Massive Aid Program for Russia, as Proposed by Nixon, Isn’t the Answer

Former President Richard M. Nixon’s recent memo on aid to Russia describes the Bush Administration’s program as “penny ante” and a “pathetically inadequate response.” Nixon outlines several areas where the United States should help: more food and medical aid during the transition; a “free enterprise corps” of managers to help new enterprises; debt rescheduling and deferral of interest payments; greater access to Western markets for Russian exports; tens of billions of dollars to stabilize the currency, and a single organization--reminiscent of the Marshall Plan that provided help to Western Europe after World War II--to coordinate government and private aid to Russia and other former Soviet republics.

The foreign aid Establishment and its friends rejoiced. Many of them even forgot their decades of antipathy toward Nixon and joined his bandwagon. They like big foreign aid programs that push out government-to-government aid. They talk of historic opportunities and dismiss mundane issues about the costs and benefits of their programs. In place of “shop till you drop,” they want “spend till they mend.”

Nixon’s proposals for open markets and emergency assistance should be welcome. But taxpayers should reject his call for a massive foreign aid program and a new version of the Marshall Plan. The survival of democracy and freedom in Russia and the other republics will not be ensured by Western aid to the Russian government. And survival does not depend on the coordinated actions of a new group of Marshall planners.

The fate of Russian citizens and other East Europeans must depend on their decisions and actions, not ours. This view is shared by knowledgeable Russians. Oleg Bogomolov, a leading Russian economist and advocate of reform, told a Washington audience just days before Nixon’s memo was released that foreign aid cannot be a main factor in the stabilization and transformation of the Russian economy. “Especially necessary is attraction of Western expertise and investments . . . (and) creation of an appropriate legal framework,” Bogomolov said.

The Marshall Plan provided capital to market economies in which competition was the norm. All of these economies had legal, financial and accounting systems, property rights and enforceable contracts. Russia has been slow to put in place rules for the protection of private property, enforcement of contracts, accounting, credit and legal systems, without which a market system does not function efficiently. Agriculture is not yet in private hands. The list of basic steps not taken is a long one.

Freeing prices is not enough to stimulate production. There must also be the incentives that a secure private property system provides. Nor can the former Soviets’ problems be solved by billions of dollars of grants or loans to stabilize the ruble. The $40 billion to $50 billion of food and other aid already sent by Western governments has had little effect.

A popular argument presents loans to support the ruble as cost-free because we give the Russians paper dollars that the Russian state bank would hold as backing for the ruble. If the plan works, the ruble would be convertible at a stable value, and the dollars would not be spent. If the plan fails, as many similar plans have in Latin America and Africa, the dollars we lend or give would quickly disappear from the central bank. A safe thing for Russians to do is hold dollars instead of rubles, so they would demand dollars.

This is likely, but it would be certain to happen if Russia fails to close its enormous budget deficit. The deficit is now financed by printing rubles as fast as the presses can run. Inflation is rampant, and lifetime savings have been destroyed.

Dollars we give are a claim against U.S. wealth. If the International Monetary Fund advances the dollars, U.S. taxpayers will share the cost with other countries. The United States has the largest share. The advance would be paid from the money American taxpayers have given to the IMF and from additional contributions that our government would require our taxpayers to contribute.

Trade, not aid, should be a principal means of encouraging economic development in East Europe. To help these countries grow without subsidies or government-to-government aid, we should do two things:

First, we should agree on a trade treaty with Russia, remove all tariff and non-tariff barriers to trade and urge the West Europeans to do the same. If East Europe can sell goods, including food, to Western Europe and the United States, they will earn hard currency to pay for Russian oil, coal and minerals. The Russians will earn foreign exchange that they can use to stabilize and develop their economy.

Second, Russia is rich in mineral resources. It lacks management skills and technology to exploit many of these resources. These will not come from government-to-government loans or the IMF. The most effective way to develop the Russian economy is to let foreign investors buy participations in assets or enter long-term leases to develop resources. The new owners or operators will bring technology and management skills. But not much will happen until the Russians establish the institutions and economic structure that permit markets to function efficiently.

Russia has decontrolled many prices. This was an important step; it took courage to make it. But it is not enough. With their inflationary finance and no clear rules for ownership and contracts, the economy will at best limp ahead. Additional foreign aid will be wasted.

The mark of successful reform will be a flow of private capital to Russia and its neighbors. Russians who sent their money abroad will bring it home, as Mexicans did after their market-oriented reforms. Private capital from loans, asset sales and repatriation can be used to stabilize the ruble and, if the budget is balanced, bring down inflation and put the economy on a positive, sustainable growth path. Protecting U.S. taxpayers’ interests and opening our economy to trade will do more to help the Russians than the well-intentioned schemes that, most likely, are soon to be launched.