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The Soviet economic crisis.

The article examines the weaknesses and inefficiencies of the Soviet centralised planning system, and the means by which Gorbachev and his colleagues sought to reform it. Along with the objective difficulties in the way of 'marketisation' (lack of practical experience and market infrastructure, lack of agreement about the final objective of reform, obstruction by vested interests, ideological pre-conceptions, popular distrust), grave policy errors were committed unbalanced budget, inflationary money-creation, loss of control over incomes, reluctance to increase prices). Meanwhile the rise of nationalism, and the de-legitimation of the regime and of the Party, created a power-vacuum, which by 1991 made impossible the implementation of any policy. Disruption of inter-republican and inter-regional supply links, and drastic cuts in imports, are causing serious declines in production. The failed coup accelerated the process of disintegration.

The economy ... approaches the borderline, beyond which one can speak not of economic crisis but of catastrophe. The sharp fall in output which is occurring in most state enterprises is accompanied by a growth of inflationary processes. The factory management is concerned not with the development of production, but with how to find a means to pay wages at the level demanded by the employees and how to supply the food and consumers' goods to spend these wages on. These problems, as well as that of material-technical supply, are increasingly being resolved by the archaic methods of barter. But barter is in its nature inefficient, it cannot ensure the needed supplies, so economic links are disrupted and production is halted...

The degree of uncontrollability (neupravlyamosti) of the economy has reached catastrophic dimensions. The planning institutions are demoralised by the uncertainty of their situation today and particularly tomorrow Reliable information from he grass-roots is lacking. All-union, republican and regional orders contradict each other, which adds to the social and political tensions.'

This is a quotation from the preamble to a reform proposal drawn up for the Russian republic (RSFSR), which appeared in, Komsomolskaya Pravda on 23 April, 1991. It is one of many such statements. Whatever differences of opinion exist as to remedies or aims, there is agreement about the depth of the crisis now facing both the economy and society.

How is it that such a situation has arisen, in the sixth year of perestroika?

A few words are necessary first about the system that was.

The logic of centralised planning can be best seen in wartime. In Great Britain too, say in 1943, there was material allocation, fixed prices, severe limitations on the market, so as to concentrate resources for the priority purpose of waging war. It was the Polish marxist economist Oscar Lange who defined the Soviet planning system as 'a war economy sui generis'. It was best suited to impose the priorities of the political leadership. However, already under Khrushchev, and under Brezhnev, those priorities became diluted: not just heavy industry and arms, but also housing, agriculture, consumer goods and services. The economy grew more complex. The number of decisions to be taken vastly exceeded the capacity of the planning system. Academician Fedorenko quipped that, to prepare a plan for next year which was fully balanced and disaggregated, with the help of computers, might take 30,000 years. So plans were not balanced or disaggregated, had to be repeatedly altered and became internally inconsistent: thus the production plan, the supply plan and the financial plan were issued from different off ices and could contradict each other. There were endless problems of inter-sectoral coordination. Thus, for example, a large increase in output of mineral fertilizer was not accompanied by the needed increase in storage space, means of transport and machines to spread the fertiliser.

A massive critical literature pointed to various forms of waste. Thus plans expressed in tons penalised economy of metal, and plans in roubles encouraged higher cost and priced. Economic ministries became autonomous interest groups, and investment resources were allocated not where they were most needed, but in response to the influence of the minister or local party secretary. Vast resources were frozen in uncompleted investment projects, uncompleted because more were started than there were resources available (labour, materials) to finish them. The system supposedly was based on the notion that the compulsory plans incorporated the needs of society, of industry, of agriculture, and of the consumer. In practice, the sheer size of the task of planning rendered impossible the task of incorporating detailed needs in the plans. There was no direct feedback from the user to the producer, despite much discussion about the desirability of direct horizontal links. Technical progress suffered because, on the one hand, risk was not rewarded (and novelty necessarily involves some risk of failure), and on the other it proved very difficult to incorporate innovation, and also quality, in quantitative plans. Planning authorities and the party leadership at all levels demanded that enterprises exceed earlier production levels. Innovation often involves temporary interruption of production, and was therefore discouraged by pressures coming from the command structure. Agriculture too suffered from the attempt to impose plans on state and collective farms, plans which frequently failed to take into account the specific circumstances of the locality.

By the early-1980s the system entered a period of stagnation, partly concealed by statistical exaggeration. An important contributory factor was the burden of the arms race, which diverted into this unproductive sector a disproportionate share of the best technology and the most talented technologists.

So Gorbachev inherited a system which was malfunctioning, and in a real sense had lost confidence in itself. The following long extract from an article by Nikolai Shmelev (Novyi mir, no. 6, 1987) expressed in particularly vigorous terms the situation as the reformers saw it, and Gorbachev expressly stated that he agreed with its analysis (though not with all its practical recommendations).

We are still dominated by the conception that the existing system of economic and property relations is the embodiment of Marxism-Leninism in practice, fully consonant with the nature of socialism as a social formation. 'Marx and Engels elaborated the theoretical bases of revolution, showed its objective inevitability, but as for what shape the economy would take after victory, on this they only had guesses (dogadki) ... They left us virtually nothing which could be considered as practical advice about the methods of reaching the aims (of socialism). The prerevolutionary works of Lenin were also in the main devoted purely to politics ... and not to what will have to be done to organise a full-blooded economic life after the revolution. Thus the revolution caught us without a thought-out or complete economic theory of socialism ... It is essential to realise that the cause of our difficulties is not only or not solely due to the heavy burden of military expenditures and the very expensive global responsibilities of our country. If we expended them correctly, even the remaining resources would be sufficient for maintaining a balanced and technically progressive economy and for satisfying the traditionally modest needs of our population. However, prolonged attempts to break up the objective laws of economic life, to suppress the age-long natural stimuli for human labour, brought about results quite different from what was intended. Today we have an economy characterised by shortage, imbalances, in many respects unmanageable, and, if we were to be honest, an economy almost unplannable ... We have one of the lowest levels of labour productivity of any industrial nation, especially in agriculture and in construction, since through the years of stagnation the working masses have reached a state of almost total disinterestedness in freely-committed and honest labour... 'Apathy, indifference, thieving .. have become mass phenomena, with at the same time aggressive envy toward high earners. There have appeared signs of a sort of physical degradation of a sizeable part of our population, through drunkenness and idleness. Finally, there is a lack of belief in the officially announced objectives and purposes, in the very possibility of a more rational economic and social organisation of life.. Clearly all this cannot be swiftly overcome-years, maybe generations, will be needed.'

The failure of the 'Kosygin' reform, and of a number of other attempts to 'further perfect' the centralised planning system, led an increasing number of economists to insist on a radical reform of the market type, since the only alternative to the planning of output and allocation from above was to allow enterprise managers to determine their own output and inputs by negotiation with customers and suppliers. However, in 1985 a five-year plan was drafted, and in 1986 a more ambitious version was adopted, envisaging accelerated growth. The plan incorporated unrealistic targets, including a large-scale investment programme to reconstruct obsolete industrial capacity, the attempt to implement which contributed to the subsequent inflation. It is now recognised that this attempt to plan along traditional centralised lines conflicted with the objective of marketisation. The very existence of such a plan was used as a means of slowing down the reform process. Where to draw the boundary between plan and market was unclear. initially, market socialism became the goal. Private enterprises were not to be allowed to employ anyone (to avoid exploitation') and the legalisation of cooperatives was not to challenge the dominance of state property. Gradually more radical voices were heard, arguing that markets and competition were inherently inconsistent with state ownership, that there should be a capital market, a labour market, and (by 1989) that extensive `privatisation' was necessary. However, there was (and still is) opposition to such ideas, not only among bureaucrats' but also among ordinary citizens, brought up to regard the market and private trade as forms of speculation'. The net effect of the attempts to change the system was a deteriorating economy, shortages, fears of chaos and disruption. S. Shatalin, L. Abalkin, and many other leading economists, spoke of a looming catastrophe; to cite Shatalin (Pravda, 23 February, 1990), 'It is not a question of saving socialism, communism or any other -ism, it is now a matter of saving our country, our people'. Since then there has been an accelerating decline in production, acute shortages, a growing sense of imminent catastrophe. Why did this situation arise?

Firstly it must be recognised that the task of `marketisation' was highly complex. Even if everyone agreed on the reform model, even if there were no opposition, the difficulties would be very serious: lack of training and experience; lack of market infrastructure; and, lack of the needed information flows. But there was not and is not agreement about a viable reform model; there was and is opposition to the necessary measures. This opposition comes from several sources: ideologists (markets and socialism were seen by marxists as inherently incompatible); some party and state officials in the nomenklatura, who feared for their status and privileges; and also those ordinary citizens who have absorbed the principles of egalitarianism and resent the enrichment of others. This `anti-mercantile' spirit has non-Bolshevik roots, one finds it in Dostoevsky and also in the ideas of Solzhenitsyn. in these respects Poland, Czecho-Slovakia, Hungary, and also the Baltic Republics have somewhat different traditions, which may explain why they have moved ahead faster on the road to the market.

Secondly, the steps taken were half-hearted, inconsistent, and contradictory. To give some examples, in 1987, a 'law on state enterprises' in the USSR was adopted, which supposedly greatly increased managerial autonomy. However, no attempt was made to make radical changes in the price system, and so profitability could not act as a rational guide to action. Instead, it was decided to replace the compulsory plans by so-called 'state orders' (goszakazy), with enterprises free to dispose of any output in excess of these priority state orders. in practice these orders incorporated the bulk of productive capacity, and, because supply of scarce materials was linked with these orders, management sought goszakazy rather than a risky independence. This meant that the centralised production and supply planning system remained, with just a change in terminology. However, the loosening of controls over enterprise finances, unaccompanied by a hardening of the budget constraint, and with interest rates on credits at absurdly low levels, led to two undesirable consequences: a substantial increase in money wages, and also the starting of too many enterprise-financed investment projects. These contributed to a growing shortage of both producers' goods and of consumers' goods.

Another example of weakness in the reform strategy was the (correct) decision to allow cooperative enterprise; the law on cooperatives adopted in 1988 was a radical law. But operating under conditions when most materials were still subject to administered allocation, and with growing imbalances in the consumer market, the cooperatives were often unable to obtain inputs through legitimate channels, and were able (or were forced) to charge very high prices, which led to their unpopularity and to pressures to limit and heavily tax their activities.

Also in 1988, measures were introduced to create so-called 'republican khozraschyot' (profit and loss accounting),-to make closer links between the plans and finances of the various republics and the functioning of enterprises located on their territory. From the standpoint of the functioning of the Soviet economy as a whole, this was unwise, in the sense that 'marketisation' logically called for managerial decision-making, within an all-union market, rather than a transfer of authority from bureaucrats in Moscow to bureaucrats in republican capitals. These measures coincided with the growth of nationalist separatism and gradually, especially in 1990, this had the effect of weakening the goszakaz system. All-union economic powers diminished, the republics and regions began to control the movement and sale of goods, but without any real move towards a market. This in turn led to the disintegration of the material supply system.

Finally and decisively, the failure to deal with prices was accompanied by a fatal loosening of financial policies. The budget deficit grew, from a modest level of about 15 or so billion roubles in the early 1980s to as much as 100 billion in 1989. The causes were many: the fall in the oil price in 1985-9 sharply reduced revenues from foreign trade; the campaign against alcoholism reduced revenues, while pressure to spend more on health, housing and pensions, plus the cost of the Chernobyl disaster and of the Armenian earthquake, increased expenditures. Efforts to cut back investment and military spending had only modest results. Failure to tackle the highly subsidised retail prices of food, while prices paid to the producers were raised, led to much higher subsidies, still further unbalancing the budget. The deficit was covered by various forms of money creation. With purchasing power rising much faster than the supply of goods and services at the state-fixed prices, both management and labour reacted by hoarding, which further emptied shops and storehouses. The rouble lost effective purchasing power. The weakening of financial control over enterprises led to a sharp and unplanned rise in wages. Various forms of barter developed, as did corruption and an economic mafia. Yet a move towards a market economy requires money in which buyers and sellers have some confidence.

Political changes 'democratisation') did not help matters. On the contrary, fear of popular protest led to the postponement of necessary increases in prices, and popular pressure for more spending proved irresistible. The politics of balancing the budget and increasing taxes pose difficulties in many democracies, not least in the US. An acute observer, Igor Klyamkin, put the Soviet dilemma well. Writing in Komsomolskaya Pravda (23 January, 1991), he noted that, in the absence of private property in the means of production, the citizens see themselves primarily as consumers, and have long learned to expect the authorities to be providers.

'So, if in such a society one introduces representative

democracy, the elected parliaments cannot avoid

becoming societies of angry consumers, which demand

redistribution of revenues at the expense of other groups

.. But since the 'bosses' must take away in order to give,

and there is no one they can take from, they have only

one solution: to print more new money and to divide it

among all claimants.'

This is in fact what Albert Hirschman has called conflict inflation'.

An effective, comprehensive programme to move towards a market economy ideally should contain a whole number of interrelated measures: stabilised money; radical price reform (including a very sharp rise in prices of highly subsidised 'necessities'); a big reduction in the budget deficit; a totally different banking system with positive real rates of interest; the legalisation of at least small-scale private enterprise; some move towards currency convertibility with free exchange rates, more joint ventures; a real capital and commodities market; strict financial discipline; and, also measures to provide protection for those who will inevitably suffer from these measures: the unemployed, pensioners, children in poor families and so on. There must also be some clarity as to the objective to be reached: a 'socialist' market with a large state-owned sector, or the speediest restoration of capitalism, albeit with a human face'. Most of the above measures were proposed in the `500-day' reform programme put forward in 1990 by Shatalin and Yavlinsky, modified by Aganbegyan, and by the proposals of Ryzhkov and Abalkin, but there was disagreement about timing and sequence, and also on the relative role of the Union and the republics, with Yeltsin seeking an independent and radical role for the Russian republic (RSFSR). No effective action was taken.

However, by 1990 there arose another obstacle. To take these measures requires political power--authority to impose them--and the power mechanism no longer functioned. Poland's 'shock therapy' could be accepted by the people, because it was imposed by a government of national trust. The USSR is still ruled by communists. Though the party's position has been gravely weakened, no other coherent group has emerged at the centre as a serious alternative. Nationalist separatism is strong. The legitimacy of the regime has been undermined: loud voices are being raised in Russia to the effect that the October revolution of 1917 was a tragic disaster. The collapse of the economy is blamed on the ruling party, and on Gorbachev personally. The system seems to be a failure. How, then, can the Soviet government mobilise the people to carry out a revolutionary change in the way the economy and society works? Gorbachev has, on paper, large powers. In practice his decrees are widely disobeyed, and not only in the non-Russian republics. His one power weapon is the army and the KGB, and the tragic events in January 1991 in Vilnius have demonstrated the consequences of its use.

There are some positive signs. There have been some (limited) auctions of foreign exchange, with rates determined by supply and demand. Interest rates have been raised. Foreign trade deals, including those with the former members of the CMEA, are being put on a hard-currency basis. The Gulf crisis led to a substantially higher price for oil, which benefited the USSR. However, oil production has been failing, as part of the general disorganisation of the economy (it fell by 6 per cent in 1990, and is failing further in 1991). The foreign trade deficit, and the level of indebtedness, have been rising. The republics, in trying to protect themselves from the consequences of the disruption of economic links, inevitably have further disrupted these links. A major cause of dispute today is the share of the republics in the receipts from foreign trade, which until recently have been centralised in Moscow (apart from some foreign exchange which exporting enterprises have been allowed to keep).

There is a fundamental issue at stake here: is there to be a Union at all, other than as a loose federation of genuinely sovereign states, which delegate upwards only those powers and resources which they choose to provide? Such a model was implied by the 500day' Shatalin-Yavlinsky plan, and was denied by the Ryzhkov-Abalkin reform version, which provided much more power to the Union. Anyhow, some republics now reject even the loosest confederation, with six of them (the three 'Balts', Georgia, Armenia, Moldavia) refusing even to discuss a new Union treaty.

Other positive signs should be mentioned. One relates to the creation of commodity exchanges, commercial banks, the beginnings of a real capital market, more joint ventures (though few of these are yet producing anything), business schools. Retail prices were (at last!) substantially increased, with effect from 1 April, 1991, thus reducing greatly the level of subsidy (thus the official prices of meat have trebled, butter is up from 3.50 to 8.80 roubles per kilo, the cheapest bread is up fourfold, textiles and clothing prices have more than doubled. There is a compensatory rise in wages and pensions). At long last, in a law dated 2 April, 1991, recognition has been finally given to quite vital elements of any functioning market economy: the right of private (and cooperative) enterprises to act as trading intermediaries (to buy and sell for profit), and the right to private employment (which since the end of NEP was treated as illegal, as 'exploitation' of the worker).

However, none of these decisions provide any ground for short-term optimism. Output is failing. The country is disintegrating. The long-delayed price increases will do nothing to stimulate production, and there is no effective control over incomes, while strikes by miners and others are simultaneously fuelling a more rapid wage-inflation and leading to further reductions in output. Foreign trade is rapidly diminishing, exports especially, and the sharp cut in the volume of imports is creating more bottlenecks and forcing the closure of many enterprises, as reported in Ekonomika i zhizn (no. 11, 1991). So, despite the price increases, goods are not likely to reappear in the shops. Meanwhile, the central state budget is in total disarray, as most republics and some regions are not transferring revenue to the centre, and so the deficit in the first quarter already exceeds the sum estimated for the whole year-and is being covered by money creation. Republics are pursuing expenditure plans of their own, using the roubles themselves. All in all, monetary disorder is growing worse. How, then, can any move to a market actually occur? The recently adopted laws certainly represent progress, but how can anyone act as economic men (or women) amid accelerating decline and legal uncertainty? This last point is worth stressing. Despite talk of the necessity of a legal order and of the observance of contracts, there is confusion as to who is responsible for what: there is taking place what has been called 'a war of laws', as the Union, the republics and even the municipalities issue conflicting laws and instructions, some of which call for breach of already-negotiated contracts. Nowhere is this confusion greater than in foreign trade and payments: for the first time virtually since 1920, there have been numerous defaults on payments to foreign suppliers during 1990-1, not only because of the fall in total earnings of foreign currency, but also because of division of responsibility-between firms, local authorities, republics, ministries, the central government, each and any of whom seeks to retain any hard-currency earnings for its own use. The centre now even has problems to raise enough valuta to service its debt. its decrees are being disobeyed.

The deterioration of the foreign trade position can be illustrated as follows: (figures in billions of foreign-trade roubles)
 1988 1989 1990
Imports 69.4 72.1 70.7
Exports 72.7 68.8 60.9
Source: Ekonomika i izhizn, no. 18,1991.

There is also the negative effect of the collapse of trade within the now-defunct Comecon.

Oil is the largest export item, and its output is falling steeply, as also are exports:
Crude oil exports, millions of tons
 1988 144
 1990 109
 1991 (estimate) 70
Source: Ibid, no. 19,1991.

As for inflationary pressures, the following figures represent the increases in money income of the population'
 per cent, per annum
1986-7, annual average +3.7
1988 +9.2
1989 +13.1
1990 +16.9
1991 Q1 (over 1990Q1) +19.0
Source: V. Volkov, Ibid, no. 16,1991.

Naturally, money supply figures show a similar pattern:
Annual average growth, per cent
 1980 1987 1988 1989 1990*
Currency 6.1 7.8 13.6 19.5 21.5
M1 7.6 15.7 15.4 14.3 13.4
M2 8.5 14.7 14.1 14.8 15.3
 * Estimate.
 Data provided by Soviet authorities to IMF/IBRD/OECD
study, 1991.

Despite some ambiguity as to the precise meaning of these categories in Soviet conditions, the pattern is clear enough.

I am not quoting aggregate output data, because these almost certainly understate the degree of decline in output of industry and agriculture in 1990, but all agree that this decline is accelerating in 1991. It is not due to falls in demand, as in the deflationary scenarios of Poland and Czecho-Slovakia, but almost totally to the disruption of production, supply, distribution.

Everyone agrees that food shortages are a principal source of economic and political danger. in part they are due to maldistribution, with some traditionally food-surplus areas withholding supplies, and rail transport in serious difficulties. It is also the case that, for example, Estonia, a republic specialising in meat and dairy produce, is having to cut its production because it cannot obtain sufficient feed-grain from other republics. But a major source of trouble is uncertainty. What is to be the future of state and collective farming? At present they control over 95 per cent of cultivated land. Laws and decrees on family leasing have so far made little difference, for several reasons. One is that the managements of state and collective farms have created a politically powerful lobby, which argues that they could perform much better if given more resources and left free of bureaucratic control, and they do not willingly lease good land on attractive terms. Another is the continuing uncertainty about the legal status of the family farmer: the terms of the lease might be arbitrarily altered, government policy may change. An argument is still proceeding over whether private ownership of land should be permissible, and, if so, subject to what limitations. Still another is shortage: of building materials, small-scale machinery, reliable supplies of feed and fertilizer, of sufficient credit. Prices of inputs and of outputs are another unknown'. It is scarcely surprising in all these circumstances that private farming has made so little headway. There are exceptions: in the Baltic republics and in Georgia the attitudes of both the peasantry and of the republican authorities are more favourable, and progress has been more rapid, but there too the state and collective farms predominate, though there are 7,500 private farms in Latvia, for instance. In the short run one cannot expect speedy results from privatisation, and there is danger that the prevailing uncertainty will disorganise production even on the more efficient state and collective farms, thus making things worse.

So the situation is grim. On this there is no dispute. There is, however, many a dispute both on immediate remedies and on the longer-term aims. These could be summarised under the following headings:

1 . What to do, to cope with the emergency?

2. Who is to do it?

3. How can any policy be enforced?

4. Over what area should it be enforced?

5. In the name of what, to achieve what?

The items on the above list are interrelated. Thus it is plainly essential to regain control over public finance and the supply of money and credit, but Gorbachev's decrees are at present being disobeyed, the all-union ministry of finance cannot collect revenue. How can the republics be compelled or persuaded to observe centrally-determined financial discipline, and should these include the six (the three Balts, Georgia, Armenia and Moldavia) that have declared their intention to secede? If disorder breaks out, as a result of the freeing of prices, who is to take responsibility for suppressing it-avoiding the 'populist' temptation to award large inflationary wage increases? Any remedial action must be painful and unpleasant, and must therefore be undertaken by a legitimate government, legitimate in its own eyes and that of the people. Can a government still dominated by communists, under a president who is also general secretary of the Party, command the necessary authority? There is no shortage of proposed strategies: in 1990 there was the Shatalin-Yavlinsky plan, the alternative Ryzhkov-Abalkin plan, the Aganbegyan modification, now the Pavlov plan, and there are also the recommendations of the IMF/IBRD/OECD group. They all have one feature in common: whatever their virtues or defects, they cannot be implemented in the political situation of today: no one has the authority, the power, to ensure the implementation of any package of remedies. The feud between Gorbachev and Yeltsin, representing respectively the all-union and Russian-republican levels, complicates matters still further, though they may find it indispensable to collaborate, given the catastrophe facing them. The more so because Yeltsin cannot secure obedience to his decrees within the (huge) Russian republic, which contains within itself national subdivisions and also independent-minded city and provincial authorities.

An important factor today is the military-industrial complex, which must regard with dismay the rise of republican political and economic separatism: the army and the industry that serves it depend on the preservation of the Union with a strong financial basis. Otherwise its very survival is threatened. in understanding Gorbachev's personal position, it is important also to bear in mind that he knows better than anyone that the power vacuum that now exists makes any action to avert catastrophe impossible. His 'turn to the right' at the end of 1990 is explicable by the need to rely on the power structures that still exist, (the army, the KGB and what remains of the party apparatus). Unfortunately, the parties and political movements that have been legalised under perestroika have failed to provide an organisational or ideological alternative, or rather there are too many of both. So: who will be in command, in the name of what legitimating principle?

On the Russian-nationalist right there are neostalinists, but also those who consider Lenin and the October revolution (and Stalin too) to have been a disaster for Russia. Some of them, like Solzhenitsyn and the neo-slavophil publicist Prokhanov, are hostile to Western mercantile values, on grounds that would have appealed to Dostoevsky. By contrast Colonel Alksnis, leader of the Soyuz group of deputies, favours moving to the market by authoritarian means 'similar to the policies of General Pinochet', as he said in a TV interview), and his programme includes the suppression of all parties, including the Communist party! The radical reformers are divided too. Some, for instance Pinsker and Pyasheva, are greatly influenced by Hayek, Friedman and Thatcherism, regarding the Swedes or the German social-democrats as dangerous lefties. Like their colleagues in Poland, Czecho-Slovakia and Hungary, they are committed to fully-fledged marketisation, privatisation, laissez-faire, the minimalist state (in my view, they go too far--to cite the Boston Globe, 'in rejecting Lenin it is not necessary to embrace Milton Friedman'). Others declare that 'socialism is the longest road from feudalism to capitalism', and wish to travel it as fast as possible. Some leading members of the party apparatus, for instance Lukyanov, Polozkov, perhaps also Shenin, the Leningrad party leader Gidaspov and Moscow's Prokofiev, represent a potent conservative group, desirous of preserving a considerable degree of central planning, while either pulling Gorbachev further in their direction or possibly even replacing him This seems as possible as the (to me much more attractive) alternative of a grand reformist coalition, embodying Gorbachev, Yeltsin, Sobchak (mayor of Leningrad), Popov (mayor of Moscow) and some leading reformers. However, it is significant that those reformeconomists who stood close to Gorbachev in 1990 (Shatalin, Petrakov, even the more cautious Abalkin) have all resigned. However, Gorbachev has now recruited the radical Yavlinsky.

A military coup? Not likely, not in accordance with Russian historical tradition, but not impossible. The military are themselves disunited. One wonders whether the Soyuz group (Colonel Alksnis and his fellow-colonels) has much in common with the top military command (Yazov or Gromov), and what would be the attitude of junior officers, or of men of non-Russian nationality. Would a conservative governing group wish to preserve the Union within its present borders? Interestingly, Alksnis is a Latvian by nationality, and the reputedly hard-line all-union minister of the interior is also a Latvian, while Alksnis's colleague Colonel Petrichenko is a Ukrainian (but then Stalin was a Georgian, and Napoleon was not French ... ).

Another possible scenario might be a state of emergency with a technocrat in charge. The name commonly mentioned in this connection is Arkady Voisky, president of the Scientific-industrial council, a body to which most Soviet managers belong, and which includes in its council the presidents both of the Union of Soviet entrepreneurs (Bunich) and of the cooperatives (V. Tikhonov).

I do not think that muddling through' is an option. They have descended too far down the precipice. A state of emergency, authoritarian rule (but over what territory?) seems the only alternative to growing chaos, economic paralysis and civil disorder on a disastrous scale.

This is an appalling prospect. As one born in that country, with affection for its people, it gives me no pleasure at all to write of disaster. Surely the Russians have suffered enough in the 20th century! I can only express hope that the prospects will prove not so bleak as have been here set out.


Seven weeks after the conference for which this paper was written, the military-political coup was attempted and misfired. No doubt its authors saw themselves as trying to save the Soviet Union from disintegration, and the military-industrial complex too. Although they did not act in the name of the Communist party, the known fact that they had support from most communist apparatchiki led to the banning of the party, of which Gorbachev had been the nominal leader in his capacity as its general secretary. He had been preparing to try to change its nature and even its name at an emergency congress. Now he acquiesces in its disappearance from the political scene.

The consequences of the failed coup are profound, and as yet difficult to predict. The break-up of the Union has been accelerated. Aware of the damage which disintegration could impose on their interdependent economies, most republics should see the need for coordinating their policies and aim for the equivalent of EEC, in other words an economic union of sovereign states. However, the critical situation and the lack of a meaningful monetary unit, plus the centrifugal forces of nationalism, lead to the conclusion that joint action is unlikely, except in the form of bilateral barter deals. Each republic appears to aim to create its own currency, and even its own army, and to obstruct movement of scarce goods. The consequences could be devastating, with shortages of food and energy likely to hit many areas in the winter. These will be due to the sharp decline in oil and coal production, and to the reluctance of farms and peasants to sell for worthless roubles.

Some believe that the Russian republic could and should go it alone. It certainly has a very strong bargaining position, as the main source of oil, gas and timber. Its leaders speak of making their own transition to a market economy, and listen to advice from such as Jeffrey Sachs, who recommends shock therapy on Polish lines. However, will Yeltsin and his colleagues be willing and able to impose the necessary financial discipline? With the demise of the Communist party, and in the absence of any serious alternative parties, in the absence too of a functioning constitution, it is far from clear that the Russian-republican government will secure obedience to its decrees. Its own budget deficit, and that of the Ukraine, plus the deficit of the all-union budget, require drastic action to raise revenue and slash expenditures, and few believe that the 'populist' leadership in these two republics will dare to incur the inevitable unpopularity.

Meanwhile earnings from foreign trade have fallen, and imports in 1991 are 45 per cent down on the same period of 1990, exacerbating shortages.

The situation varies greatly between republics and regions. Thus Latvia and Estonia can hope for political stability while they try to reorientate their trade links (their main market between the wars was Great Britain, but the Common Agricultural Policy stands in their way). Uzbekistan seems to be run by the ex-communist political mafia, Georgia by a dictator. Parts of the Russian republic are trying to turn themselves into free-enterprise zones (St Petersburg, Kaliningrad, Nakhodka and Sakhalin are in the first group), hoping to earn hard-currency for themselves.

In fact any region or enterprise that could sell for hard-currency will try to do so, disregarding their `rouble' customers. As established supply links are severed, output will fall faster. 'Optimists' speak of a capitalism arising red in tooth and claw, with primitive accumulation' by way of speculative or even fraudulent activities, thus accumulating the capital needed for future real investment ...

We seem to be entering a new 'time of troubles'. One cannot foresee what happens next, except that the outlook is stormy.
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Author:Nove, Alec
Publication:National Institute Economic Review
Date:Nov 1, 1991
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