The Second Economy of the Soviet Union and Eastern Europe

Abstract

The second economies of the Soviet Union and other East European countries derive from structural inadequacies in the socialist planning system and from the cultural and historical evolution of each East European society. This article combines the structural and cultural approaches to the second economy and focuses on four of its most prevalent forms: peasant household production, the shadow economy within socialist enterprises, the underground factories of Soviet Georgia, and the hidden economy within the retail and service sectors. In all cases, social linkages and cultural values provide frameworks for economic activities. The second economy helps to alleviate consumer shortages and bureaucratic bottlenecks in all these societies. It also acts as a social mollifier, channeling dangerous political frustrations into consumerism, swindling, or petty corruption. Yet the overall effect of the second economy is a corrosive one: as a surrogate reform, a second economy tolerated by the authorities only reproduces the fundamental flaws of the formal economy. Moreover, it exacerbates the gap between society and the state, between “us” and “them.”