February 3, 1991
"Soviet Reform is Stifled"
San Jose Mercury News
By Timothy Taylor
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SPEAKING OF lead balloons, have you been following the path of Soviet economic reform lately? It appears that Mikhail Gorbachev is giving up on the idea of economic perestroika, or restructuring.

Last weekend, Gorbachev gave the KGB and the police new and sweeping powers to search and question all private businesses, as well as their suppliers and bankers, to fight "economic sabotage." As the New York Times reported, "the list of new powers seemed almost deliberately designed to intimidate any entrepreneur."

The same day the new powers were announced, the State Committee for Statistics announced that the Soviet GNP declined by 2 percent in 1990.

Since Soviet economic statistics tend to combine a lack of knowledge with optimistic speculation, the real news is that things have gotten so bad even the government has been forced to admit it. Before this, the USSR hasn't admitted to having a recession since World War II.

The day before that, it was announced that grain, meat, vodka and wine would now be rationed in Moscow. Almost all consumer goods were already rationed in other cities, but when rationing hits Moscow, it means supplies are truly drum-tight around the country.

A couple of days earlier, the Soviet government had suddenly declared that all 50- and 100-ruble notes were no longer legal tender. The rough equivalent for the United States might be to declare that at midnight tomorrow, $20 bills are no longer legal tender. Supposedly, the move was to clamp down on inflation and the black market, by cutting the nation's supply of currency by one-third.

BUT IN the USSR, many people hold large amounts of cash. After all, the only investment available to most people, a bank account, pays little interest. Many people don't trust the government-owned banks with their deposits, anyway. And in an economy with pervasive shortages, it makes sense to keep a lot of cash around just in case you have a chance to buy something with it.

As a result, tens of thousands of people were trying to change their ruble notes to smaller denominations. Some banks and stores were refusing to take them. Some retired people were terrified that their life savings had just been wiped out. Consumer-oriented businesses and travelers, who had a lot of cash on hand, suddenly found their money worthless.

It's not clear how the details of the great currency ban are going to work out, but let's just say that it wasn't a big confidence builder for Soviet citizens.

Yet, according to the most recent comprehensive report on the Soviet economy, confidence building is exactly what is needed. "The Economy of the USSR" was co-authored by a blue- ribbon group consisting of the International Monetary Fund, the World Bank, the Organization for Economic Cooperation and Development, and the European Bank for Reconstruction and Development. It was released about a month ago.

ALTHOUGH the report isn't structured this way, I counted at least eight major policy steps that it recommends for Soviet economic reform; cut the budget deficit sharply from its current level of 8 percent of GNP; absorb the extra money that people are holding; try to offer positive interest rates; free up prices rapidly and comprehensively; allow more imports and exports; create a foreign exchange market; privatize government-owned businesses; and establish ownership rights to private property.

Of course, the authors of the report don't claim to know how to do all this, along with everything else that needs to be done. If Gorbachev could do it all, he would be well-entitled to rest on the seventh day.

But as the report says, "The imperative is to make sufficient progress at the beginning so that reform is seen as an irreversible break with the past and the process gains an unstoppable momentum."

Instead of forging ahead, however, Gorbachev appears poised to blame the state of the economy -- on the IMF estimates, the Soviet standard of living is comparable to that of Brazil -- on too much economic reform. Such scapegoating must either be open cynicism or pitiable ignorance.

AS THE IMF report makes clear, the first years of perestroika were just an old-fashioned attempt to make communism work by stirring up enthusiasm among the workers. The last few years have given businesses some hypothetical freedom to negotiate with each other, but they were required to fill "state orders" first, to pay the official prices for inputs and charge the official prices for outputs. The Soviet Union has talked a lot about markets, but done almost nothing.

Yet Nikolai Petrakov, who resigned as Gorbachev's personal economic adviser a couple of weeks ago, has told interviewers that there is no longer anyone in Gorbachev's Cabinet who supports a move to a market economy.

Forget any plans for Soviet economic reform you may have heard about: the Abalkin plan of 1989, or last year's Shatalin 500-day plan. According to Petrakov, Gorbachev's current Cabinet unanimously favors a return to strict central planning.

The Soviets can clamp down on entrepreneurs. But having admitted so many of the failures of central planning these past few years, it may be harder to put the idea of market-oriented economic reform back in the bottle.

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