BUSINESS

GORBACHEV’S LAST STAND

THE SOVIET LEADERSHIP MAKES A CRITICAL ATTEMPT TO MOVE TOWARDS A MARKET ECONOMY

JOHN DALY September 17 1990
BUSINESS

GORBACHEV’S LAST STAND

THE SOVIET LEADERSHIP MAKES A CRITICAL ATTEMPT TO MOVE TOWARDS A MARKET ECONOMY

JOHN DALY September 17 1990

GORBACHEV’S LAST STAND

BUSINESS

THE SOVIET LEADERSHIP MAKES A CRITICAL ATTEMPT TO MOVE TOWARDS A MARKET ECONOMY

Over the years, the 12 million people of Moscow have discovered how to deal with most of communism’s hardships. They have learned to wait peacefully in store lines for hours, even if there is often nothing left to buy at the end of the day, or at the end of the line. But it was nearly always possible to get at least a loaf of bread—until last week when, despite a record Soviet wheat harvest, Moscow’s bakeries and stores simply ran out. Fights broke out as desperate shoppers tried to get a share of the city’s remaining bread supplies. The shortage underscored dramatically a potentially explosive crisis: the Soviet Union’s economy under President Mikhail Gorbachev is disintegrating rapidly. This week, in an attempt to rescue his perestroika economic reforms, Gorbachev plans to formally table a radical new marketbased, 500-day economic plan in the Supreme Soviet. To win the support of his leading domestic political rival, Boris Yeltsin, chairman of the Supreme Soviet of the Russian Republic, he has abandoned a more cautious approach advocated by his prime minister, Nikolai Ryzhkov. Still, many of his other political rivals, including some who are demanding a return to orthodox communism, predict that he will fail and that his regime will collapse as a result. Declared beleaguered Moscow bakery manager Givi Nebiyeridze: “The economic reforms are part of the whole mess, the derangement of our lives that has been going on for years.”

With the economy in disarray after five years of halfsteps towards a market system, most Western experts say that Gorbachev had few choices except to adopt the strategy advocated by Yeltsin and his more radical advisers and introduce far more sweeping and risky reforms.

Despite some economic liberalization under perestroika,

Gorbachev’s policies have failed to improve the living standards of the vast majority of Soviet citizens. With the

breadlines and other signs of economic decay multiplying, Gorbachev and Yeltsin have both agreed to adopt a blueprint prepared by Stanislav Shatalin, an economist close to both leaders. Among other measures, it calls for widespread privatization, an end to most state control of prices and creation of a stock market. The bold new plan bears little resemblance to two more cautious plans prepared by Ryzhkov over the past year, and Yeltsin and many other Soviet politicians are now calling for him to resign.

Clearly, Ryzhkov’s plans have failed. The Soviet gross national product fell one per cent in the first half of the year, while the annualized inflation rate jumped above 10 per cent. Offi-

dally, the Soviets are predicting that the economy will shrink this year for the first time since the 1930s, although Western experts say that the Soviet’s painful economic skid began more than a year ago.

Last week’s breadlines in Moscow were the most embarrassing evidence to date of the decline, and a chilling reminder of past upheavals. In October, 1917, bread shortages in the imperial capital of Petrograd, now Leningrad, led to the Bolshevik Revolution. Party leader Vladimir Ilyich Lenin swept to power promising “Bread, peace and land.” According to Marshall Goldman, a professor of economics and associate director of Harvard University’s Russian Research Center, the parallels between the chaos of 1917 and Gorbachev’s current crisis are far more than symbolic. Said Goldman: “When you come down to the fact that there’s no bread, that’s the holy of holies. It’s a terrible admission of incompetence.”

Other signs of that incompetence are also growing. In Moscow, cigarettes have been added to the list of such already-rationed goods as sugar. And throughout the Soviet Union, in fact, both smokers and nonsmokers are caught in the painful transition from a centrally directed system that is unable to deliver consumer goods to the uncertain promise of a market economy. In the case of cigarettes, the city is allocating 15 packs per month for every resident, smokers and nonsmokers alike. Nonsmokers are free to give them to friends, trade them on the black market or turn them in for an extra 4V2 lb. of sugar. As a result of the shortage, men and women all over Moscow now sidle up to smokers and ask them if they want to buy cigarettes at inflated prices.

Meanwhile, in Brest, a Byelorussian city near the Polish border, local consumers came close to rioting when they discovered that the rarely available sausage that was put on sale by the local trade organization had already rotted in storage. And even the strongest sectors of the economy are themselves contributing to the crisis. Officially, the Soviets blame the bread shortages on farmers, who they say are hoarding their record harvests until a market economy with higher prices is formed. Still, Western experts say that even the bumper grain crop will not alleviate the bread shortage. Indeed, agricultural analysts point out that 50 million tons, about one-fifth of the total harvest, will rot or be wasted because of inadequate transportation and storage facilities.

Similar inefficiencies also riddle other economic sectors. Oil production, for one, has been unable to increase because of outdated equipment to take advantage of shortages— and high prices—caused by the Persian Gulf

crisis. The Soviets, by far the world’s largest oil producers, are now pumping less than 12 million barrels a day, compared with the 12.4 million barrels a day achieved in 1987. Western analysts predict that, even if prices continue to soar, the Soviets will be forced to cut back even further. Moreover, last week union leaders representing 700,000 Siberian oil workers threatened a general strike if Gorbachev did not move to protect them from general price increases and other hardships that they say have resulted from his economic reforms.

Gorbachev’s bold 500-day plan has four phases. In the first 100 days, he plans to slash his government’s 105-billion ruble budget deficit, $211 billion at official rates, by sharply cutting spending on the military, the KGB and foreign aid. As well, he plans to sell many stateowned apartment buildings and factories to private owners, and to ease restrictions on private farming.

Over the following 150 days, Gorbachev will try to eliminate most agricultural and industrial subsidies, which now cost the government about $265 billion a year, to cut back and abolish many government ministries and phase out most price controls. In the plan’s next 150 days, in a clear attempt to attract new foreign investment, he will try to make the ruble more freely convertible and take steps to set up a Soviet stock market. Then, during the plan’s final 100 days, Gorbachev plans to establish social safety nets to cushion the impact of his reforms. Goldman and other Western experts predict that those will likely include price controls on some commodities, such as bread and meat, as well as other measures to limit exorbitant price increases. Apart from Gorbachev and his closest advisers, however, virtually no foreign or Soviet experts, let alone ordinary Soviet citizens, give the plan any chance of success. Soviet economist Vladimir Popov, a researcher at Moscow’s Institute of U.S.A. and Canada, predicts that industrial production could plummet by as much as 30 per cent in 1991, while the unemployment rate could jump from its current level of less than three per cent to eight per cent or more.

Added Andrei Anikin, a senior economic adviser to Gorbachev who recently visited Toronto as a guest of Canadian computer experts: “I fear that things will get much worse before they get better.”

Moreover, many experts say that Gorbachev has agreed to transfer too much power to the increasingly rebellious republics in order to neutralize some of the political opposition to his plan. In order to secure the support of Yeltsin and the other leaders, Gorbachev last week was on the verge of agreeing to hand them much of Moscow’s

taxing authority. In Anikin’s view, increased separatist pressures are one of the greatest dangers to Soviet economic stability. He added: “Everyone wants to go their own way. They want their own laws, their own currency, their own army, their own foreign trade. That is the apocalyptic vision that could tear my country apart.”

Already, eight of the 15 Soviet republics, including Yeltsin’s Russian Republic, the country’s largest in terms of population and industrial output, have declared control over their own natural resources. One major economic impact of those declarations has been to create new bureaucratic hurdles for such Western oil companies as U.S.-based Texaco Inc. and Chevron USA Inc., and the French firm Société National Elf Aquitaine. All three companies have begun negotiating joint-venture agreements with the Soviets this year to explore and develop remote oilfields.

Gorbachev seems prepared to let free markets develop and compete in the republics, with Moscow maintaining firm control over such areas as foreign policy and broad domestic and social issues. Western experts say that he had no choice but to compromise politically in order to proceed with real economic reforms. According to Kenneth McCarthy, director of research for Rinfret Associates Inc., an influential New York City-based economic and social forecasting company, Gorbachev must eliminate Moscow’s control of virtually all, not just some, prices and production targets in the Soviet Union. Said McCarthy: “They need it to provide incentives to make individuals be more productive and work harder.”

And while Gorbachev’s economic reforms to date have received widespread publicity, McCarthy claims that “very little has actually been done.” In practice, he said, Gorbachev’s only meaningful changes are allowing factory managers greater freedom to trade among themselves, to permit a small amount of private farming and to legalize the privatization of small co-operative businesses such as restaurants and flower sellers. Anikin also says that, in the past two years, the output value of new private ventures has grown to $82.7 billion from $605 million a year, and the number of people they employ has risen to 4.5 million from 70,000.

But co-operatives still account for only about five per cent of the Soviet Union’s GNP, which Western economists say is less than half of that of the United States’ $5.5 trillion. As well, Goldman estimates that the value of all blackmarket activity is equivalent to only another 10 to 15 per cent of the GNP. As a result, the vast majority of Soviet citizens are still almost wholly dependent on the old, centrally planned economy.

Because of the huge problems that Gorbachev faced when he assumed power five years ago, McCarthy says that it is unfair to blame the Soviet president alone for the subsequent economic decay. Goldman, in contrast, claims that Gorbachev began with a program that was precisely the wrong policy for the time. He says that Gorbachev concentrated more economic power in Moscow and created unwieldy new super-ministries. He also said that Gorbachev was wrong to order factories to produce more tools and heavy equipment; instead, Goldman said, they should have been increasing production of consumer goods. Said Goldman: “He took a bad situation and made it worse.”

Now, Goldman says that the situation in the Soviet Union is so grave that Gorbachev could conceivably be forced from power within the next two years. And although McCarthy is more optimistic, he too says that “the whole thing is tumbling down” and that there could well be a second Russian Revolution within the next two decades. Indeed, at last week’s Russian Republic Communist party congress, Moscow party chairman Yuri Prokofiev warned that the national leadership is losing control of the country, and that the Soviet Union is sliding towards dictatorship or chaos. For Gorbachev, the next 500 days are absolutely critical. They will either produce a last-minute rescue or shatter perestroika—and possibly his regime along with it.

JOHN DALY with MALCOLM GRAY in Moscow and HOLGER JENSEN in Toronto

MALCOLM GRAY

HOLGER JENSEN