Soviet Breakup Could Hurt Economic Reform : Soviet Union: U.S. experts are heading to Moscow with prescriptions for fiscal change. But the independence of republics could hamper the restructuring needed to rescue the economy.

As the leaders of the Soviet Union wrestle with the new political order emerging in their rapidly disintegrating nation, the seemingly intractable economic woes that spurred both perestroika and this month’s abortive coup still threaten like boulders in a rushing stream.

The Soviet economy is near collapse, as illustrated most strikingly by empty store shelves and long queues for basic foodstuffs. Output is shrinking rapidly. Inflation is running at almost 100%. Western credit has dried up. Foreign debt payments this year will approach $12 billion. And winter is coming.

To help the shift to a market economy after seven decades of Communist central planning, U.S. economists are heading to Moscow, armed with various prescriptions for reform. But their advice has gotten a mixed welcome up to now, and the post-coup environment poses new obstacles for the restructuring they propose.

In particular, the threatened breakup of the Soviet Union into separate, independent states could undermine proposed reforms.

The plan that has received widest attention--drawn up by Harvard University academics and a Soviet economist--was based on the assumption that most of the Soviet Union would remain intact under terms of the proposed Union Treaty. That now appears unlikely.

The rupture of the U.S.S.R. could jeopardize cooperation, trade relations and even a common currency among the republics--setting the stage for complete economic chaos, said Jeffrey Sachs, a Harvard University economist and one of the authors of the program.

“The political opportunities for doing radical reform are enhanced,” Sachs, who advised the Polish government on its “shock” economic reforms, said in a telephone interview from Budapest. “But the gravity of the situation is actually worse now than it was just a few weeks ago.” He fears an economic “calamity” that could result in sharply deteriorating living conditions.

Still, U.S. economists, including some advising Soviet President Mikhail S. Gorbachev’s central government and Russian Federation President Boris N. Yeltsin, see an opportunity to move ahead with market reforms now that the aborted coup has eliminated hard-line opposition.

Economists generally agree that the Soviet economy requires basic economic overhaul before it can move toward a market-based system:

* State-owned property--including “the means of production” in classic economic terms--must be turned over to private owners.

* The ruble must be stabilized and made convertible with other hard currencies, to ease foreign trade and investment.

* Prices must be freed from state control and allowed to rise to market levels. A commercial and legal infrastructure must be created from scratch.

* State subsidies for consumer goods and other products must end.

It is the specifics that may hang up the speed with which these reforms are implemented.

“They must be hammered out; you can’t just give them a plan and have it implemented,” said Edward P. Lazear, an economist at the University of Chicago and the Hoover Institution at Stanford University.

Barry Bosworth, an economist at the Brookings Institution in Washington, said formidable cultural barriers remain. “The Soviet system has no advocate for capital interested in protecting the investment of capital in an enterprise,” he said.

In addition, economic programs could lead to rapidly rising prices and unemployment, which in turn could trigger widespread popular dissatisfaction with more aggressive reforms, economists warn.

The Soviet central government under Gorbachev has considered and rejected several plans for economic reform, including a radical proposal called the Shatalin Plan, which had a 500-day timetable.

One main plan still under consideration by the central government was formulated by Harvard professors and Grigory Yavlinsky, a reform-minded Soviet economist and former Russian deputy prime minister. Yavlinsky has been named to a four-man committee of the Soviet government charged with managing the economy.

The Harvard program, called the “Grand Bargain,” sets a timetable for reforms to be implemented in stages through 1993, pegged to huge infusions of Western aid. Sachs plans to meet with Yavlinsky and other Soviet leaders in Moscow next week.

But Marshall Goldman, associate director of Harvard’s Russian Research Center, has criticized the Harvard plan.

“The American side really had a kind of an instant preparation on Soviet institutions, and they need something more than that,” he said. “Yavlinsky from the Soviet side does not understand Western institutions. It’s like trying to teach an Eskimo what tropical heat is.”

A key shortcoming of the Harvard plan, Goldman said, is its failure to deal with the lack of a wholesale distribution system in the Soviet Union.

“If a builder needs timber in the U.S., he calls a wholesaler, who moves it to him,” Goldman explained. “But in the Soviet Union as it is, he must call the factory. And in a society that’s never even had a phone book--much less a Standard & Poor’s (corporate directory), how do you do that?”

Meanwhile, as political power disperses from the center, other levels of government are working on their own plans--most notably, the Russian Federation under Yeltsin. Because of Yeltsin’s rising power, it’s thought that any reforms adopted by the nation’s largest republic might serve as a model for the entire country.

Lazear, part of a Hoover team that has been advising Yeltsin and his chief economic counselors, is headed to Moscow in mid-September for a week and a half of meetings.

“They’re very far along in terms of their thinking,” Lazear said of the federation’s leaders. “We’re not going to sell them on free markets or privatization; they’re well past that. What they’re interested in right now are the details, the specifics.”

Lazear favors privatizing state industries by issuing stock-like vouchers--akin to similar schemes taking hold in Eastern Europe. He also suggests that state industries be grouped into conglomerates that would have the power to sell off parts of their operations as independent companies. That would avoid the red tape of having the central ministries dispose of each business individually, Lazear contends.

The republic has already implemented his team’s recommendations for privatizing slaughterhouses.

Lazear also favors allowing the ruble to become convertible at a free exchange rate. But because that might spur inflation--threatening the savings of pensioners and many other Russians--he believes that it is more probable that the Soviets will adopt some kind of phased exchange. An official exchange rate would be set, perhaps, but trades at market rates would be permitted for certain licensed transactions.

Another sometime Yeltsin adviser, Steven H. Hanke, has urged a different approach to currency reform and privatization.

Hanke, a former Reagan Administration adviser and professor of applied economics at Johns Hopkins University in Baltimore, favors creation of a central currency board, an institution that would issue local currencies backed 100% by some hard currency, such as the dollar.

Such an institution, which would differ from a central bank, would be able to exchange local currency for the reserve currency at a fixed exchange rate, thereby guaranteeing stability.

To speed privatization of state-owned assets, Hanke favors creation of a private pension system, financed with state capital. As citizens became eligible for pension benefits, the state assets would be transferred to private hands in an equitable and orderly fashion, he said.

Economic Revolution in the U.S.S.R. Though they debate the proper pace of reform, Western experts essentially agree on what must happen to rebuild the economies of the Soviet Union and its republics from the rubble left by Communist rule: Stabilize ruble and make it convertible with world currencies.

Privatize state-owned property.

Liberalize the economy by freeing prices and trade and creating a legal infrastructure.

Stabilize the economy, including eliminating state subsidies.

One plan for reaching these goals is being advanced by Soviet experts at Harvard University. Its key elements: Develop a sound fiscal policy with realistic currency exchange rates set by the central government and a sharp devaluation of the ruble.

The central government, individual republics or even local governments should auction or lease small shops, farms and equipment quickly. Reformers should develop plan for selling larger enterprises.

Stop fixing prices, and let enterprises and markets set them. But this must be combined with convertibility of currency so that domestic prices can be determined by world market conditions and world competition.

Make sharp and decisive cuts in subsidies of basic consumer goods. Cushion the blow by redirecting some government funds to direct welfare expenditures for the poor and issuing food stamps that would give inexpensive foods in limited quantities to the population.