The Reds Are in the Red : THE COMING SOVIET CRASH : Gorbachev’s Desperate Pursuit of Credit in Western Financial Markets <i> by Judy Shelton (The Free Press: $22.50; 238 pp.) </i>

It is hard to disagree with Judy Shelton’s conclusion when she writes that those who “aspire to become reputable members of the international financial community and the global economy . . . should not come begging for handouts. If they want to be accepted as trading partners, they should work to have something worthwhile to trade. If they want to acquire hard currency, they should concentrate on developing ways to earn it. There is more to superpower status than sheer military might.” The casual reader might conclude that Shelton is referring to the United States and its trade and budget deficits. Instead, her subject is the Soviet Union. That may console the miserable among us who like company, but it also highlights just how monumental Gorbachev’s effort at economic reform must be.

Despite her sensationalist title, Shelton deserves credit for pointing out that the Soviet budget has been in the red for many years, Soviet assertions about a balanced budget to the contrary. She relies almost entirely on the work of Igor Birman, an emigre economist, who for years was not taken seriously by his Western colleagues. Now both he and she stand vindicated. This past November, Soviet authorities officially conceded that not only will this year’s Soviet budget be in the red, but it has been in deficit for most of the past decade, with expenditures exceeding revenues by as much as 10% and probably more.

The printing of paper rubles to finance this deficit has given rise to inflation of about 7%-8%, which is now also officially acknowledged. In addition, because of the poor quality of Soviet goods, the Soviets have had a hard time finding customers for their exports. Consequently, they have turned more to the capitalist world to finance their foreign trade, their domestic budget, and, as Shelton argues, their military expenditures.

Certainly, one should be cautious in lending money to the Soviet Union, but Shelton is unduly an alarmist. The Soviets have indeed increased the size of their international debt, but in the last two decades or so, whenever this debt has increased, they have moved rapidly to shrink it. They are much more conservative and traditional about these matters than we are.

Shelton has been victimized by the occupational hazard facing all Sovietologists today. Gorbachev has been changing the Soviet economic system so rapidly that what looks to be firmly in place today may be gone tomorrow or nine months after the manuscript is sent off to the printing house. Thus the Soviets no longer insist that foreign partners in joint ventures must be limited to no more than 49% of the ownership in such ventures. Moreover, the tax holiday for joint ventures extends to the first two years when they are profitable, not just the first two years of operation. Also, the Ministry of Foreign Trade has been abolished. Most telling of all, by proposing a unilateral reduction of 500,000 troops and 50,000 tanks and calling for the transfer of resources from the military budget to the consumer goods industry, Gorbachev has begun to address some of Shelton’s most telling criticism. Indeed, the Soviets have announced that military factories will produce 40% of the plumbing that is destined for its new apartment construction program. But Shelton was right to raise such challenges to Gorbachev, just as Gorbachev has increased his credibility by moving to address concerns of the type she has expressed.

To make her case, Shelton presents the Soviet Union and Gorbachev as overindulgent and spendthrift, and portrays Western bankers throwing money at the all-too-willing Gorbachev. That may describe some foreign bankers, but that is not true of American bankers. As Shelton herself points out, U.S. loans to the Soviet Union totaled a mere $257 million as of June, 1985. Yet, she writes that this total is “an 80% increase over six months earlier.” The fact remains, however, that this is a relatively small amount. Granted, Soviet borrowing from the West has increased substantially since Gorbachev came to office, but even so, net foreign debt totals only an approximate $26 billion. When Shelton lumps together all Soviet bloc debt of about $100 billion, that indeed is something to worry about, but as we saw when Poland had a debt crisis, each East European tub stands on its own communist bottom.

Shelton makes some minor errors, such as the statement that the Chase Manhattan Bank opened its office in the 1960s after David Rockefeller’s visit to Moscow, when in fact the office was opened in 1973. But her bigger problem is that some of her conclusions are not borne out by the facts. For example, she asserts that “imported goods do not use up Soviet resources.” But even with loans, the Soviets have to export goods to pay for their imports, and petroleum and natural gas make up almost 80% of Soviet exports to the Western world. Paying for imports this way certainly does use up Soviet non-renewable resources and for that reason has been a source of considerable criticism inside the Soviet Union itself.

She also worries that granting the Soviets “Most Favored Nation” status will enhance the Soviet Union’s ability to sell its goods here. While it certainly will help, even the Soviets acknowledge that it will not help much, largely because at any price, the Soviets have had a hard time producing goods that anyone wants. Nor would most observers agree that “the biggest threat to the continued global authority of the Soviet Union and its status as a working model of socialism is the massive budget deficit it is carrying.” Saying that is like putting the cart before the troika. Gorbachev’s challenge is to energize the economy, shift resources from the military to the civilian sector, increase civilian productivity and improve the standard of living of the Soviet people. The budget deficit is a factor, but it is only one of many and not the most significant for the Soviets or the outside world.

Whatever one’s disagreements, Shelton’s book serves an important purpose. She is correct to call for the increased monitoring of loans to the Soviet Union and most important, she forces us to focus on the question of what kind of Soviet Union we really want.

If she ever writes a sequel, I would urge her to ask another question: At what point in his reform process should we regard Gorbachev’s reform as substantive rather than just cosmetic? Depending on the answer, it may be in our interest to facilitate, rather than frustrate his efforts. Gorbachev has backtracked some, and the Soviet Union is still a long way from becoming a democracy, but would Shelton not acknowledge that the Soviet Union is a more benign society (dare we say a “kinder, gentler nation” ?) than it was four years ago? If so, the issue then is whether we want the Soviet Union to continue along this more promising road or whether, instead, we want it to fail? These are the tough questions and as of now Shelton provides us with no guidance.