Soviets Unlikely to Avert Stagnation and Inflation

Will the Soviet Union make a successful transition to a market economy? Opinions differ and, like much else about economic changes in the Soviet Union, a lot depends on the meaning of the words used by different people.

Phrases such as private property, price stability and market economy often do not have the same meaning for Soviet officials and economists as for Westerners. And even within the Soviet Union there are major differences.

It was my good fortune to be in Moscow in mid-September with the Global Economic Action Conference while the great debate about the 500 days’ reform took place in the Soviet parliament. The issues appeared to be not only whether radical reforms would be made or, once again, postponed, but whether the radical reformers would come to power.

But this is somewhat misleading. Even the radical reformers offer a program that is much too modest to solve the major problems of the Soviet economy. For example, a major issue is whether there is to be private property. The so-called radicals want to permit private ownership of land and apartments. On closer reading, it turns out that often the meaning of private ownership is highly restricted. Apartments and land would be sold, but only on condition that they would not be resold--except to the state. Because housing is heavily subsidized, many Soviet renters see this as an attempt to reduce subsidies, not as a way of encouraging investment and production to reduce the chronic housing shortage.

The more basic problem is that major problems are not addressed adequately either in public discussion or in the “radical” proposals.

One is the problem of repressed inflation, which appears to be getting worse. This is the problem of stabilizing a properly constructed general or average price level.

Second is the problem of achieving commodity prices that are related to costs of production and consumer or producer demands. Here the problem is to get not stability but flexibility of individual prices, many of which have been unchanged for decades.

Third is encouragement of competition. There are many ways in which competition could be increased. One of the most effective steps would be to permit imports and allow convertibility of the ruble.

There is much talk about developing a market economy, but at the highest levels there seems to be little awareness of what is involved. Internal discussion does not recognize that there are successful and unsuccessful market economies, or why some succeed. In contrast with such relatively successful economies as the United States, Germany, Japan, Hong Kong and Taiwan, there is Argentina or Brazil, where competition is limited and where inflation and hyper-inflation distort decisions and impede progress toward efficiency and higher living standards.

My impression is that even if the radical reform proposals are adopted, the Soviet economy is more likely to reach an “Argentine solution” than to achieve stable prices and growth. There are several ominous signs.

The budget deficit is estimated at 15% to 20% of gross national product. No one can be very precise, since neither GNP nor the budget is calculated reliably. But many estimates lie in this range. Aside from defense, much of the spending goes for subsidies to producers and consumers. The only program for removing some of these subsidies calls for higher prices that would reduce living standards. But closing, or substantially reducing, the budget deficit would require substantial cuts in living standards and unemployment. The reformers are cautious about reducing subsidies.

Since there is no capital market and very little saving to finance the deficit, most is financed by printing rubles. Unofficial estimates put inflation at 20% this year and money growth at 25% to 30% and rising. With output falling, it will be hard to hold inflation at current levels without major reductions in spending and subsidies.

There are signs that a flight from money has started. The government has devalued the tourist ruble to about 17 cents, 10% of its official value. On the black market that thrives in the large cities, the ruble sells for about one-third of the tourist rate (or less), about 3% of the official rate.

Most taxi drivers refuse to accept the ruble; their business is done in cigarettes, dollars and other convertible currency. Street vendors sell watches, army binoculars and other goods only for hard currency. This illegal activity is widespread in Moscow, and I found it in areas as remote as Uzbekistan in Soviet Central Asia.

The current inflation is more damaging because it is repressed, not open. Since prices remain controlled, goods disappear from the established markets to reappear in the black markets. This longtime feature of the Soviet economy has become more widespread. Goods must be hunted down, and many can be purchased only on the black market.

With wages controlled, living standards fall, adding to the widespread discontent. Freeing prices without introducing competition, which at first must come mainly from abroad, will not move the economy toward a rational system. There is no relation between prices, costs of production and demand. The proposals for reform do not deal with this central problem of establishing not just markets but competitive markets.

The command economy no longer functions as it once did. The crops were good this year, possibly a record. But the harvest is poor. In the past, people would be ordered into the fields to collect the harvest. That method is no longer as widely used, and it has not been replaced by a functioning price system. So, much of the crop will rot in the field, and food will be scarce this winter.

When money does not buy goods, it loses its value and its ability to motivate people to work and produce. The Soviet Union has not reached that condition, but it seems headed in that direction. None of the debates taking place in Moscow seemed designed to reverse course.

As we left Moscow, President Mikhail S. Gorbachev talked of taking control and ruling by decree, and soon after he did so. Given his record of vacillation and error in economic policy, that is not a promising development. The “Argentine solution” may be postponed by this decision, but the Soviet Union is unlikely to prevent the drift toward stagnation and rapid inflation that appears to be gaining momentum.