Events are spinning out of control. In 1991, the Soviet gross national product will drop at least 14 percent, estimates the consulting firm Plan-Econ. Inflation is running at an annual rate of 200 percent or more. Oil production has declined 10 percent. The centrally planned economy is crumbling. A strong market economy hasn’t arisen. Combined with intense nationalism, the economic breakdown is a formula for anarchy. Jan Vanous of PlanEcon fears “riots of angry coal miners” and more ethnic strife.
Our ability to influence events is modest, but aloofness no longer serves U.S. interests. For starters, controlling nuclear weapons will be harder if the republics sink economically. Russia, the Ukraine or Kazakhstan–or wherever the weapons wind up–won’t eagerly cooperate with a United States that ignores their economic plight. Likewise, the future of Europe (and our relationship with it) is at stake. The Europeans rightly fear that a Soviet depression would flood them with immigrants. If we disregard this issue, our influence in Europe will erode.
More than money, the Soviets now need a sense of direction. There’s a power vacuum. Power has left the Kremlin and hasn’t yet arrived in the republics. “It’s hard to find anyone on the other side who has authority,” laments one U.S. official. It’s precisely because the Soviets are in such disarray that the United States, Europe and Japan must provide leadership. What we can offer is a reform agenda and the money–not huge amounts–to make it practical.
Specifically, the republics need to:
This is essential, because the republics are so interdependent. In 1988, Estonia, the Ukraine and Russia shipped 67, 39 and 29 percent of their outputs elsewhere in the Soviet Union. Unfortunately, some republics are erecting trade barriers to halt exports of scarce goods for worthless rubles. To maintain trade, the republics need a “payments union,” as urged by John Williamson and Oleh Havrylyshyn of the Institute for International Economics in Washington. It would value exports in dollars or other hard currencies. The payments union would offset each republic’s imports against its exports and provide credit for net importers. Industrial countries could help by financing the payments union with $3 billion.
Chronic food shortages can’t be overcome unless farmers are paid enough to encourage higher production and discourage huge spoilage and hoarding. The United States and the European Community already seem committed to providing food to augment the poor 1991 grain harvest, estimated to be down 20 percent from 1990. But the aid should be provided only if the republics abandon price controls on farm products.
People won’t work unless they receive something of value in return. The inflating Soviet ruble isn’t it. Some republics will now issue their own currencies. The Baltic States are almost ready. The Ukraine may follow. A new Russian ruble is possible. Controlling inflation would require the republics to have roughly balanced budgets, so that deficits aren’t financed by printing piles of money. (That’s now happening. In August, 19 billion rubles were printed-more than in all of 1990.) Republics that succeed could receive hard-currency loans from the International Monetary Fund to soften their slumps.
Dropping output has sharply reduced oil exports, which typically represent about a third of all Soviet exports. There’s a vicious circle. To increase production, Russia needs more imported oil equipment. But it can’t import, because its exports lag. This is an area where dedicated loans-perhaps from the World Bank-would pay for themselves and also help restore the Soviets’ buying power abroad.
Unless we create priorities, no one will. Without them, the republics may flounder endlessly. Political paralysis and economic chaos will feed on each other. At the upcoming annual IMF-World Bank meeting in Bangkok, the industrial powers should outline a reform plan. We can afford it. Suppose it cost $20 billion. That’s small compared with the GNPs of the United States, the European Community and Japan, which totaled $14 trillion in 1990.
There are two reasons that aid makes sense now and didn’t before the coup. First, aid then might have underwritten the Soviet military. This is now unlikely. “There’s no way the republics will give enough money to the center to maintain the [current] Soviet military,” as Richard Judy of the Hudson Institute says. Indeed, the Soviets plan to cut troop strength at least 700,000, down from an estimated 3.4 million. Second, there was no guarantee before that the Soviets would dismantle central planning. Well, it’s now disintegrating: this is the best time to influence its replacement.
We are already seeing early signs of a market economy take hold. Major cities now have “commodity exchanges”: middlemen who arrange sales of items ranging from bricks to steel to cars to fax machines. Private food markets are apparently amply supplied. The profit motive is starting to stimulate work and production.
But candor is required. These beginnings are tiny, and our efforts to promote reform could go for naught. Our money might be wasted. The Soviet Union is in the midst of a revolution, and revolutions are unpredictable. The mixture of economic collapse, political dissolution and ethnic distrust is explosive. Trying to help is a huge gamble but one that-because the stakes are so high-we must take. If we wait idly for the worst, it will almost certainly occur.
