Reforming the Ruble: Monetary Aspects of Perestroika.

Edited by Joseph C. Brada and Michael P. Claudon. New York: New York University Press, 1990. Pp. viii, 228. $35.00.

The thrust of this book is how to use external factors such as the world market and Western capital, technology and management to decentralized and marketsize the Soviet economy. Since the employment of these exogenous stimuli in the reform process of the Soviet economy requires ruble, convertibility, measures that would help make the ruble convertible are therefore the major focus of the book. Monetary and price reforms are considered key prerequisites for the full convertibility of the ruble.

The certrality of monetary reform is largely due to the fact that there is a huge disproportionality between the amount of rubles in possession of the public and the supply of goods and services in the Soviet Union, i.e., between supply and demand. The resulting inflationary overhang has made the abolition of administrative prices and institution of market prices difficult because the consequent hyperinflation could lead to economic instability and social unrest. Establishing a balance between supply and demand is therefore viewed as the first step toward the price reform and ruble convertibility.

The authors suggest a number of way to absorb the excess rubles: (a) financing the government deficit through the sale of bonds to the public; (b) selling government-owned property to the population; and (c) "importing large amounts of Western consumer goods for a period of years. The hard currency to purchase these goods would be obtained by borrowing in the West, possibly up to US$15-16 billion in the first year and US$5-6 billion a year subsequently" [p. 104].

Once the excess purchasing power is thus absorbed and a supply-demand equilibrium is established, the market can substitute "realistic" prices for "distorted" administrative prices and the stage is set to implement the plan of ruble convertibility. The plan includes a series of periodic hard currency auctions that would serve as transitional steps toward the emergence of a fully-fledged foreign exchange market by the year 2000. "By expanding the scope of hard currency auctions," so that they would increasingly encompass a greater volume of Soviet hard currency trade and permit participation of a greater number and type of buyers and sellers, "the practice of holding periodic auctions would give way, in a quite natural and evolutionary manner, to a genuine foreign exchange market" [p. 117].

To bring all this about and to integrate the Soviet economy into the world market, the book makes a number of other recommendations: grant most-favored nation status to the Soviet Union eliminating the prohibitive U.S. tariffs on Soviet goods and the restrictive U.S. export controls to the Soviet Union; allow U.S. national banks and financial institutions to participate in loans or finance credits to the Soviet Union; protect capital against currency devaluations, obrogations of joint ventures, or government expropriations; and implement a U.S.-based venture capital fund to channel approximately US$100 million into start-up and early-stage financing of Soviet technology enterprises [pp. 3-4].

Despite their neatness and consistency, the efficacy of the book's prescriptions to cure the Soviet economy are highly questionable. For what ails that economy is not so much a lack of capital, technology, Western management, or ruble covertibility, but paralyzed relations of production. These includes questions of ownership and property rights, questions of control and management, questions of privileges and corruption, and so on. As long as these fundamental questions are not resolved and the Soviet workers are not motivated to produce as effectively as they can, any amount of Western capital or technology will be of little or no effect.

The dilapidated state of the Soviet factories is not due to a lack of capital or scientific and technological knowledge. It is rather due to mismanagement, waste and corruption--hence due to the alienation of workers and their apathy toward work. For example, the Soviet Union is the world's primary producer of mineral fertilizers but, according the daily newspaper Trud, a quarter of what is produced annually is lost to rain and wind during transportation, storage and distribution. Gorbachev recently admitted that about a third of the paid work hours in the Soviet Union are wasted. A worker from the city of Minsk succinctly explained the underlying reasons for waste and economic paralysis:

I think that the main cause of all this is the indifference shown towards the working class.

. . . The worker will agree for the sake of the common good, if he is convinced that these

sacrifices are really necessary. But if these sacrifices are only to pay for . . . idleness of

someone else, then the worker begins to slow down his rhythm. . . . The negative attitude to work,

which has increased a lot recently, is a sort of strike, a perfectly natural response to the

bureaucracy [Moscow News, 22 November 1987]. The book makes sporadic references to waste and inefficiency of the Soviet economy but fails to explain its real causes. The book also fails to point out the likely negative impacts of the recommended exogenous stimuli such as foreign capital and world market. For example, it points out that the "inflationary overhang" of excess rubles can be eliminated by "importing large amounts of Western consumer goods" financed by borrowing in the West. But it fails to point out that even if such borrowing cures the problem of "inflationary overhang," it can lead to an even bigger problem: the problem of foreign debt.

The authors acknowledge that so much reliance on foreign capital markets, both for the purchase of consumer goods as well as for that of Western technology, could lead to Soviet indebtedness. But they claim that if their reform package is implemented, "then in five to seven years, at most, perestroika would pay for itself, as an efficiency of a new market economy would be considerably higher than that of the present system" [p. 105].

This is highly optimistic. Many of the Third World countries that are languishing under tens of billions of foreign debt followed a similar advice by the experts of the IMF and international capital markets. But long before getting a taste of the promised fruits of the borrowed funds, their economies were drowned in debt. One might argue that a large part of the Third World external debt is due to mismanagement and plunder of the debt by the ruling circles in those countries--e.g., through capital flight. But the case of the Soviet Union would be no exception of this pattern. In fact, the Soviet bureaucrats in charge of economic policies and foreign trade (the "economic mafias," as they are called in the Soviet Union) are so resourceful in the theft and plunder of economic resources that many of them have managed to open personal accounts in western banks even in the absence of ruble convertibility. Ruble convertibility, which the authors of this book consider vital to the success of the Soviet economic reform, will make capital flight and the transfer of Soviet economic resources abroad much easier for the "economic mafias."