Baker Prefers ‘Step-by-Step’ Soviet Aid : Economy: Spurning calls for a ‘big bang’ injection of funds, he calls on Moscow to make major political and legal reforms.

Secretary of State James A. Baker III, in the Bush Administration’s most detailed response yet to Soviet pleas for Western economic aid, warned Thursday that Moscow must enact major political and legal reforms before the United States will help reshape its moribund economy.

Baker specifically rejected the proposal of some American and Soviet economists that the West should attempt to remake the Soviet economy through a massive aid package, saying a slower “step-by-step approach” is more “realistic and workable.”

Addressing a meeting of the foreign ministers of the 16 North Atlantic Treaty Organization countries, Baker spoke only hours before the British government announced that it has invited Soviet President Mikhail S. Gorbachev to present his economic reform plans to President Bush and other leaders after the Group of Seven economic summit next month.

A Bush Administration official at the conference said Baker’s comments on the Soviet economy were “put forth partly to affect other people’s thinking” as the meeting with Gorbachev approaches.

There was no immediate response from the Soviet government to the British invitation, which Gorbachev had solicited.

Prime Minister John Major proposed that Gorbachev be invited to meet the leaders of the world’s seven major industrialized democracies at the conclusion of their summit in London. Major’s office said a formal invitation will be issued only after the other members of the Group of Seven--Canada, France, Germany, Italy, Japan and the United States--agree to the idea.

In his speech to the NATO ministers, Baker said: “The Soviets must find the will to open the way to a new future. They must start with self-help.

“If they do, we will support them,” he said, adding, “I don’t honestly think we can catalyze Soviet reform through a ‘big bang’ approach.”

Aides said that was a reference to the proposals of some U.S. experts that Western countries should attempt to jump-start sweeping economic reforms in the Soviet Union with an aid program as large as $50 billion per year.

Baker aides refused to specify any economists by name, but the term ‘big bang’ has been used by Harvard economics Prof. Jeffrey Sachs, who successfully advised the government of Poland to try that approach and has called for a similar effort in Moscow.

Baker suggested six economic reforms and four political reforms that the Soviet Union should implement to transform its economy.

In economic terms, he said, “The Soviets must move to embrace a real market economy with private property, incentives, established and respected laws on exchange, competition, a sound currency and real prices.” By incentives, Baker meant principally that businesses in the Soviet Union should be allowed to make profits.

In political terms, he said, the Soviet Union should continue moving toward free elections and the rule of law, allow the Baltic republics to gain independence and other republics to gain autonomy, eliminate aid to Cuba and other “regimes that pursue internal repression or external subversion” and reduce defense spending.

Without offering specifics, Baker held out for the Soviets the prospect of significant help from the West if they fulfill those conditions.

“We recognize the choices the Soviets need to make,” he said. “But . . . we do not intend to stand idly by if the Soviets come to grips with these questions of political and economic legitimacy. Perestroika could be the most important revolution of this century. All of us have a profound stake in its outcome.”

An Administration official said the six economic conditions that Baker named were mandatory before the United States would consider major assistance, but the four political conditions, he said, were “less tightly linked.” The Administration will not explicitly insist on their fulfillment as a condition for economic help, he said, because that might create a political backlash inside the Soviet Union against economic reform.

“I don’t believe that it’s feasible for the Soviet political system” to link political change with Western economic help, he said.

Baker said the Administration is “developing a package of supportive measures” for Soviet economic reforms. But other officials said the package consists largely of measures the Administration has hinted at before--such as the extension of most-favored-nation trading status and special associate membership in the World Bank and International Monetary Fund--and does not include direct financial aid.

The Administration hopes to announce the package at the next summit meeting between Bush and Gorbachev, tentatively scheduled for Moscow in late June or early July, officials indicated.

Asked why the Administration did not offer more specific forms of aid in return for specific Soviet economic reforms--as some experts have proposed--one official said that approach could be counterproductive.

“You actually might remove some of the incentives for them to come up with a comprehensive plan,” he said.

The official said Baker’s rejection of a “big bang” approach was not addressed to the efforts of Grigory Yavlinsky, a Soviet economist who has been working with Sachs and others at Harvard University’s John F. Kennedy School of Government.

“He strikes us as a pretty good economist,” the official said.