Perestroika
The Soviet economy was slowly becoming stagnant, as Gorbachev stepped into power, whilst military spending went through the roof. Reagan's Strategic Defense Initiative was seen as a threat to be countered, and the Soviets threw more money at the military - the US was spending 15-18% of its Gross Domestic Product (how much the country earns) at the military, the Soviets were spending up to 35% - they were bankrupting themselves. To counter this stagnation Gorbachev introduced the policies of Glasnost (openness) and Perestroika (restructuring).
Perestroika
Perestroika, which is Russian for restructuring, is a governmental reform established in the Soviet Union by Mikhail Gorbachev in the mid-1980s to restructure Soviet economic and political policy. Seeking to bring the Soviet Union up to economic parity with capitalist countries such as Germany, Japan, and the United States, Gorbachev decentralized economic controls and encouraged enterprises to become self-financing in 1986. The program was an end of subsided prices and a continuation of earlier attempts to reform the Soviet economy by Khrushchev and Kosygin. However, the economic bureaucracy, fearing the loss of its power and privileges, obstructed much of his program. Gorbachev also proposed reducing the direct involvement of the Communist Party leadership in the country’s governance and increasing the local governments’ authority.
By 1987, Gorbachev was acknowledging that perestroika was a word with many meanings, but "the one which expresses its essence most accurately ... is revolution," since the "qualitatively new" and radical changes which the Soviet Union required constituted a "revolutionary task." Substantively, it was to mean in the political sphere the introduction of genuinely contested elections for new political institutions (e.g., the Congress of People's Deputies), enhancement of the governing role of the soviets, and other measures to promote democratization of the Communist Party and the entire political system.
To what extent was Perestroika the reason for the collapse of the Soviet Union?
1985-1991 was a tumultuous yet optimistic period in the Soviet Union’s history. Gorbachev hoped that people would be open about how to rebuild the communist system, and make it work better. All it did, however, was allow people to openly criticize the system, and soon they were calling for it to be replaced. Although Gorbachev’s intention was to create a more resilient, robust Soviet Union, in practice he did the opposite. Perestroika caused living standards to worsen, increased the public’s disillusionment and cynicism towards the Communist Party, and contributed to ethnic tension, which ultimately led to the Soviet republics to declare independence, destroying the fabric of the Union. Gorbachev did have some successes, such as opening up Soviet society and achieving détente with the West.
Newfound freedoms of assembly, speech, and religion, the right to strike, and multicandidate elections undermined not only the Soviet Union's authoritarian structures, but also the familiar sense of order and predictability. Long-suppressed, bitter inter-ethnic, economic, and social grievances led to clashes, strikes, and growing crime rates. The Communist control system and over-centralization of power and privilege were maintained, and new policies produced no economic miracles. Instead, lines got longer for scarce goods in the stores, civic unrest mounted, and bloody crackdowns claimed lives.