Recipe for Market Economy Hasn’t Served Up Recovery : Russia: Food remains scarce. Inflation has soared. The people are edgy and growing more angry by the day. The government’s answer: ‘Be patient.’

The recipe for economic reform in the old Soviet Union was always straightforward: Eliminate state subsidies, raise prices at least to cover costs, allow enterprises a real profit--and then market forces would take over from government planners. More would be needed, of course, but this was the essential first step.

Russian President Boris N. Yeltsin, breaking away from seven decades of Soviet socialism, followed the recipe exactly--but so far the country’s economic collapse only continues.

Food shortages remain severe, with long lines for milk, bread and meat. While more food appears to be available, it costs three times and even 16 times what it did a month ago. Many ordinary consumer goods are beyond the reach of most people. Inflation is so high at “thousands of percent” that it is unmeasurable, and the impoverishment of the Russian worker grows each day.

“We are facing the main danger to our reforms right now,” Andrei A. Nechayev, the first deputy economics minister and an author of the price reform plan, said in an interview, “and that is high price increases but with empty shelves. . . . Safe passage through this moment is crucial to the whole effort.”

In industry, supplies were supposed to increase with potentially greater profits, but demand has dropped off with higher prices. The energy sector, still state-regulated, is nearing the crisis point as coal miners strike for higher pay; steel mills are already closing for lack of coke, and power outages have become common for thousands of factories.

Russia’s overall production, which shrank 15% in 1991, is likely to contract 15% to 25% more this year as measured by gross domestic product. Less than a fifth of the contracts for industrial goods are being honored.

About one out of six enterprises will go bankrupt this year, according to government projections, and a further 25% will break even at best. Unemployment, virtually zero under socialism, will jump to 6 million people.

Amid all this, the proverbial Russian patience is badly strained, and Yeltsin, proud of acting where former Soviet President Mikhail S. Gorbachev balked, is now facing a stern test of his leadership.

Popular sentiment is turning sharply against the government, according to the latest opinion surveys, with 71% of the population expressing serious doubts about the country’s “ability to survive.”

Within the Russian legislature, pressure is mounting on the government to resign. Yeltsin’s prestige, says one minister, is “our only remaining capital.”

“Shock without therapy,” Russian political commentators are saying, referring to Poland’s “shock therapy” two years ago involving a rapid, forced transition to a free-market economy. “People go to shops as they would to museums to see the new prices,” the Communist newspaper Pravda remarked. “But neither queues nor shortages have been eliminated.”

Yegor T. Gaidar, the deputy prime minister overseeing the economic reforms, is under daily attack as naive, if not incompetent, and even pro-market economists criticize his program as too harsh. An angry power struggle is under way with the Russian Central Bank, whose liberal credit policies fueled inflation and still protect inefficient enterprises from market forces.

“There is a natural tendency to ask, ‘What went wrong?’ ” Nechayev remarked. “Our answer is, ‘Nothing--what is happening now was more or less expected.’ I can’t say, ‘Don’t worry,’ but I can say, ‘Remain calm, don’t panic.’

“There is a normal process by which producers, consumers, suppliers and traders adapt to free prices, something we have not had for more than 60 years. Everyone needs more time to see how a market works, to find a place for himself in it.”

Yeltsin, Gaidar and other Russian officials are pleading for time to allow the reforms to work. Yeltsin is promising an economic upturn by autumn; Gaidar predicts that with the budget deficit reduced to almost zero, hyper-inflation will end in three or four months, and Nechayev, the least optimistic, says “strong and healthy market forces” will take over by year’s end.

To give those forces a boost, Yeltsin this week lifted virtually all controls on retail and wholesale trade, ending the long state monopoly on the distribution of goods. The move should introduce more competition into the Russian economy and thus increase the impact of the price reforms.

“The next battle line will be the government budget,” Nechayev said, anticipating appeals to the Russian legislature for more funds. “State enterprises want their subsidies restored because they are finding they too have to pay higher prices. They want additional credits from the Central Bank, and we want them to have none. They want new investment from us.

“I keep explaining, ‘No, if we do that, we’ll never break out. You must find the money yourself,’ I tell them. Fortunately, Yeltsin is firm on this, and he is the one who will have to fight it through.”

The Russian president remains equally committed to policies aimed at privatizing state-owned enterprises by the thousands, at giving farmers their own land to cultivate and ending agricultural collectivization and at making the country’s currency, the ruble, convertible into other currencies on the international market.

Together, these policies have been the key elements in the transformation of other centrally controlled economies. But their success elsewhere depended on how closely they were linked so that they supported and reinforced one another.

The Gaidar team, however, almost prides itself on not having a clearly defined, stage-by-stage program, believing that Russians and potential Western donors alike long ago grew tired of anti-crisis programs, numbering 17 by one count, that were never implemented.

“We don’t have a program like (Grigory) Yavlinsky,” Nechayev said, referring to the prominent free-market economist who drafted several programs for Gorbachev and who now criticizes the Gaidar approach as “harsh, naive, uncoordinated, ultimately catastrophic.”

“Yavlinsky prefers to write plans; we prefer to fulfill them,” Nechayev said.

Yavlinsky is equally dismissive of Gaidar and his associates. “They are incapable of implementing a serious policy,” Yavlinsky said. He predicted that hyper-inflation will devalue the ruble completely, that prices will continue to skyrocket, that unemployment will be three or four times the projections and that industry will halt production.

With this will come the end of Russian democracy, Yavlinsky argued, for only a leader with dictatorial powers will be able to restore order and begin to rebuild the Russian economy after such a collapse.

Ruslan Khasbulatov, chairman of the Russian legislature and a prominent reform economist, also contended this month that the government’s “anarchic” policies will bankrupt the country and destroy popular confidence in the reforms. People will then turn, he said, to “a strong hand” to govern.

And yet the Yeltsin-Gaidar approach has its defenders.

“This is a very courageous strategy politically, and there are already very significant achievements,” Jeffrey Sachs, a Harvard University economist advising Yeltsin, said as criticism of the government mounted here. “The goal is to stabilize prices within several months, to establish a convertible currency, to have goods in the shops.

“People will remain poor here, however, for economic stabilization doesn’t change the quality of life except to make it more bearable.”

Many economists nonetheless remain skeptical because price reform, seen for so long as the main lever for the country’s transformation, did not bring the overall economic liberalization this month that many expected.

“Not much seems to be happening except for a few fights in the stores, a few strikes in the mines,” a senior official of the International Monetary Fund observed here. “It is difficult to feel that something fundamental is going on.

“And maybe not much, in fact, is happening as people adapt to the new prices as nothing more than the old price structure at higher levels. That would be a pity, for we want deeper changes, not everybody acting the way they did under the lower prices.”

Another economist, one of the 13 senior advisers Yeltsin has hired from abroad to help guide the transition to a market economy, made a similar point. “Pain--we are not seeing real pain yet,” he commented, also asking not to be quoted by name because of his position. “Until we do, then the reforms are still working on the margins of the economy, not at its core.

“Don’t misunderstand--we do not want to see bread riots or starvation. What we do need is evidence that market forces, such as supply and demand, and not government decrees, are ruling. So far, we see only the beginnings, the very beginnings, of this change, and they are emerging more slowly than we hoped.”

The IMF official, while praising the general direction of the Gaidar policies, said: “The best they can hope for is to avoid the worst--and the worst would be social unrest, civil wars, a war between the (former Soviet) republics. There is such a risk, and for the time being, it has been averted.”

Specific criticism comes from Russian economists, who contend that without ending the monopolies enjoyed by state enterprises and privatizing many of them first, the price reform was simply punishing the workers, whose wage increases are to be kept about 30% behind the price boosts.

Nechayev and Sachs replied that price reform must come first in practice so that potential buyers will be able to assess a firm’s profitability. “To privatize, you need real prices,” Nechayev said.

The price reform is also criticized as failing to free prices completely and amounting to little more than a government effort to end its huge budget deficit by eliminating state subsidies to unprofitable firms. These critics see it failing to force any fundamental economic restructuring.

At the same time, the country’s currency has regained none of its value. Enterprises prefer to sell their goods through complex barter deals and avoid the ruble entirely if possible. Nechayev and other government economists say that until the ruble becomes convertible, deeper reforms are not possible.

Still other economists and politicians fault the hesitant, piecemeal way the reforms were undertaken. Although outlined by Yeltsin to the Russian Parliament at the end of October, they were delayed in the political maneuvering that brought the Soviet Union’s disintegration and the formation of the Commonwealth of Independent States last month.

“The lowest point of the crisis has not been reached yet,” remarked Abel Aganbegyan, a leading liberal economist. “I hope that it will happen this summer or autumn, but I fear that every month of delay in making real changes puts off settlement of the crisis until 1993.”

Alexander N. Shokhin, Russia’s deputy prime minister for social policy, acknowledged in an interview: “Many of the criticisms are true, but we had an imperative need to act. Every delay made the situation more complicated and reduced our prospects for success. We had already lost a lot of time, and we could not wait until we had a perfect program.”

Shokhin said there will be a “very sharp recession” in industry as the withdrawal of government subsidies is followed by consumer refusal to buy overpriced goods and then by cutbacks in production. “On paper, it is a simple move from one stage to the next,” he said, “but in life each step is painful and dangerous.”

Shokhin and Nechayev said that producers, trying to maximize their profits after the lifting of price controls, have in many cases charged more than the market would pay and are now cutting back their output as goods go unsold. Slowly, they will begin to rebuild, orienting their output to market demands.

“We do not yet have real prices, but price expectations--what producers would like to be paid,” Nechayev said.