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July 13, 1990
"Reform, Not Foreign Aid, Will Rescue Soviet Economy"
San Jose Mercury News
By Timothy Taylor
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JUDGING from the headlines at the economic summit in Houston, a lot of people believe that unless the USSR gets a few billion dollars in aid from the capitalist nations of the world, Mikhail Gorbachev's economic reforms will be doomed.

But the hard reality is that the Soviet economy is too large and too decrepit for outside aid to make much difference. Compared with the economic problems of the USSR, which seem to look worse with every new economic study, the amount of aid money being discussed is trivial.

The textbooks of a few years ago used to cite standard estimates that the Soviet economy was about half the size of the U.S. economy. Now, Soviet economists are claiming that their economy may be just one-fifth of the U.S. economy.

That dismal fraction implies a correspondingly low standard of living. Soviet citizens consume less meat now than they did before the revolution; per-capita housing space is one-tenth that of the United States for 15 percent more people than in the U.S. population; a majority of homes do not have hot running water or telephones; the list goes on and on. If you have a chance to talk with a visiting Soviet citizen, ask him what he thinks of capitalist miracles like Lucky or Safeway or Target or K mart.

Against this background, consider the impact of providing $10 billion per year in outright aid to the Soviet Union, forever. If the Soviet GNP is actually $1 trillion (about one- fifth the size of the U.S. economy), that aid could increase current Soviet GNP by 1 percent in the first year, with no additional increase in future years.

Of course, even that minimal effect depends on the capacity of the Soviet government to assure that the aid is spent wisely. As Latin American governments and America's own savings and loan operators have shown, it's quite possible to lose hundreds of billions of dollars and have nothing productive to show for it.

In the face of these hard numbers, proponents of aid can respond that the aid isn't intended to be a solution in itself, but rather that it will buy political space for Gorbachev to carry out needed reforms.

Given that no one has been much good at predicting the path of Soviet politics in the past few years, I suppose this diagnosis is as likely as any other. But the argument also admits the key point, which is that sensible Soviet economic policies are far more important than any aid package. For example, increasing Soviet economic growth by 2 percent per year would increase a GNP of $1 trillion by $20 billion a year, $40 billion in the second year, $60 billion in the third year, and so on.

Unlike foreign aid, economic growth compounds and builds on itself. Moreover, such growth is by definition real production, not just money that may or may not find its way into an economically sensible project.

However, the Soviets have traditionally had a misguided notion of the roots of modern economic growth. Soviet economic planning has suffered from giantism, the disease of believing that a bigger factory is always better.

Economist Clark Kerr has argued that the Soviets have tried to create economic growth by increasing the amount of labor, capital and land that is in production. During this century, about 90 percent of Soviet economic growth has come from these factors, with the rest coming from technological growth. In the United States, on the other hand, about 90 percent of economic growth in this century has come from technological progress.

In this context, technological progress doesn't primarily mean major inventions like the automobile or the laser or the semiconductor. Most technological progress involves an enormous number of much smaller efficiency gains and inventions, made on a worker-by-worker level throughout the economy. It's born in a frame of mind that continually looks for improvements.

Plans for Soviet economic reform have discussed eliminating price subsidies and allowing markets and bringing in foreign investment and technology. All these ideas (and more) have a role to play. But the pervasive changes in attitude that are needed are much more important, and much more difficult. Remember that no worker or manager who has spent his or her life in the Soviet Union has ever worked under the incentives and opportunities and disciplines and hardships of an advanced capitalist economy.

Meanwhile, the rest of the world economy is not standing still, waiting for the Soviets to catch up. Seweryn Bialer, a Soviet specialist at Columbia University, has written that Gorbachev's economic reforms will be a success if in a decade the Soviet Union is no longer continuing to fall still further behind the countries of the West. As to actually catching up -- that's a problem for the first half of the 21st century, should significant economic reforms be adopted soon.

Western nations can and should be appreciative and encouraging toward Soviet economic reform, being willing to trade, invest and even lend a few bucks and a few words of advice. In fact, a policy along these lines seems to be emerging. But in the end, successful reform of the Soviet economy can only come from within.

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