TIME: Almanac 1993/TIME Almanac 1993.iso/time/050790/0507208.000

Text File | 1992-08-28 | 13.8 KB | 268 lines

                Q╠╞                                                          BUSINESS, Page 84

Hurry, Doctor!


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.