IMF, World Bank Urge Soviet Market Reforms : Economy: Without a sharp break from central control, the groups say, Western aid will be of little help.

The International Monetary Fund and the World Bank warned Friday that the Soviet Union must make a sharp break with centralized control and move quickly to a market economy if it is to pull out of its accelerating downward spiral.

They also cautioned that, except in certain limited circumstances, given the shattered state of the country’s distribution and economic systems, large-scale Western aid--including emergency food and humanitarian assistance--would be of little use in reviving the Soviet economy.

The assessments, the result of the first formal study of the Soviet economy by the groups, concluded that the economy has now “broken down,” with both employment and the nation’s output of goods and services plunging in a near-free fall.

Under such conditions, a large dose of Western assistance would be wasted, the document said.

A separate report by the Economic Community in Europe supported many of the conclusions reached by the IMF and the World Bank, terming the Soviet Union an economic basket case whose condition has only been made worse by halfway reforms.

“The Soviet Union is at a critical juncture,” the EC study said. “The government is committed to fundamental reform, but it has not yet taken the process far enough to make that reform irreversible.”

Both studies thus implicitly criticized the direction of economic and domestic policy under Soviet President Mikhail S. Gorbachev, who has sought to chart his internal reforms down a middle path between traditional communism and free-market capitalism.

But the studies found that Gorbachev’s efforts to appease hard-liners within the Communist Party by pushing for a compromise between Western capitalism and Soviet-style Marxism-Leninism have led to a nightmarish condition, in which neither structure can function.

“The traditional centrally planned system has largely collapsed, but has not been replaced by a functioning market system,” the IMF-World Bank study declared. “Ideally, a path of gradual reform could be laid out that would minimize economic disturbance,” the study said. But, it added, “we know of no such path.”

Despite all the criticism, the reports were at least somewhat sympathetic to Gorbachev’s current position.

“The (Soviet) authorities face an enormous task, involving reforms of the legal, financial and trade systems, and also of vital sectors of the economy,” the IMF-World Bank study said. “These changes cannot be made in a matter of weeks.

“But,” it added, “the imperative is to make sufficient progress at the beginning so that reform is seen as an irreversible break with the past and the process gains an unstoppable momentum.”

The grim reports were made public against a backdrop of increasing economic and political instability in the Soviet Union, just a day after the resignation of Soviet Foreign Minister Eduard A. Shevardnadze. He warned Thursday that there is an increasing threat that the current instability could lead to a dictatorship imposed to deal with the nation’s state of near-collapse.

Perversely, the Soviet oil industry, once one of the bright spots of the nation’s economy, is actually decreasing its production, despite the increase in oil prices brought on by the Persian Gulf crisis--because domestic economic chaos has led to a sharp falloff in investment.

But the IMF and World Bank warned that the problems will not be rapidly solved by a quick conversion to a market economy. In fact, they cautioned, the transition will be an extraordinarily painful one, with no guarantee of success.

After the shift to a market economy and an end to government control over prices, the pain would first come from hyper-inflation, the studies warned.

With consumer goods in short supply and paper money in abundance, economists fear that rampant inflation will take over, as consumers bid up the newly liberated prices with hoarded rubles.

Now, economists are trying to gauge just how bad that problem could become by measuring “repressed inflation”--how fast prices would rise if there were enough goods for consumers to buy.

Still, the pain from the quick transition would be far less damaging than what the Soviets will experience if they defer reform, the studies concluded.

“The necessary economic reform program cannot be implemented without an initial decline in output and employment, but delays in implementation would lead to an even larger and longer decline,” the IMF-World Bank study said.

James Risen reported from Washington and Joel Havemann from Brussels.