Message for Soviets: Policy Reform First

IS it worth $30 billion or so per year to bring the Soviet Union into the world economic system? Some economists say such an expenditure would be pouring money down a rat hole.

``To forestall collapse, the Soviet Union needs to establish private property and a market economy,'' Karen LaFollette, a research associate at the Institute for Political Economy, wrote in a study for the Cato Institute. ``As has been the case in the Third World, foreign aid does not help to reorient economies, and in the case of the Soviet Union, it will merely serve to entrench the communist old guard at the expense of democratic reformers.''

In a degree, the Western world has accepted that thesis - aid without reform would be a waste of money.

A report requested by the leaders of the seven major industrial democracies at their summit in Houston last July concluded that technical and humanitarian assistance would be fine, but not big chunks of cash. ``General balance of payments assistance or project assistance may be useful when a comprehensive program of systematic reforms has begun to be implemented, leading to a closer integration of the economy of the USSR into the world economy,'' stated the December report, prepared by a group of multil ateral institutions led by the International Monetary Fund (IMF).

Meanwhile, the Soviet economy continues to deteriorate. George Kolt, a Soviet expert at the Central Intelligence Agency, told the Joint Economic Committee of Congress last week that the Soviet economy could shrink by 10 to 15 percent this year. Inflation ``could easily'' exceed 100 percent, he said.

Now, Yevgeny Primakov, a senior adviser to President Mikhail Gorbachev, and Grigory Yavlinsky, author of the ``500-day'' drastic reform plan that was backed and then dumped by Mr. Gorbachev, have written the Group-of-Seven leaders. The two call on the Soviet Union to draft a comprehensive reform plan and the Seven to prepare a parallel plan of economic cooperation - i.e., provide money.

Mr. Yavlinsky was in Cambridge, Mass., at Harvard University this week to discuss and refine details of the proposal. It could present the Seven - the leaders of the United States, Britain, Japan, France, Germany, Italy, and Canada - with a tough issue when they meet in London in mid-July. If there is any interest, the proposal could be made official by Gorbachev, who is apparently hoping for an invitation to the gathering.

In a way, the proposal would put the Soviet Union in the position of other countries suffering from international payments problems. Under the IMF, these countries - primarily developing countries nowadays - get loans in return for economic reforms.

The $30 billion in Western aid suggestion comes from Jeffrey Sachs, a Harvard University economist who is an advisor to the Polish government. It is just a made-up number. The World Bank, the largest provider of development funds on the globe, loans just under $20 billion per year. So $30 billion would mean the mobilization of Western financial resources on an extreme scale that is not likely.

Lawrence Summers, chief economist of the World Bank, notes that development aid normally follows a step-by-step approach. After a nation has taken some policy reforms, it gets some loans. Following more reforms, more money.

``Don't look for huge sums of money put onto the table before policy reforms,'' he says, adding that questions of Soviet foreign policy, human rights, and military issues are also at stake.

A study released Tuesday by Susan Collins and Dani Rodrik for the Institute for International Economics, suggests that net capital flows to both the Soviet Union and Eastern Europe could range between $30 billion and $90 billion over the next five years. But much of that money, private as well as government funds, will go to east Germany from west Germany.

Because of this new demand for capital, global interest rates would have to rise between 1 and 3 percentage points if the capital comes from increased savings around the world, they calculate. Some of that increase may already be incorporated in the markets, they say. They warn than any diversion of this money from flows to third-world countries would slow progress in these developing nations.