Soviet Economy at Crossroads

Western economists agree on need for measures to reduce government deficits

WESTERN economists have analyzed the economy of the Soviet Union from afar for decades. But they rarely bothered to make suggestions for reform. It was, as Israeli economist Gur Ofer says, ``inconceivable'' that outsiders could have much influence on the Soviet's rigid system of government planning, production by state-owned enterprises, and centralized price setting. That's changed. Mikhail Gorbachev began introducing economic reforms five years ago. Soviet economists do talk with economists from Western Europe, the United States, and elsewhere. So Western economists no longer figure it is whistling in the wind to offer advice to the Soviets. They just might be heard.

``It is a revolutionary period,'' says Abram Bergson, a Harvard University Soviet specialist.

At a National Bureau of Economic Research conference last week, Mr. Ofer, of the Hebrew University of Jerusalem, not only analyzed the failure of recent Soviet reforms to improve economic performance: he proposed policy changes to get the Soviet economy back on track towards a market-based system.

Back in 1985, the Soviets hoped that initial reforms combined with the first steps toward democratization would release enough hidden economic reserves to boost living standards and thereby fuel political support and economic incentives for further reforms.

``These hopes did not materialize,'' notes Ofer. ``The failures disillusioned many with the prospects of the reforms, reducing both popular and professional support for them.''

Faced with open inflation of between 7 and 11 percent and widespread hoarding of goods, the government adopted a stabilization program for the 1990-95 period. This program, presented by the chairman of the Council of Ministers, Nikolai Rzyhkov, calls for re-balancing the state budget by mostly traditional fiscal instruments and taxes, re-tightening central controls over the limited authority previously granted to state enterprises in the determination of wages and prices, similarly limiting the authority of banks to grant credits, and reallocating resources from investment and defense to the production of consumer goods.

All these involve central physical planning and command. It backtracks on moves to release enterprises from the obligation to fulfill central production orders and to divert more of their production to free markets. Price reform was postponed.

``The name of the game is temporizing,'' says Professor Bergson. ``The government is too frightened to do what needs to be done.''

He would like the Soviet government to reduce its subsidies on food and rent. Those on food alone equal the government deficit. That deficit, compared to national output, was almost three times worse than that of the United States last year. But the Gorbachev regime apparently fears the outbreak of public disturbances like those that occurred in Poland when food subsidies were cut there in 1980.

Poland has chosen the ``Big Bang'' route - the quick introduction of free markets, price decontrol, and other radical reforms.

Neither Ofer nor Bergson thought this route practical for the Soviet Union. Ofer likened it to throwing a child in the water to teach it to swim. ``You don't want to do it on the most stormy day in the ocean,'' he says, agreeing with Soviet officials that some stabilization of the economy is necessary before more major reforms.

Three interrelated factors have prompted the failure of Soviet reforms, says Ofer.

1. The economic legacy of communism was worse than assumed. There were very few reserves in the nation's production capacity to support reform. Despite huge capital expenditures, productivity had not increased - or actually declined - for 10 or 11 years. The environment had been degraded. Raw materials were not utilized well.

On top of this, a huge budget deficit emerged for the first time. It resulted from a large reduction in the output of heavily-taxed liquor, the fall in profits from oil exports when prices fell, and a decline in enterprise profits.

One result has been the creation of a ``monetary overhang.'' The public holds some 330 billion rubles (US$547 billion) in savings and $100 billion (US$166 billion) in cash. Some of this money is being used to buy any useful goods that appear on the shelves, creating shortages even though production has not declined.

2. The economy lacks an infrastructure for introducing free markets.

Ofer points out that the government budget is different from what it is in the West. The monetary system doesn't include the production system. There is no legal system to support, regulate, and protect free market operations. Soviet knowledge and experience in economics and business is very limited.

3. The Soviets made mistakes in their initial reforms, partially because of ideological, political, and institutional restraints.

Ofer would like to see a program to put prices gradually closer to those of world markets plus cuts in state subsidies.

THE SOVIET BUDGET DEFICIT

Billion rubles Percent of GNP 1985 13.9 1.8 1986 45.5 5.7 1987 52.5 6.4 1988 80.6 9.3 1989 92.0 10.1 1990 (Est.) 60.0 6.0 One Soviet ruble equals $1.66 Source: Abram Bergson, Harvard University