accounts written by Nobel laureate Svetlana Alexievich or the thorough analysis and theorization of Harvard’s Serhii Plokhy. Even sub-facets of this story seem to have been repeated frequently, making it especially challenging to shed new light on the matter, but Disruption offers a fresh account of how the interplay of global economic events and intra-bloc relations shaped the outcome of the Cold War. It explores the nexus between commodity prices, debt, and capital costs to explain the gradual disintegration of Soviet communism. In contrast, the economic might of the US coupled with the rise of the dollar and the greater flexibility of Western capitalism offered a more enduring social system.The prelude to De Groot’s analysis was the United States’ ability to establish what economist Charles Kindleberger referred to as “economic primacy,” which came hand in hand with the rising dominance of the dollar in global financial markets following the conclusion of World War II. It was not only the main force behind global economic growth, but the loans it provided to the Allies positioned it at the center of financial contractual obligations. What is more, leaders in Washington launched the Marshall Plan to kick-start economies, and ultimately allowed the recipient countries to pursue autonomous economic policy, even if this was accompanied by some dependence on the United States, be that through its provision of credit or security guarantees. The Soviet Union responded with the far smaller and much more fragmented Molotov Plan, which those within its sphere of influence received. This form of Soviet cohesion policy was, however, fairly lackluster, and despite relatively even levels across Europe of well-being in terms of GDP per capita and technological sophistication, the economic development of countries within the two blocs began to diverge.Drawing on his already published scholarly work and thorough archival research, Michael De Groot, assistant professor at Indiana University Bloomington, begins his analysis around 1970 with President Richard Nixon’s New Economic Policy. The US struggled to address the mismatch between the fixed exchange rate regime that pegged currencies to the dollar and that which pegged the dollar to gold, introduced as a part of the Bretton Woods system, without taking into account different inflationary rates and the impact of trade balances on monetary flows—a concern J. M. Keynes had famously voiced. Problems were rooted in the United States moving from a trade surplus to a deficit, as governments (e.g., the Federal Republic of Germany or Japan) reconstructed their economies and increased exports. The United States faced inflationary pressure, exacerbated by the costs of the Vietnam war, leading Nixon to leave the gold standard and impose price controls to halt inflation while introducing import surcharges and stimulus measures to alleviate unemployment. These actions had a positive effect, but the economic pressures were symptoms of a changing global economic order. A credit-based consumer society would form in the US, but foreign exporters would recycle much of their earned income into US investments, enabling deeply intertwined relations of debt based on a trust in the US economy and the dollar.The Eastern Bloc’s economic policy administered the division of labor in a top-down fashion with little regard for local resources and skill sets. De Groot meticulously introduces the model by which the Soviet Union provided Warsaw Pact signatories with natural resources at prices well below those on the global markets, to enable their production of goods, which were generally inferior to those offered by Western counterparts. Mikhail Gorbachev would describe these relations somewhat later in a frustrated manner, when complaining that the USSR was “actually hired into slave labor—to get raw materials and supply them to other countries” (191). The resource allocation was unsuccessful, as the centralization of decision making drove inefficiencies, rigidity, and inhibited innovation, forcing governments to turn to Western capital markets to maintain the well-being of their citizens. Highlighting the impact of global economic turmoil on these newly formed debt relations and their geopolitical implications is the main contribution of De Groot’s work.A fundamental force driving the eventual disintegration of the Eastern Bloc was the debt governments accumulated to offset uncompetitive output and rising input costs amidst the energy crises and the Volcker Shock. Oil prices rose during the late 1960s and early 1970s on the back of strong global demand, plateauing US production, limited spare capacity, the devaluation of the dollar, and various geopolitical risks. The latter materialized in the Organization of Petroleum Exporting Countries (OPEC) embargo during the Arab-Israeli war of 1973, which drove oil prices to unprecedented highs. Western governments largely responded on a bilateral basis, despite some efforts to take concerted action, led by the United States and largely based on its own interests. While the United States had some domestic oil production to lean on, European states had few alternatives and opted to diversify their energy mix by growing the role of natural gas. They launched imports from the Soviet Union, reducing the animosity between the two blocs and introducing trade ties that would stabilize political relations for decades.The Eastern Bloc felt little of the shock initially since it purchased oil from the Soviet Union according to the Bucharest formula: based on the five-year moving average of global prices. Leaders in Moscow saw it as a buffer to reduce volatility, but it also insulated economies from market realities. As the Bloc continued down its path of forced industrialization and wasteful consumption, the wedge between market realities and their import prices grew. What is more, many sought to resell Soviet imports to Western counterparts at market prices in order to acquire hard currency. Not only did this pose a problem for the Soviet Union—due to the foregone income it needed to subsidize grain imports—but it had trouble meeting demands as systematic mismanagement and underinvestment into the sector limited output. Leaders in Moscow capped intra-bloc exports and increasingly pushed Warsaw Pact signatories to take up alternatives, such as natural gas, and participate in the development of respective projects. They became reluctant to subsidize the economies of their welfare empire, while levels of well-being within the Soviet Union declined.The stagflation that ensued throughout the globe was particularly detrimental for Eastern Europe. Debt became an acute problem as the economic turmoil in the West led financial institutions to reduce the credit provided to the Eastern Bloc, while the Volcker Shock substantially increased the cost of capital. The Paul Volcker-led Federal Reserve hiked interest rates to curb rampant inflation in the United States, stymieing economic growth, reducing the competitiveness of exporters, increasing unemployment, and reducing the bargaining power of labor vis-à-vis capital domestically. Financial institutions withdrew credit they had provided to foreign entities and invested it in safe(r) US assets, forcing other actors to deal with the consequences—an immense challenge given the dollarization of global trade and finance. Refinancing debt suddenly became extremely costly, eating away the hard-currency reserves of Eastern European countries. Western financiers and the IMF had to step in to avoid the insolvency of these governments. Leaders in Moscow were not willing to sacrifice domestic resources to provide a financial backstop anymore, ushering in the disintegration of the Soviet Union’s welfare empire.De Groot convincingly argues that “Moscow simply did not have the means to keep its allies afloat” (150) as the global economic challenges of the 1970s and 1980s wreaked havoc in Eastern Europe. Governments took on debt that proved to be even more enduring than the ideological and political commitment many leaders of the Eastern Bloc shared. With this, welfare empires as understood by De Groot effectively withered. The US forced allies to accept the market mediation of goods and financial relations. It may have maintained its military presence, but its true power came from its control over global debt. To this day, few alternatives exist to the dollar, and none of these is a true contender in overshadowing the US currency’s role in mediating debt relations. Both Russia and China may have sought to grow their influence by extending credit, but this pales in comparison to that of the US-centered world economic order.