Gorbachev Retreats on Radical Economic Plan : Soviet Union: The president decides on a gradual approach. An angry Yeltsin accuses him of reneging.

President Mikhail S. Gorbachev on Tuesday retreated sharply from a radical program to transform the Soviet Union’s state-owned, centrally planned economy into a new system based on market forces and private entrepreneurship.

Gorbachev, apparently fearing social unrest from resulting inflation and unemployment, instead proposed a carefully graduated transition that would slowly ease central controls over the economy, retain many government subsidies for inefficient firms and privatize much smaller segments of industry and commerce.

Although Gorbachev maintains his commitment to the eventual development of a market economy, he would delay its achievement by a number of years and keep it within the framework of what he calls the Soviet people’s “socialist choice.”

Put to Soviet lawmakers Tuesday as the consolidation of seven earlier reform programs, Gorbachev’s proposal brought immediate protests from those who had favored the far more radical “500-Day Plan,” with its forced march to the free market.

Boris N. Yeltsin, president of the Russian Federation, the largest Soviet republic, accused Gorbachev of reneging on a commitment to the radical plan, and the Gorbachev proposal appeared to have rekindled the potentially explosive dispute between the country’s two most powerful politicians over the course of its reforms.

Yeltsin, his voice thundering with anger, called upon the Russian legislature to consider “breaking out” of the program, even to the point of dividing the country’s armed forces. This would amount to an economic declaration of independence if Gorbachev did not back down and accept a coalition in the central government.

Gorbachev’s proposal is little more than “another attempt to preserve the administrative system so odious to the people,” Yeltsin said, calling it an effort to “sabotage” the Russian Federation’s own 500-Day Plan, which is to start Nov. 1.

“Realization of this new program would lead to a catastrophe,” Yeltsin said, predicting that, if attempted, the effort would collapse within six months as unworkable.

Gorbachev, however, clearly feared that plunging the disintegrating Soviet economy into the melee of the market would tear it to shreds--and with it the social fabric of the country.

“The market, while providing for high economic efficiency, still needs state and political regulation--first of all, to prevent such negative developments as inflation, unemployment, excessive differences in (income), instability of production and erratic patterns of development in different regions,” he said at the outset of his proposal.

Although Gorbachev had declared last month that he favored the 500-Day Plan drafted by Stanislav S. Shatalin, a member of his Presidential Council, and other radical economists, he retained only elements of it in the program he submitted to the Supreme Soviet, the country’s legislature.

While declaring that “the historical decision to adopt the market system has been made,” Gorbachev accepted the argument of Prime Minister Nikolai I. Ryzhkov that the transition has to be planned and managed--by the same bureaucracy that brought the economy to the point where the Soviet Union cannot feed, clothe or house its 290 million people.

And as Shatalin’s goals for 500 days--a time frame that he believed long enough to achieve real change but short enough to give people the hope needed to withstand the accompanying pain--Gorbachev extends them far, almost indefinitely, into the future.

What frightened Gorbachev, it is clear from the preamble to the reform plan, its scaled-down goals and its stretched-out timetable, was the prospect of sharp increases in consumer prices, widespread unemployment, the bankruptcy of tens of thousands of unprofitable state-owned enterprises and farms and the sheer uncertainty of what would happen.

Radical economists have argued persuasively to Gorbachev in recent months about the necessity of moving swiftly into a market economy to get through the painful part and restore popular confidence in the reforms. But conservatives in the Communist Party’s policy-making Central Committee strongly opposed such an approach at the committee’s meeting in Moscow last week.

Working late into the night over the past week at his suburban dacha west of Moscow, Gorbachev has consequently fashioned a program that appears to be a compromise, taking Shatalin’s general scheme but Ryzhkov’s specifics.

The reality, radicals claimed Tuesday, was an almost total victory for Ryzhkov and the apparat, whose language of “administer,” “assign,” “control,” “instruct,” “regulate,” “allocate” and “lead” permeates a document meant to develop a market economy.

“We can easily see the desire to concentrate economic power at the center--nothing has changed,” said Ruslan Khasbulatov, Yeltsin’s deputy. “But this concentration is in the hands of a weak and inefficient government, and it will not bring positive results.”

Gorbachev will argue his case Friday before the Supreme Soviet, but that body has already given him the power to rule by decree for 18 months, rendering almost irrelevant its approval of the program. The lawmakers are scheduled to debate the program through the weekend before voting on it.

“The acuteness of the crisis makes it essential to act without delay,” Gorbachev said in the 66-page program. “The situation in the economy is continuing to deteriorate. The volume of production is declining, and economic links are being broken.

“The life of ordinary people is becoming more and more difficult, and their interest in working is failing, while their faith in the future is being destroyed.

“The economy is in an extremely dangerous zone--the old administrative system of management has been destroyed, but new stimuli to work in market conditions have not yet been created. Energetic measures, based on public consent, are needed to stabilize the situation and move ahead quickly on the road to a market economy.”

However, radicals like Khasbulatov said they fear that so much time has been lost and the economy has disintegrated to such an extent that any attempt to plan the country’s economic transformation is in vain. The process of economic collapse is both accelerating and accumulating, they feel, and with Gorbachev’s program becomes inevitable.

“Shatalin offered us a last chance to break out, and now Gorbachev is locking us in,” a Yeltsin backer in the Supreme Soviet said as he read the Gorbachev proposal. “Shatalin said, ‘Do this, and you’ll be free in 500 days.’ Gorbachev says, ‘Do this for a few years, and then we’ll see where we stand.’ He wants to make us a prisoner of his fears and his weaknesses.”

Where Shatalin urged that state controls be removed quickly so that the market forces of supply and demand would provide the energy of economic growth, Gorbachev said: “From the very beginning, the strengthening of the financial system must be stressed with the preservation of the established patterns of economic ties and the flow of raw materials and components within the economy. . . . The transition to market prices will occur in the future.”

Gorbachev sees this transitional period lasting as long as two years, not the 100 days Shatalin wanted, and he plans to use his powers to rule by decree to shape the reform, step by step. “Only after this, the development of the full-blooded market will start,” Gorbachev said.

Where Shatalin envisioned the privatization of state-owned enterprises as propelling the economy forward, Gorbachev almost never uses the word.

Where Shatalin frees prices to find their own levels, Gorbachev invokes a little-observed 1988 government decree setting wholesale prices.

Where Shatalin cuts the budget deficit to almost zero, Gorbachev maintains the subsidies on consumer prices and for inefficient companies that this year could take it as high as $300 billion at official exchange rates.

Where Shatalin pushes the ruble, the Soviet currency, first into devaluation and then its use as a convertible currency--freely exchangeable in the West for dollars or German marks--Gorbachev postpones this crucial move.

And where Shatalin pushes the country, ready or not, into price reform early in his plan, Gorbachev remains unclear when and how this will occur across the board. By 1992, only the prices of bread, meat, dairy products and a few other staples would remain fixed by the state, according to the plan, but many exceptions are already noted.