Gorbachev the Economist

The Soviet Union today is a radically different place from what it was five years ago when Mikhail Gorbachev became general secretary of the Communist Party. Admittedly, Gorbachev promised then that his goal would be to reform Soviet economic and political life. But the Soviet people had heard similar promises before, almost all of which had ended up unfulfilled. No wonder few anticipated that in a few years the Soviet Union would in fact legalize the formation of such un-Soviet institutions as cooperative and private businesses, joint ventures with foreigners, and economic autonomy for several of the Soviet republics. It would have been even more farfetched to predict that there would also be glasnost, secret ballots, the disappearance of the secretariat of the Communist Party, the creation of a Supreme Soviet and a presidency that would usurp much power from the Central Committee and the Politburo, calls for regional secession and, finally, an end to the Communist Party's monopoly in political life.

Gorbachev deserves enormous credit, not only for what he has accomplished but also for the fact that he has managed to ride out these transformations-many of which have been rather tumultuous. But while his efforts at political liberalization have been extraordinarily fruitful, his attempts to revitalize the Soviet economy so far have failed. Economic reform was Gorbachev's number-one priority. He promised a radical transformation of the economy, which he eventually came to call perestroika. If it succeeded, the Soviet Union would be competitive not only in terms of conventional products such as machine tools, but also in the field of high technology. Equally important, soon after assuming power he promised to raise "the economic well-being of the Soviet peoples to a qualitatively new level."1

Unfortunately for the Soviet people, not only have they not enjoyed "a qualitatively new level" of economic well-being, their per capita real standard of living has actually fallen by what one respected Soviet economist estimates to be one percent per year.2 In addition, the Soviet economy now finds itself beset for the first time since World War II with an overt form of inflation that may exceed 20 percent a year, as well as persistent shortages of such basic products as sausage, salt, soap, school notebooks and sugar. A Soviet survey in early 1988 found that only 23 out of 211 varieties of foodstuffs were readily available in Soviet shops.3 Even bread, the one product that Soviet leaders have always tended to protect, has "sporadically" disappeared from the shelves of such normally well-provisioned cities as Moscow.4 Out of necessity, rationing of basic products such as sugar has been instituted, in many cases for the first time since 1947.

What produced this crisis? Why is such an enthusiastic reformer having such a hard time? And how much responsibility does he bear for what has happened?

II

In fairness to Gorbachev, the economic situation he inherited in 1985 could hardly be described as robust. It is hard to judge just how serious conditions were. As part of the glasnost process, Soviet economists have begun to criticize not only their own but even CIA statistics. Some charge that the CIA's figures present too rosy a view of past Soviet economic growth. But even the so-called overestimated statistics still reflect a decline in the rate of growth. For example, in 1979 and the early 1980s there was a drop not only in the rate of growth but in the actual output of such important industrial commodities as steel, machine tools, coal and petroleum. In addition, beginning in 1978 the Soviet Union found itself with a succession of six bad harvests. Formal meat rationing was introduced in various provinces of the Soviet Union.

Although it is traditional for the incumbent leader of the Soviet Union to blame his predecessors for almost all the country's current shortcomings, Gorbachev can be forgiven for referring to the Brezhnev era as "the years of stagnation." Indeed, much that was being produced at the time was of poor quality or outmoded. Thus, even though the Soviet Union called itself the world's largest producer of steel and machine tools, hardly anyone in the outside world with convertible currency to spend was interested in buying Soviet materials. For that matter, even Soviet buyers without any alternative sometimes resisted the pressure placed on them to utilize Soviet goods.

In addition to Brezhnev's legacy, Gorbachev had to deal with a host of other problems unrelated to the state of the Soviet Union's economy. It almost seems as if there is a perverse "Gorbachev's law": If it ain't broke, it soon will be. He appears to be a magnet for catastrophe. Only a year after becoming general secretary, Gorbachev had to cope with the nuclear reactor explosion at Chernobyl, followed by massive earthquakes in Armenia and Central Asia. At the same time there was a series of droughts combined with excessive heat and premature cold, all of which had a serious impact on the Soviet harvest. On top of everything else, the world price of oil dropped. Since petroleum had accounted for over 60 percent of the Soviet Union's hard currency earnings, this reduced the country's ability to pay for its imports. Nor did it help when the Soviet Union was forced to import more grain to compensate for the poor harvests. To have sustained its previous volume of imports, the Soviet Union would have had to borrow significant sums from Western lenders. But Soviet leaders have traditionally been reluctant to borrow money to sustain or increase imports. They borrow but only after they have first tried to increase exports and cut imports.

Certainly these difficulties, which placed a severe strain on the Soviet budget, would have handicapped even the ablest administrator or economic manager. Yet it is necessary to remember that the problems facing Gorbachev are not unique. Maybe the magnitude of what his predecessors had to contend with was not quite as overwhelming, but all previous Soviet leaders have had to deal with extraordinary catastrophes.

An analysis of these last five years shows, rather, that faulty decisions by Gorbachev and his administration have been a major cause of the magnitude of the Soviet Union's economic crisis. This is partly because Gorbachev responded inadequately to some of the Soviet economic problems. More important, it is because until 1988 and 1989 most of his programs were inappropriate, untimely and, in a few instances, harmful. Consequently he and his advisers must bear a major share of the responsibility for the deterioration that has taken place. He promised the Soviet people a better life, but because of misjudgments about the economy, their circumstances are now more stringent then they need have been.

III

Where did Gorbachev go wrong? In the beginning he seemed to be doing well. Taking the lead from his mentor, Yuri Andropov, Gorbachev reinstituted a campaign for tighter discipline, along with a crackdown on corruption and alcoholism. He adopted much tougher restraints on the sale of vodka by raising the price and reducing the number of outlets and their hours of service. Production of most Soviet industrial products rebounded sharply from the low growth or negative rates of the Brezhnev and Chernenko eras.

Gorbachev's effectiveness was exemplified by his reinvigoration of the petroleum industry. Monthly production began to fall in October 1983. In 1984 the Soviet Union experienced its first annual drop in petroleum output since World War II. Production continued to decline throughout 1985. Since petroleum is so important to the Soviet Union both internally and externally, Gorbachev sought to prevent a further decline. Giving the venture his personal imprimatur, he made an on-site visit to the oil-rich Tyumen region in September 1985, a mere six months after coming to power. Although Tyumen is the Soviet Union's main producing center in western Siberia, many complaints had been heard over the years about its inept operations. After some unprecedentedly frank discussions, Gorbachev demanded remedial measures including a purge of local administrators and managers. The turnaround was almost immediate. Petroleum output increased markedly in January 1986 and continued to rise for about two and a half years. It was an excellent example of how discipline, anti-alcohol campaigns and administrative housecleaning can make a difference. A renewed drop in petroleum output in late 1988 indicates, however, that exhortation and managerial changes do not of themselves ensure structural change in the economy.

For several reasons Gorbachev devoted little attention to consumer goods. Instead he emphasized machine tool production; this was a serious mistake. It is hard to explain Gorbachev's obsession with machine tools. The best explanation seems to be that, like so many Soviet leaders before him, Gorbachev adhered to the view that the route to an advanced, affluent economy was through the machine tool industry. This was also the advice given him by a small circle of economic advisers led by Abel Aganbegian.5 The emphasis on heavy industry had become doctrine in the Stalinist period. Development of "Sector A" industries, as the heavy industrial sector was called, was regarded as a necessary prerequisite for the growth of "Sector B" industries-consumer goods.

Not everyone in the Soviet Union supported this emphasis on heavy industry, particularly as it had evolved under Brezhnev. Critics were concerned by what they saw as the very wasteful utilization of resources. But Gorbachev thought he had a solution. In contrast to what he called Brezhnev's "extensive" approach to development, Gorbachev urged a switch to intensification and acceleration (uskorenie). Enterprise managers were to continue their emphasis on the machine tool industry but to utilize raw materials more effectively by working additional shifts and using more care.

To achieve true efficiency and higher quality, factory managers were given more decision-making powers. Some initial experiments were introduced as early as May 1985 at the Volga automotive plant in Togliatti and the Frunze Scientific Production Association in Sumy. The managers were allowed to fire some of their workers and redistribute wage savings to the continuing members of the work force. They were also promised that they could hold on to as much as 40 percent of whatever foreign exchange they earned from exports.

In tandem with his efforts to expand the authority of enterprise managers, Gorbachev realigned the powers of the ministries and committees in Moscow. On the one hand, he created Gospriemka, the State Quality Acceptance Committee, a new organization whose function was to ensure a radical improvement in the quality of production, a persistent shortcoming of Soviet economic life. In 1985 quality inspectors were assigned by Moscow authorities to 19 enterprises with the power to accept or reject output. By October 1, 1986, factories producing 20-30 percent of all Soviet output were assigned Gospriemka inspectors, and on January 1, 1987, representatives from Gospriemka began to inspect the output of most other major Soviet industries.6

At the same time, Gorbachev altered the function of the industrial ministries. At the urging of Aganbegian, he consolidated several ministries into a small number of superministries that supposedly would be too preoccupied with major policy issues to interfere in the day-to-day affairs of operating enterprises. Instead, the superministries in such fields as machine tools and energy production would be able to focus on larger policy issues and technological development.

Perhaps the most publicized example of a superministry was Gosagroprom, the State Committee for Agricultural Industry, or as we might call it, the agrobusiness ministry. This ministry was put in charge of everything having to do with agriculture. It was the survivor of five former ministries and one state committee, all of which had previously been responsible for one aspect or another of the food-growing and food-processing cycle.

It may well be that nothing Gorbachev could have done at the time would have spared the Soviet Union economic and political problems. After all, the Chinese took a very different route to economic reform; after a decade of remarkable success, they too encountered serious problems. Given the enormity of the undertaking that both Gorbachev and Deng Xiaoping were attempting, perhaps such problems were inevitable. Their goal was nothing short of a revolution-peaceful, but nonetheless as far-reaching as what happened in 1917 and 1949.

Yet in retrospect Gorbachev would probably have done better if, instead of emphasizing the machine tool industry and superministries, he had followed the Chinese example by focusing on the revitalization of a grass-roots agricultural and consumer goods sector. Deng's efforts began with the peasants taking over the land for themselves. Soon afterwards, he diverted resources from the heavy industrial and military sectors to the consumer goods industry. This helped to encourage the peasants to further efforts. The peasants saw that if they worked harder, they would be rewarded with heretofore unavailable consumer goods and farm building supplies.

As we have seen, Gorbachev had a very different set of priorities. Instead of emphasizing agriculture and consumer goods, the areas most in need of attention, Gorbachev focused on Gosagroprom and machine tools. Even though he, like Deng, talked about transferring decision-making to the localities, by his actions he increased the power at the center in Moscow. Gospriemka, for example, with its quality inspectors, increased Moscow's control over day-to-day operations to a level reminiscent of the Brezhnev and Khrushchev eras. Similarly, the superministries, particularly Gosagroprom, actually interfered more than their predecessors had done.

Gorbachev's contradictory policies toward private and cooperative trade produced similarly mixed signals. As a by-product of Gorbachev's drive against crime, the Soviet government in October 1985 prohibited the sale of farm produce in Moscow and the republic of Georgia by anyone other than the original producer. This experiment became the law of the land on July 1, 1986, when a ban was declared on receiving "unearned income" from the sale of products produced or grown by somebody else. However, in a complete about-face, another decree was instituted on May 1, 1987, which legalized the establishment of individual, family and cooperative businesses. Initially there were all kinds of restraints on what could be sold and who could sell it, but the important point is that the 1987 law sought to expand what the 1986 law sought to ban. Not surprisingly, this caused confusion and hesitation among would-be entrepreneurs. Nor has it helped that even Gorbachev himself has recently made some anti-cooperative-trade remarks. In response, price controls have been instituted and cooperatives that act only as middlemen have been banned.7 Similar sentiments were echoed in July 1989 by striking coal miners. For instance, one of the demands of the Karaganda Strike Committee was that "trading and purchasing cooperatives" as well as cooperative restaurants "be closed down."8 As they see it, the high prices, shortages and increased crime are largely the consequence of greedy cooperative practices.

IV

The negative impact of such misguided and contradictory policies has been profound. There is little doubt that they have exacerbated the already existing economic difficulties in the Soviet Union.

The renewed and accelerated emphasis on the machine tool industry is a good example of how such ill-advised policies have created unintended consequences. As the data in Table 1 show, by 1988 the Soviet Union had increased its annual importation of machinery over 1984 levels by approximately 2.5 billion rubles. This was done despite the fact that, due to the fall in the world price of oil, petroleum export sales to both hard and soft currency buyers fell from a high of 30.9 billion rubles in 1984 in the pre-Gorbachev period to about 20.7 billion rubles in 1988. This constituted a staggering drop of 10 billion rubles or one-third of the total.

Fortunately for the Soviet Union, two good harvests in 1986 and 1987 made it possible to reduce grain imports. This allowed a reduction of 2-3 billion rubles in import expenditures, which made up for some of the shrinkage in export earnings. When the harvest suffered again in 1988 and 1989, however, it was necessary to increase grain imports by 50 percent in 1988 and again in 1989, thereby increasing import expenditures. It would have been better to have reduced machinery imports by a substantial amount, especially when it became clear that oil export revenues had fallen off sharply. This should have been done as early as 1985 and certainly before 1987. Gorbachev and his staff, however, did just the opposite; rather than cut back on machinery imports, the Soviets actually increased them.

TABLE 1

SOVIET EXPORTS AND IMPORTS

(in millions of rubles)

PRODUCT 1983 1984 1985 1986 1987 1988

Imports

Machinery 22,747 23,944 25,683 25,455 25,155 26,584

Food (except grain)

& consumer goods 11,079 12,411 13,205 12,926 11,964 11,738

Food and consumer

goods plus grain 14,724 17,776 18,045 14,961 13,516 14,101

Exports

Petroleum, crude

and refined 28,216 30,895 28,188 22,464 22,826 20,708

Natural gas 6,302 7,463 7,695 7,358 6,381 5,197

SOURCE: Vneshniaia Torgovlia, Statisticheskii Sbornik, annual editions, 1980 through 1988.

What Soviet officials did instead was to cut imports of consumer goods. This began in 1986 and continued each year, so that by 1988 Soviet consumer goods imports were about one and a half billion rubles less than they had been in 1985. These imported consumer goods would have been marked up about six-fold by the time they were sold to Soviet consumers. This explains why Soviet authorities report that under Gorbachev, food and consumer goods imports fell by the equivalent of 8.5 billion rubles in retail prices.9 As we shall see, this slashing of consumer goods imports had serious fiscal implications.

The fetish with industrial machinery was further reflected in the domestic budget. Budget expenditures on capital investment within the Soviet Union for both factory construction and machinery (particularly "Sector A"-heavy industry) continued to rise steadily throughout the Gorbachev years with a particularly notable surge in 1986. Further, because of the crackdown on the sale of alcohol and the reduction in consumer goods imports, domestic collections of the turnover tax, the Soviet Union's sales tax, also fell. From a high of 103 billion rubles in 1983 and 1984, turnover tax collections fell by nearly 13 percent to a low of 91.5 billion rubles in 1985.

The impact of higher budget expenditures on machine tools combined with lower revenues was dramatic. After years of insisting that the Soviet Union always operated with a balanced budget, Soviet authorities in 1988 finally acknowledged that their budget was, in fact, in deficit. But the deficit that totaled a rather modest 18 million rubles in Gorbachev's first year had tripled to 48 million rubles in 1986 as a result of his policies. The deficit continued to expand so that by 1989 it reached 100-120 billion rubles, about 14 percent of the Soviet Union's GNP.10 This compares to a U.S. deficit of about 3-4 percent of its own GNP. The accumulated Soviet national debt totaled 312 billion rubles.11 For the most part, these deficits and debts were financed the old-fashioned way-by turning on the printing presses. This in turn was the underlying cause of the sudden inflation and goods shortages that struck the Soviet Union.

Inflation is not an entirely new phenomenon in the Soviet Union. As a result of the persistent emphasis on military expenditures and heavy industry, there has always been a tendency to pay out a wage bill that is larger than the value of the consumer goods and services available for purchase with those wages. And since prices were carefully controlled in state shops, the result was a steady form of suppressed inflation. However, the increasing budget deficit and the legalization of cooperative ventures with considerably more power to set their own prices made inflation overt. In 1988 for the first time since World War II, prices of almost all Soviet goods began to rise. The impact was dramatic. According to the Soviet economist Vasily Selyunin, the emphasis on heavy industry, combined with the outpouring of newly printed rubles, explained why "we have fewer goods than planned and twice as much additional money. What happens in this case? During the second half of last year [1988] trade began to fall to pieces before our eyes."12 By 1989 many prices were increasing at a rate of 20 percent or more-that is, when one could find the goods to buy. Some Soviet economists have even begun to warn of hyperinflation.13

Compounding the problem was Gorbachev's decision to crack down on alcoholism. At first it seemed like a laudable decision, but after a few months of effective enforcement thousands of enterprising Russians realized that there was much money to be made in distilling home-produced vodka. Moonshine, or samogon as the Soviets call it, became big business. Moonshiners, however, found they needed large quantities of sugar for their work. In a short time, sugar simply disappeared from the country's shops, even in Moscow. In addition to exacerbating the fiscal crisis by reducing the national budget revenues, the crackdown on vodka sales provoked a sugar shortage-a shortage relatively rare in the pre-Gorbachev era and a trigger that set off all kinds of other shortages.

The unprecedented sugar shortage, combined with the decision to reduce consumer goods imports, plus the surge of more newly printed rubles and the resulting inflation, triggered a buyers' panic. People began to hoard. One Moscow friend acknowledged that although there was no more room to store the sugar that she had to buy with ration coupons, she would continue to buy-fearing that it would not be available when she needed it or, if it was, the price would be even higher. In this kind of environment it was difficult to keep much on Soviet store shelves. Most Soviet stores were empty of such products as jewelry, furniture, milk products, sausage, soap, laundry detergent, pasta, tea, matches and even salt.

V

Gorbachev is very much aware of his fiscal problems. His concern with the budget deficit, for example, is at least a partial explanation for his early determination to reduce military expenditures. This was one way to shrink the size of the deficit and reduce or eliminate inflation. It also made possible the belated transfer of resources to the consumer sector-as Deng had done earlier in China. Only now, after four to five years in office, is Gorbachev trying to do the same thing.

But as praiseworthy as Gorbachev's current efforts are, his initial actions are largely responsible for the present inflation and goods shortage. He should have moved immediately, not four years later, to provide more for Soviet consumers. Instead he sent out the opposite signals. For more than four years Gorbachev did little to stimulate increased consumer goods production. His advocacy of cooperatives and private businesses lacked enthusiasm. Unlike Deng, Gorbachev never said, "It is good to be rich." When he finally decided to allow private, family and cooperative farming in 1987, his signals were ambiguous. While exhorting the peasants to move off on their own, he continued to insist that nothing should be done to diminish the role of the traditional sovkhoz (state farm) and kolkhoz (collective farm). Moreover, many sovkhoz and kolkhoz members themselves tried to prevent others from leaving the larger units and opening their own farms. Furthermore, Gorbachev continued to support his agricultural superministry Gosagroprom. Although the ministry was finally abolished in 1989, many of its bureaucrats and their responsibilities did not really disappear. As happens with so many Soviet bureaucracies, Gosagroprom was replaced with another ministry-like apparatus, the State Commission for Food and Procurement of the U.S.S.R. Council of Ministers.14 Bureaucratic meddling by Soviet officials more than anything else frustrated efforts to generate increased grain sales to the state.

In an ideological breakthrough it was announced in mid-1989 that the state would pay peasants in hard currency for any increase in deliveries over 1988. But despite a slightly higher 1989 harvest, deliveries to the state actually fell 27 million tons below plan. The reason is that the bureaucrats attached so many conditions to what the peasants must do to take advantage of their hard currency credits that the peasants came to the conclusion that it was all a bureaucratic deception. As a result they grew the grain but refused to deliver it to the state. Similar bureaucratic mishandling helps explain why peasants have been so reluctant to set out on their own. Moreover, in addition to the bureaucratic and economic uncertainties, peasants who show too much initiative risk being labeled kulaks, the epithet for middle-class peasants who were killed in the Stalinist terror. Already there are reports that some peasants who have set up their own farms have been stabbed and their farms set on fire. Nor was it reassuring when Gorbachev appointed Yegor Ligachev to the job of supervising agricultural reform, particularly since Ligachev, a conservative, has always made it very clear that he opposes any effort to abolish the sovkhoz or kolkhoz and continues to denounce capitalist practices.15

The signals have been equally mixed in industry. Gorbachev's key June 1987 reform, the Law of the Enterprise, turned out to be a big disappointment. Given the power to set wages, the enterprise managers found themselves under great pressure to raise salaries, which in turn helped to fuel inflation. The Enterprise law was undermined by most of the industrial ministries. Under the new law they were supposed to shrink the share of the goszakazi, state orders, to about 70 percent of enterprise output. Most ministries, however, continued to claim 90 percent and sometimes 100 percent of what the factories under them produced. And when the ministry did reduce its goszakazi, frequently the enterprise itself would seek to increase the share to 100 percent. With goszakazi, the enterprise would be spared the worry of finding a customer for its output and be assured of government guaranteed and supplied components. Without goszakazi, the factory would have to take the risk of finding a customer and developing its own suppliers. That required a new set of skills that Soviet managers had seldom if ever used. If successful, setting off on their own could mean higher profits and bonuses for the managers, but it also might mean losses and the denial of wage premiums and bonuses. Most managers refused to take that chance.

This reluctance to sever the guaranteed umbilical cord to centralized control and decision-making characterized almost all efforts to transfer authority to the enterprise. In addition to reflecting the unwillingness of Soviet managers to set off on their own, it also confirmed the reluctance of the central government to let power slip from its hands. Like bureaucrats anywhere, the Moscow authorities enjoyed the power they had and saw no reason to let others have it. Since the Moscow bureaucratic apparatus also knew that they would ultimately be held responsible for any failure, even if power had been decentralized, they tried to protect themselves by ensuring that no mistakes would be made. This attitude helps explain the decision to introduce Gospriemka. It also explains why, when a decree was finally issued to allow any Soviet enterprise to export or import on its own, this decree was "clarified" immediately by noting that although in principle enterprises could indeed import or export on their own, they would nonetheless have to check with Moscow authorities for permission to buy and sell a large list of goods.16

This same bureaucratic unwillingness to let go reduced the effectiveness of joint ventures. In a radical break with ideology, Soviet authorities decided in 1987 to allow foreign businessmen to set up joint ventures on Soviet soil, as in the 1920s. Despite valiant efforts by Gorbachev to implement this decision, however, the intermediate bureaucrats encumbered this initiative with all kinds of obstacles. At first the foreign partners could own no more than 49 percent of the operation. This limitation was relaxed in the spring of 1989, but there remained other constraints such as the need for unanimous decisions in the joint venture, even when the foreign partner owned 90 percent of the equity.

The joint venture has no assurance that it will receive high-quality raw materials from the Soviet economy and, most important of all, it still cannot take out or convert Soviet rubles. No wonder that out of the 1,300 or so joint ventures that were formally registered as of January 1, 1990, fewer than 200 were in actual operation and of those only 30 were involved in meaningful industrial operations. All the other joint ventures focus primarily on service activities and are designed to get in with minimum investment and, if need be, to get out fast with minimal loss. Consequently some Soviet critics are calling for the revoking of the law authorizing joint ventures.17 As these critics see it, foreign investors are only interested in exploiting Soviet raw materials and making a quick ruble while the Soviets end up with outdated machinery and a polluted environment. Thus joint ventures are hampered by the same ambiguities that have hamstrung the cooperatives and private trade. What should have been a remedy for the Soviet Union's economic problems has become another part of the problem.

VI

Gorbachev is now trying to redress some of his earlier miscalculations. Very little or nothing is being said or heard about the long list of what were once his top priorities: the machine tool industry, intensification, three work shifts, uskorenie, Gospriemka, Gosagroprom, the alcohol crackdown, the ban on private trade and the maximum equity of 49 percent in joint ventures. Several of these miscalculations are not easily reversed. By beginning with Gosagroprom rather than with the breakup of the sovkhoz and the kolkhoz, most Soviet peasants have the impression that Gorbachev has no real commitment to the private or family farm. How can they trust Gorbachev to continue his support? Not only has it taken a long time to formulate the law guaranteeing long-term private use of the land; more important, Soviet history gives no assurance that such a law will be honored and not revoked.

Given the proper incentives, it may well be that the peasants will be willing to set up their own farms. Peasants in the Baltic and Caucasian republics in particular have hinted that they might be responsive, especially as their republics begin to assert economic autonomy or some independence from the rest of the Soviet Union and particularly Moscow.

Yet notwithstanding the fact that he is a superb politician, Gorbachev has lost much of the credibility that he once had when it comes to dealing with the economy. To pull himself out of this mess, it is not sufficient simply to prevent further mistakes. The momentum is in the direction of further inflation and inadequate supplies of consumer goods. That is why in December 1989 Gorbachev and his advisors decided to revert to central planning and price control. They promised that this would last no more than three years and that the main emphasis would be on the production of more consumer goods. By then, they insisted, the consumer goods shortages will have disappeared and it will be possible to introduce a market system. But central planning serves to create shortages, not eliminate them. The odds are that it will take years for the economy to correct itself, and it is unclear at this point if the population has enough confidence or trust in Gorbachev to sit idly by for the length of time he will need to remedy his past mistakes as well as restructure the economy. Already there are worrisome signs that conservative and worker's groups have linked up in a "Peronist" opposition to reform. The United Front of Workers is opposed to price reform, cooperatives and any retreat from central planning.

If Gorbachev is to succeed he must introduce, as the Polish government has now done, a new more consistent (although politically more risky) agenda for the economy. For the Soviet Union, it may now be too late. Just as in corporate life, Gorbachev might have done better if he had taken the hard decisions when he first assumed power. This would have focused the blame on his predecessors. Then he could have started with most of the problems behind him. For example, he should have immediately introduced a program of monetary reform, devaluation and convertibility of the ruble and moved to free up prices. That would have absorbed most of the money overhang and helped him establish market equilibrium that would have helped eliminate the shortages. All of these steps he will have to take sooner or later if he is to carry out economic reforms; now every time he hints at any such step, a new panic ensues and he backs away, further tarnishing his credibility.

Gorbachev also has to face up to his bureaucracy, which continually frustrates his initiatives. To his credit, he has sharply reduced the number of industrial ministries; like bureaucracies around the world, however, even if reorganized they somehow manage to hold on to or reestablish their cherished prerogatives. One solution would be to dismantle all industrial ministries and comparable bureaucracies. In the same way, if Gorbachev is ever to see the growth of family or private farming, he will have to abolish state and collective farms. If the members want to keep their cooperative or state farm, they can vote to reconstitute it. But until Gorbachev shows clearly that he wants to do away with the sovkhoz and kolkhoz, and as long as the sovkhoz and kolkhoz are there to discourage anyone who contemplates leaving, individual peasants will almost certainly find it difficult to break out and set off on their own.

The Soviet Union has lacked diversity of economic enterprises since Stalin established his rule. But if the peasants are willing to take the risk, let them run private farms, yet let them also opt for the sovkhoz and the kolkhoz if they so choose. Similarly, allow factory workers the chance to break out into smaller factory shops from the larger factories and reduce government regulation and control. This should also facilitate the growth of price competition. For that matter, let anyone who so chooses set up a cooperative or joint venture without having to seek permission from some state official. The ability to issue permits of one sort or another not only facilitates the retention of monopolies and bureaucratic strangulation, it also opens the door to extortion and corruption.

Admittedly, imposing a program that is as far-reaching as the one proposed here can be carried out only by a master politician. Of all the past and probable future Soviet leaders, Gorbachev has the best chance. Of course, such measures must also include a carefully thought-out safety net of increased pensions and welfare support. The poor and low-income workers must be provided for during any such transitional period.

Gorbachev, however, can no longer postpone taking such strong medicine. He seems to be waiting for a more propitious moment when supply and demand are more in balance and when there is a wholesale market for machinery and a money supply that is smaller and less volatile. But even he acknowledges that these shortages will not go away as long as the planning system and administrative allocation of goods keeps distorting the economic situation.18

Belatedly Gorbachev and his advisers have moved to reduce the budget deficit and increase the production and import of consumer goods. Reportedly he is also preparing a far-reaching reform program that will bring with it price reforms, stock markets, convertability and other market-type mechanisms. However, his task will not be easy. Just as often happens in other countries, his call for a tax increase was rejected last year by the Supreme Soviet. Moreover, given all the rubles circulating in the economy, it is unclear if such belated efforts are adequate to solve the problem. If anything, the situation seems likely to deteriorate even more, which only increases the opposition to more market reforms and leads instead to calls for additional doses of central control.

VII

The Communist Party Congress scheduled for this June or July will have to deal not only with the political makeup of the party and its role in society, as Gorbachev wants, but with the economy as well. Ironically, despite all the talk of a move toward a market-oriented structure, the decision to return to planning and price control, even if temporary, means that the Soviet economy today operates much as it did in 1985. The main difference is that the population perceives that its standard of living has deteriorated.

Yet despite the economic decline, Gorbachev's political position in the party appears to be strong. The big unknown is how long he can remain in control while all around him there is a growing sense of economic and social disintegration. Master politician or not, it is difficult to see how Gorbachev can survive without an improvement in the economy-and soon. But that depends on bold economic action, and not even Gorbachev seems willing to take that chance.

Gorbachev and his counterparts in Eastern Europe and China are now discovering that it may be easy, although bloody, to set up a Stalinist centrally planned economic system, but it is very difficult to dismantle it and replace it with one that is market oriented. The market system is complex, like a forest, a living organic thing. As the economists Kenneth Boulding and Joseph Berliner have noted, it is easy to chop down that forest, but it is very difficult and time consuming to grow it again. It is not enough merely to replant several trees and call it a forest.

Gorbachev seems damned if he does move for more decentralization and damned if he does not. But at least if he does, the odds are that the Soviet economy will become more responsive than would otherwise be the case, even though it may not be Gorbachev who then has the power.

2 Sotsialisticheskaia industria, Oct. 30, 1988, p. 2.

3 Sotsialisticheskaia industria, April 6, 1989, p. 1.

4 Foreign Broadcast Information Service (hereafter FBIS), July 20, 1989, p. 85.

6 Pravda, Nov. 16, 1986, p. 6. See also FBIS, Nov. 25, 1986, p. R4; Dec. 31, 1986, p. 51; Feb. 18, 1987, p. R11.

7 Moscow News No. 11, 1989, p. 3; FBIS, Sept. 13, 1988, p. 40; Jan. 23, 1989, p. 49; June 8, 1989, p. 4.

8 FBIS, Aug. 7, 1989, p. 73.

9 Economicheskaia gazeta, January 1989, No. 1, p. 10.

10 Pravda, June 9, 1989, p. 2; The Wall Street Journal, Aug. 7, 1989, p. A15; FBIS, Aug. 7, 1989, p. 60; Pravitel'stvennii Vestnik, No. 18, 1989, p. 6.

11 FBIS, Aug. 7, 1989, p. 55.

12 Sotsialisticheskaia industria, April 6, 1989, p. 1.

13 E. Gaidar, "Trudnyi vybor," Kommunist, No. 2, 1990, p. 25.

14 Moscow News, No. 33, 1989, p. 5.

15 FBIS, Jan. 17, 1987, p. 77; Izvestia, Jan. 9, 1990, p. 2.

16 Pravda, Feb. 14, 1989, p. 2.

17 Izvestiia, June 3, 1989, p. 3; Literaturnaia gazeta, July 5, 1989, p. 10.

18 Pravda, July 30, 1988, p. 2.