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<text> <title> (May 07, 1990) Economic Reform:Hurry, Doctor! </title> <history> TIME--The Weekly Newsmagazine--1990 May 07, 1990 Dirty Words </history> <link 04689> <link 03788> <link 01734> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 84 Hurry, Doctor! </hdr> <body> Gorbachev is moving too cautiously in dispensing the bitter medicine that the Soviet Union needs. Here is the prescription he must swiftly administer By Ed A. Hewett and Richard Hornik--With reporting by Paul Hofheinz/Moscow The image was familiar: Mikhail Gorbachev on another barnstorming journey, surrounded by a sea of citizens. "The point of this trip was to come and see if what we're hearing about your concerns is true," he told workers at the Uralmash plant in Sverdlovsk, in the Soviet Union's industrial heartland. That concern was familiar too: the state of a faltering economy close to collapse and increasingly incapable of delivering goods and services to 287 million citizens. For the past month, Kremlin officials had promised that a radical strategy for economic modernization would be unveiled as early as May Day. But Gorbachev decided against such a quick fix. "If someone at the top says we should just raise prices and have shock therapy, don't believe them," he said in Sverdlovsk. "If we are going to do something like raise prices, we'll do it together, as we promised." Aware of overwhelming public opposition to radical reform, he was out to calm fears about such a restructuring and to initiate a nationwide discussion on what it might entail. Since coming to power in 1985, Gorbachev has repeatedly underestimated the depth of his country's economic troubles and the harshness of the measures required to alleviate them. He finally seems to understand how bankrupt the system is, but his dithering frittered away much of the political capital needed to impose the painful, unavoidable solutions. How did he get into this predicament, and what can he do to climb out of it? While the delay in reform is disappointing, it need not be fatal, provided Gorbachev moves swiftly. The Soviet Union, the sick man of Eurasia, is in desperate economic shape. It suffers from a mix of mutually exacerbating ailments. What they have in common is their base: the institutionalized absurdity known as communism. A system that radiates orders from the top down destroys initiative on the part of workers and managers, hampering the quantity and quality of production. Government-set and -subsidized prices are kept so low that producers have no incentive to produce, retailers no incentive to sell. There is less and less for consumers to consume, and people are forced to save the money they cannot spend. At least 165 billion rubles in involuntary savings, the equivalent of six months of retail sales, lies like a deadweight on the economy. The ruble is worth so little that enterprises must barter their output and pay their workers with goods rather than money. If what ails the Soviet Union is Marxism, what will cure it is the introduction of market mechanisms. But the Soviet people are not prepared for that sort of shock. True, a free market will put more goods on the shelves of the gastronom, or grocery store, but with state subsidies removed, prices will rise. As Nikolai Petrakov, Gorbachev's top economic adviser, told the Rabochaya Tribuna (Worker's Tribune) last week, "People accept rationing coupons and standing in line--especially during work time--but not price increases." And the housewife can now vote for a parliamentary representative able to stand up in the Congress of People's Deputies and, if necessary, shake a fist at Gorbachev on the podium. Preoccupied with the nationalities problem and facing a Communist Party Congress in July, he cannot afford another exposed flank. Had Gorbachev moved quickly after coming to power, he might have been able to blame both the problem and the need for painful solutions on his predecessors, especially Leonid Brezhnev. Instead, he hedged. Now much of the public blames Gorbachev, and his government has lost credibility. Some of the concrete measures Gorbachev did prescribe were confusing or contradictory. He told ministries to stop meddling in managerial decisions, but left them with responsibility for the performance of the enterprises within their purview. Legislation allowing the creation of cooperatives and small privately held companies has introduced just enough free enterprise to let a few citizens get rich, but not nearly enough to alter the system as a whole. In any case, cooperatives have been given only limited access to raw materials, capital and foreign exchange. That has forced them to turn to the black market, where prices are higher still--and therefore to charge more for their own goods and services. The result: widespread resentment among the public. Most Soviets have long since got used to the idea of uravnilovka, or leveling: everyone lives badly, but equally badly. Seeing a fellow citizen get ahead bothers the average Ivan Ivanovich. Leonid Sukhov, a former cabdriver who is a parliamentarian, wants to close medical cooperatives, for example, because he thinks that doctors who work in them earn too much money. There is a certain degree of lassitude as well. According to a wry bit of folk wisdom, the social compact in the workers' state is, "We pretend to work, and they pretend to pay us." Gorbachev tried to offer a new deal: "You really work, and we'll really pay you." So far, neither half is in prospect. Most Soviets, according to a recent poll, have little interest in making more money if more work is required. Ideology has not only hobbled Gorbachev but also crippled the dismal science from which he needs solid advice. Because the Stalinist system rejects the laws of economics, such as the influence of supply and demand on prices, the vast majority of Soviet economists have little understanding of how a modern economy works. That picture is getting brighter, but only slowly. Over the past year Gorbachev has begun to bring some of the U.S.S.R.'s best--and most radical--economists into his inner circle. Most notable was the appointment last December of Petrakov as his personal adviser. Petrakov wants to create a market economy in the U.S.S.R. open to, and integrated with, the rest of the world. Petrakov has powerful allies at the top, including Leonid Abalkin, the Deputy Prime Minister for Economic Reform, and Stanislav Shatalin, a member of the just appointed body that has effectively replaced the Politburo as the top policymaking group. Gorbachev's economic brain trust spent months trying to design a daring strategy for rescuing the economy, only to find the schedule slowed down in recent weeks. Thus the group must return to the drawing board to see what it can do to prepare the economy for a thorough overhaul without the linchpin of any reconstruction: comprehensive price decontrol. Whatever the final direction, the Soviet Union must begin to take several essential steps in the coming weeks and months if there is to be hope for recovery: PRIVATIZATION. The Kremlin must privatize state enterprises and encourage the start-up of small businesses. Assets--land, production equipment, merchandising networks--should be put into the hands of owners who have a personal economic interest in expanding the value of those assets. Large conglomerates should be broken up into more manageable elements. The Khrunichev Machine Building Enterprise in Moscow, for example, which makes everything from rockets to bicycles, should be divided into separate enterprises. JOINT-STOCK COMPANIES. Once broken up, state-owned enterprises should be converted into joint-stock companies. The state might retain a share, with the remainder being sold off to employees, state pension funds and even foreign investors. One approach would be the creation of employee stock-ownership plans (ESOPs in the U.S.) by agreeing to accept installment payments by workers. COMPETITION. If runaway inflation is to be avoided once prices have been decontrolled, the system must foster competition. The government must have an active antitrust policy to prevent new monopolies from forming. Entrepreneurs who have good ideas should be able to raise capital, start businesses and compete with existing enterprises. One method would be the creation of an agency, modeled after the U.S. Small Business Administration, to provide advice on cutting red tape as well as support for bank loans. BANKING SYSTEM. If entrepreneurs are to respond quickly to the opportunities of a free market, they will need institutional investors capable of attracting savings from businesses and individuals and channeling those funds to the private sector. Yet commercial banks in the Western sense are virtually nonexistent in the U.S.S.R. Soviet banks provide customers with little more than passbook savings accounts. Building commercial banks will mean relying on Western institutions for staff training and probably even direct involvement through joint ventures. In addition, to regulate the money supply, the Soviet Union will have to replace Gosbank, which is an arm of the government, with a more independent central bank along the lines of the U.S. Federal Reserve. At least initially, the central bank will have to impose a draconian monetary policy, including forbidding the government to print nearly worthless rubles to pay its bills. GOVERNMENT MEDDLING. Although there has been some attrition in the number of economic ministries, the remainder should be eliminated. A modern economy has no place for a Ministry for the Production of Mineral Fertilizers, the de facto owner of factories--and a likely opponent of privatization. Instead of micromanaging--or, more to the point, micromismanaging--the economy, the government must pursue an overall balance between output and demand. To do that, it will have to weigh public demand for defense, welfare, cultural activities and the like against its ability to raise revenues. Instead of simply confiscating the earnings of enterprises, the Soviets will have to learn the mechanics of raising public funds through a comprehensive tax system, the centerpiece of which should be a value-added tax. SAFETY NET. Theoretically, poverty and unemployment are unknown under socialism, so institutional remedies such as unemployment insurance or low-income support barely exist. In the past, the poor were protected by a system that kept prices artificially low but that simultaneously subsidized those members of society who could easily fend for themselves. Eventually, benefits will have to be targeted toward those in need through a comprehensive social-welfare system. There will also be a need for services like job retraining, since unemployment will rise sharply as inefficient, unprofitable factories are closed down. RUBLE OVERHANG. Moscow will have to soak up those billions of unspent--and now largely unspendable--rubles lurking in the shadows of the economy, waiting for something to buy. Like a giant monster, they will snap up new goods as soon as they appear. While the monster is at large, workers will have little incentive to work, even at higher wages: Why should they earn more rubles when so much money is already salted away? The government could confiscate savings--by switching to a new currency--or absorb them by selling off to private interests such state-owned assets as land, apartments and stock in public enterprises. LEGAL SYSTEM. Overhauling the economy requires a legal system that provides laws on corporations, conflict of interest and antitrust. None of those exist, though some are being developed. Both the fledgling private sector and the government will need crash courses in contracts and accounting. Executives will have to understand--and be willing to obey--the new rules of the new game. Such concepts, practices and institutions are familiar to Westerners, but they are generally terra incognita for Soviets. If reform is to have a chance of success, it will probably have to be put in place by a government with many new faces, and certainly with a new set of attitudes. The decision to delay the most painful parts of the reform demonstrates that pressure by a handful of radicals at the top is not potent enough. Gorbachev's approach to date has illustrated the danger of trying to saw slowly through the Gordian knot rather than cutting it in one daring slash. Yet his advisers appear to prefer the quick and daring move, despite the risks involved. Initially, Soviet economists were encouraged by Poland's apparent success in its so-called cold-shower transition to a market economy. On Jan. 1 practically all prices were permitted to float while the government refused to print money to subsidize weak firms. The predicted and widely feared result was massive inflation and growing unemployment. Yet almost four months later, the economy appears to have stabilized. Nonetheless, Petrakov and his colleagues have reluctantly concluded that the Polish approach will not work in the Soviet Union. As Petrakov said last week, "The situation in our country is completely different." But is it hopeless? Although Gorbachev has repeatedly shown his willingness and ability to change his mind and his policies at a moment's notice, his temporizing on the economy has become worrisome. The public may not be ready to accept the revolutionary changes that are needed, but will it be any readier, say, a year from now? The experience of the past five years should have taught Gorbachev that when it comes to economic reform, a piecemeal approach is doomed. A radical change is required. Last week Gorbachev made it clear that he is not ready to take that crucial step. The Soviet leader believes he needs more time, but that may be the commodity in the most dire shortage of all. </body> </article> </text>