In Eastern Europe, ever more radical systemic changes are underway, but the Polish “big bang” of early 1990 suggests some first steps. There must be a general liberalizing of economic life, with freedom of private enterprise and free pricing. In Poland, the result has been an almost overnight end to the shortages endemic in communist societies. The Soviet economy should be opened to foreign competition as well as investment, though in the short term government credits and the liberalization of trade will have greater impact than foreign direct investment. Simultaneously, Moscow should introduce a strict stabilization policy, with the elimination of budget deficits and stringent monetary policies. These will be painful. In Poland, inflation was 344 percent in 1990 before subsiding this year. Therefore the Soviet Union will need a social safety net to make the changes politically acceptable.
The costs of transition to capitalism are high, but there is no other way. The punishment for hesitance is worse suffering. It is increasingly evident how backward the Soviet economy actually is. Just look at the nominal figures. The current official exchange rate for tourists is 32 rubles to the U.S. dollar. According to that rate, an average monthly Soviet salary is a ludicrous $15, and its GNP per capita about $100 last year, which would put the U.S.S.R. among the poorest countries in the world. These figures need to be multiplied several times for comparisons with other countries; exchange rates set on distorted markets give an exaggerated picture of backwardness. Even so, the Soviet Union is among the least-developed countries.
A poor economy grows poorer every month. Soviet official statistics are greatly inflated. But even by their standard, the Soviet national income declined by 12 percent during the first half of 1991. Presumably this figure contains about 5 percent of hidden inflation, and the fall is accelerating. Thus, a drastic real slump of 20 percent seems likely for 1991 as a whole, presenting us with the worst economic catastrophe in Europe after World War II, even surpassing the Great Depression in the United States. The key problem is shortages: why work for money if you cannot buy anything for the money you earn? The attempt to boost production by liberalizing prices for some 40 percent of the volume of sales hasn’t helped. Officially recorded inflation from June 1990 to June 1991 amounted to 91 percent. At the same time, shortages have barely eased.
An underlying problem is that both wages and social benefits are beyond control. This year, on top of everything, tax revenues have collapsed. Both the republics and the union treasury claim the same taxes; state enterprises respond by paying neither. The overall Soviet budget deficit can only be loosely assessed at about 20 percent of GNP for this year. Prime Minister Valentin Pavlov’s government was both unwilling and unable to cut this deficit.
The crisis is most apparent in foreign trade. During the first half of 1991 Soviet exports dropped by 23 percent. Vital oil exports plummeted by 50 percent. At this rate, Soviet oil exports would stop by the end of 1992. Since few Western credits have been forthcoming, imports were cut by no less than 48 percent during the first six months of 1991. The result has been recession. In the second quarter, after the massive price increases on April 2, retail trade turnover fell by a quarter. The most surprising feature of the Soviet economy is that there have been so few strikes.
In the aftermath of the foiled coup, long overdue economic transformation all of a sudden seems possible. The deep crisis calls for action both radical and fast, and the political stage seems set. Swift democratization offers at least the government of the Russian Republic great legitimacy, which will facilitate drastic cuts in overblown subsidies and defense expenditures, while social expenditures can be frozen. The entirely wasteful production of modern arms-often scrapped immediately after production in line with disarmament agreements-must end. The KGB may be dissolved, but that will save the government only 5 billion rubles.
However, before any stabilization can be undertaken, some kind of agreement must be reached between the center and the republics on a number of issues. Should there be a single currency? Should taxation be both national and local, as in the United States? And what about ownership of enterprises currently controlled by the center? Characteristically, Soviet President Mikhail Gorbachev’s proposed union treaty clarified only that there would be a common currency. He left the other points open. Instead, these key economic points should be singled out for an early agreement, whatever the consequences. Russian President Boris Yeltsin seems to realize this.
Yeltsin represents the vast majority of Soviets, who favor market economy and privatization. During the last year a wave of privatization has gone through the country, but it is a weird form of privatization. State directors and party officials are setting up their own companies, to which they sell state assets they control at very low prices. As prices are not set on a market, it is difficult to say which ones are too low. In the Ukraine alone, young Communist officials have formed 1,500 companies at the expense of the state. What the country needs is real privatization, not embezzlement. Again, only democratization can solve this problem.
Will the union or the republics direct the economic transformation? If democratization goes ahead, and some modus vivendi is found for economic relations between the union and the republics, an attempt at a big bang seems plausible. Even then the Soviets will require large-scale technical help: currently, neither the union nor the Russian government possesses the necessary economic expertise. One litmus test will be the next round of appointments to economic portfolios. If the new officials are able young economists convinced of the superiority of the market and private enterprise, we can hope that the Soviets are now serious about reform. In that case, the Soviet Union–or its separated parts–should receive substantial Western support just as Eastern European reform governments now do. Will the territory between the Baltic Sea and the Pacific Ocean satisfy Western requirements? The West had better get ready, but insist on strict conditionality.
