COLUMN RIGHT : Soviets Need Change, Not Tons of Money : With appropriate reform, aid will not be needed. Without it, aid will be wasted.

The idea of a Marshall Plan for the Soviet Union, involving large-scale aid not linked to market forces and extended over several years--is fundamentally flawed. It is also likely to be a source of sharp contention among the Group of Seven major industrialized democracies, pitting European members against Japan and the United States.

Japan’s role is crucial because it is the only G-7 member with a substantial and continuing surplus in its international accounts--probably about $50 billion to $60 billion in 1991--that would enable it to finance large-scale aid. (The German and U.S. international payments deficits will be about $25 billion and $50 billion, respectively.) If G-7 members other than Japan were to provide aid to the Soviet Union, they would be obliged--directly or indirectly--to obtain funding from Japan, through borrowing or sale of assets.

Japan would be the ultimate paymaster.

Japan’s reluctance to become “fully engaged” in aiding the Soviet Union has deep roots. One is its unresolved claims for return of the four Kurile Islands; others are the powerful Soviet naval, air and missile forces in the Okhotsk region and in Soviet East Asia; the changing but still uncertain state of Soviet relations with North and South Korea; Japan’s doubts about whether there are realistic prospects of achieving successful economic and political reform in the Soviet Union, and, not incidentally, Japan’s commitments to providing increased aid to less-developed countries.

The case for large-scale aid from the West entails other fundamental shortcomings, quite apart from Japan’s crucial role.

First, the proposition that government-to-government aid can assist in transforming a non-market system into a market one is an oxymoron. The essence of a market system is that goods and services, as well as the capital and labor that produce them, are exchanged at prices determined by demand and supply.

The essence of government-to-government aid, on the other hand, is that goods and services are provided by donors without reference to market-based prices. Such aid carries with it either no costs or subsidized costs to the recipient, thereby absolving it from having to meet a market test in use of the aid. Marketization implies market-based prices, whereas aid means that market prices are deliberately ignored. Marketization implies access to external resources through the international capital market, whereas aid implies access through the favors of foreign governments.

To promote marketization through government-to-government aid is like reforming an alcoholic with a gift of liquor.

The second flaw is the unavoidable problem posed by the interchangeability of resources. Providing the Soviet Union with aid resources means that donors cannot be sure of the net effect of the additional resources they provide.

An ostensible “bargain” that purports to link the added resources to changes in Soviet allocations--for example, to cuts in Soviet military spending and forces, as advocated by Martin Feldstein--would be an illusory bargain. The Soviet economy is already under strong and growing pressure to cut military allocations and to convert military industry to market-based civil production. Because resources are interchangeable, government assistance would be as likely to abate as to abet these pressures.

One version of the argument for large-scale aid focuses on its potentially appealing role in providing a “stabilization reserve” to underwrite convertibility of the ruble. This, too, is flawed. If monetary and fiscal balance is attained in the Soviet Union, convertibility with a floating exchange rate can be established with only minimal hard-currency reserves. If this balance is not attained, the ensuing run on the stabilization reserve would rapidly exhaust it, thereby aborting convertibility. Indeed, providing a stabilization reserve may actually have a perverse effect by easing the pressure on policy-makers to impose monetary and fiscal balance.

With appropriate reform measures, aid will not be needed. Without them, aid will be wasted. Technical assistance, as well as Soviet access to external markets through most-favored-nation treatment, can help to advance marketized reform. And humanitarian aid may also be necessary to relieve possibly critical shortages of food and medical supplies.

But large-scale government aid should be eschewed. It is neither something that the West should promise, nor that those who seek genuine reform in the Soviet Union should be encouraged to expect.