The first public warning came from Soviet Finance Minister Boris Gostev in a speech to members of the Supreme Soviet legislative body last October. While announcing the country’s first formally acknowledged budget deficit, Gostev declared, “We have to learn how to live according to our incomes.” But three months later, Leonid Abalkin, director of the National Institute of the Economy and a senior economic adviser to President Mikhail Gorbachev, said that Gostev’s original estimate of a $70.4-billion deficit in a total 1989 budget of $966.5 billion had been recalculated at an anticipated $195.6 billion— about 11 per cent of Soviet gross national product (GNP).
By comparison, the muchcriticized U.S. deficit this fiscal year is expected to total $162 billion, or about four per cent of its GNP. Last month, economist Nikolai Shmelyov, another adviser to Gorbachev, said that inflation is running at close to nine per cent—and could easily move into double-digit figures. Unless something is done quickly, said Shmelyov: “Everything will collapse. We will get an uncontrolled market and a devalued ruble.”
After years of silence about the state of the economy, senior Soviet officials have begun discussing their country’s financial problems with unprecedented frankness. Their conclusions, some of which affect the Kremlin’s foreign policy, have been equally startling. Already, some Soviet officials acknowledge that Gorbachev’s December announcement of a 20-per-cent reduction in the country’s armed forces was partly motivated by financial considerations. Western experts estimate that military expenditure—which Soviet Prime Minister Nikolai Ryzhkov said last week would be made public for the first time within 12 to 18 months—accounts for at least one-third of the annual Soviet budget.
Now, some Soviet economists are questioning whether the country can afford to continue such cornerstones of the Soviet social and economic system as massive subsidies of food and rental costs, and its low rate of income tax.
At the same time, many of them advocate opening the country up to a limited free-market system that would allow for competition. Declared Abalkin: “As long as the market remains unbalanced, without any practical competition between manufacturers, price reform will not yield the expected positive results.”
In fact, Western and Soviet economists say that the country’s present problems are the result of both long-standing weaknesses in the system and an extraordinary streak of misfortune. Cleanup measures taken after the 1986 accident at the Chernobyl nuclear plant in the Ukraine have cost nearly $16 billion. The resettlement and rebuilding of Soviet Armenia after last December’s earthquake, which killed 25,000 people, is expected to cost $13 billion. And the worldwide drop in oil prices—the Soviets’ principal source of foreign currency from exports—has cost the country an estimated $79 billion in revenue since 1985.
At the same time, Soviet officials acknowledge that many of the country’s problems are the result of either poor internal planning or improper execution of programs. Pravda, the official newspaper of the Communist party, estimated last year that the farm economy lost $120 billion through food that is spoiled, wasted or lost during shipping. Even well-intentioned programs have resulted in economic problems. Since 1985, when Gorbachev came to power, an aggressive antialcohol program resulted in a 49-per-cent decrease in alcohol production—and a loss of $70 billion in tax revenue to the government. Because the cutback was put into effect so quickly, Abalkin said, the result was a “giant gap” that caused liquor revenue to drop from 12 per cent of state revenues in 1984 to nine per cent in 1987.
Many of the country’s deficit problems are the result of social and consumer benefits that Soviet citizens have come to regard as basic rights. For years, most of the country’s 285 million people have grown accustomed to the frequent lack of such items as meat, fresh vegetables, soap and winter boots. But many Soviets have consoled themselves with the knowledge that their socialist economic system ensures that other needs are inexpensive, and available to all. Although the average Soviet salary is just over $400 a month, basic staples are easily affordable. Public transportation costs the equivalent of pennies per passenger, and the average family pays about $50 in monthly rent—the last time rents were raised was in 1928—for a three-room apartment. Food prices are heavily subsidized, medical care is free, and annual income taxes are a flat 13 per cent of income. Declared Alexander Lebedev, a member of the ideology department of the ruling Central Committee, in a recent interview: “These things have traditionally been taken for granted, with no thought of their cost.”
Now, however, Soviet finance ministry officials are hoping to increase revenue by instituting a Western-style progressive income-tax system—the bigger the income the higher the rate—that would replace the flat tax rate. They also argue that the present system is unfair because, in spite of its uniform rate, it taxes different forms of incomes differently. As a part of their studies, two finance ministry officials visited Canada and several Western European countries last fall to study tax rates. Soviet officials say that they hope to introduce a progressive tax by the early 1990s.
But reforming the country’s pricing system is likely to be far more complex—and controversial. Despite the fact that most Soviets say publicly that they support Gorbachev’s policies of glasnost (increased openness) and perestroika (reform), many of them say privately that fewer consumer items are available now than when he came to power. Gorbachev supporters acknowledge that such problems have occurred because the government has dismantled or restructured hundreds of organizations in the past three years. Declared Abel Aganbegyan, a key economic adviser to Gorbachev, in a recent speech at the Soviet Academy of Sciences: “The Soviet economy now enters the difficult stage when elements of the new management mechanism will go side by side with old economic levers.”
Still, many Soviets are suspicious of the promise that short-term difficulties will lead to long-term improvements. As well, many of them doubt government promises that shortages are only temporary. Said economist Otto Latsis, deputy chief editor of the party journal Kommunist “People are buying goods not because they need them, but because they do not trust the reliability of commerce.” In the past two years, Soviet authorities have begun rationing sugar—bought up by consumers in large quantity to distill home-made alcohol— after the cut in vodka production. Said Latsis: “Consumers saw the introduction of sugar rationing as a sign of unreliability, after which people began buying up boxes of salt, soap and matches that are by no means in short supply.”
Soviet officials are equally aware that any attempt to reduce subsidies on food production is likely to face enormous opposition. At present, the government spends at least $140 billion annually to keep prices of milk, meat, bread and other food products affordable for all consumers. As a result, meat produced at a cost of $9.50 per kilogram is sold in state stores for half that price. At the same time, many consumer items that are less essential but highly coveted are exorbitantly priced by Western standards. A blank video cassette tape can sell for up to $140, and Western cigarettes sell on the street for up to $40 a package. But many people say that lifting food subsidies would put meat prices out of reach of the average consumer unless widespread wage increases—which would further fuel inflation—also take place. Said Kim Khmelkov, an economist and director of a Moscow-area farm: “In a word, it is a race in a circle, and the destabilization would start with those with the lowest incomes.”
But the greatest problem that Soviet economic reformers face may be the currency itself. Because foreign currency is not directly convertible into rubles, the country cannot rely on foreign capital—which normally can only be spent abroad—to help balance the budget. Although the ruble is equal to about two Canadian dollars at the official exchange rate, the black market rate is about four rubles to the dollar, which some economists consider is roughly equivalent to its real value. And because many consumer items are unavailable in the Soviet Union, while rubles cannot be easily exchanged into foreign currency to buy goods from abroad, the ruble’s purchasing power is even further limited. Said adviser Shmelyov: “The ruble does not work, for neither enterprises nor individuals are allowed to spend it freely, as they see it.”
Despite that, the government says that it plans to move only gradually toward making the ruble fully convertible. But, economists say, such a move is unlikely for at least another decade because of the profound changes it will require of the country’s entire financial system. Said Shmelyov: “Complete convertibility is impossible without realistic proportions in retail prices.” He added: “We must not hurry. Too much is at stake.”
In fact, Moscow-based Western diplomats say that no matter how dramatically Gorbachev moves, it will be several years before economic improvement is visible. Said one diplomat: “He is trying in four years to correct the abuses of at least four decades.” For his part, Gorbachev cautioned earlier this year, “We are not promising manna from heaven.” But some Soviets say that what they are asking for is considerably less. Said Pavel, a 25-yearold office worker in Moscow: “I live on less than my father had, and I do not want my son to have less than I. Must it be that way?” For Pavel, and other young Soviets, it may be years before that question wins a clear-cut answer.
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