Why the USSR failed

and China succeeded

“Without heavy industry, we will not be able to build any industry”

Soviets tried to build the industrial economy from its basic elements.

Short answer:

There are two ways for a poor, underdeveloped country to industrialise: Soviet vs Chinese way.

Soviet way, is to start building the industrial society starting from its very foundations. That is from the basic, back end industries, such as the metallurgy, petrochemical & chemical, machinery. Once you developed it, you can build the rest starting from these basic elements.

That is what the USSR tried.

That is where the USSR failed. And that is because the back end of industrial civilisation is hard. It is capital intensive, it is knowledge intensive, it is highly mistake intolerant, and it is all too easy to mess everything up. Worst of all, markets of the back end tend to be small, and the more critical, the smaller.

Aiming to brute force your way to the back end, you will only bleed yourself, and bleed yourself for a relatively small financial gain. In theory, laying the foundations would allow you to proceed to the upper floors. In practice, however, you will get stuck on the foundation part, and remain there until you run out of money. Then you go bust.

And that is what happened with the USSR.

Chinese way, is to skip the foundation part altogether. Do not even bother with laying proper foundations, but start building the roof asap. Do the front end, consumer market oriented industries. Make slippers, make toys, make gaming consoles.

The thing with front end markets is that they tend to be easier compared to the back end. The entrance barriers are lower. You can start with little money, with relatively little expertise. You can be making mistakes, you can be messing things up, and that will still work because low price is the only thing people really care about.

On top of that, front end markets tend to be bigger, so much bigger compared to the back end. And that is the great paradox of the manufacturing sector. A dumber, easier to enter, more mistake tolerant front end industry will correspond to a critical back end industry it is based upon as an elephant to a mice. Front end is very large.

Do not even bother with developing any proper back end. Just go to the front end, and swallow the elephant whole. Once you have swallowed the elephant, you will be drowning in cash. Now you can redistribute a part of these earnings on developing the niche, complex and not particularly lucrative expertises of the back end.

And that is what China did

(and is still doing now)

In other words, the USSR tried to build the edifice of industrial economy starting from foundation, and got stuck there. If you start from foundations, you will never ever get to the roof.

China, on the other hand, started from the roof, skipping the foundation part altogether. Unlike the Soviet way, Chinese way does work. The flip side, however, is that leaping to the front end, you leave many, and many, and many back end-related critical points behind. And that is because you never even bothered with developing them.

Long answer:

Front End vs Back End

We, the people, buy stuff. Whether we pick it in the supermarket, or order it on the amazon, we all buy stuff.

To be fair, we don’t really buy any stuff. There is almost always a clear line between what we do buy and what we don’t.

We may buy a pair of jeans. We may buy a rocking chair. We may even buy a laptop.

Stuff we do buy is called the consumer goods. Whatever you can find on the supermarket shelf falls under this category.

Still, it is important to remember that it doesn’t just materialise on the supermarket shelf out of nowhere. There is a long and complex manufacturing chain behind the shelf. And the production of a ready consumer good, such as a towel, a bicycle or a quadcopter is but the final, ultimate step of the chain.

As the production of consumer goods comprises the final element of the manufacturing chain, we will be calling it the Front End of the manufacturing industry. Production of toys, clothes, furniture, household appliances, consumer electronics all falls under the Front End category.

The list of top selling Amazon products gives an idea of what the front end is, and how it looks like.