BACK IN THE U.S.S.R. AS THE STORM CLOUDS GATHER

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP91B00551R000100080030-9
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 2
• Document Creation Date: December 23, 2016
• Document Release Date: April 25, 2014
• Sequence Number: 30
• Publication Date: September 14, 1989
• Content Type: OPEN SOURCE

Declassified and Approved For Release 2014/04/28: CIA-RDP91B00551R000100080030-9
THE WALL STREET JOURNAL THURSDAY, SEPTEMBER 14, 1989
Back in the U.S.S.g. as the Storm Clouds Gather
By MARTIN FELDSTEIN
My second visit to the Soviet Union
within six months left two very clear and
disturbing impressions. First, the Soviet
economy is on the verge of collapse. And,
second, in the current political environ-
ment, the economic deterioration cannot
continue for long without provoking a
sharp political change.
Ironically, the recent political reforms
are making it particularly hard for the So-
viets to achieve the economic reforms that
they need. And yet it is the new politi-
cal freedoms that will permit the public to
hold the political leadership accountable
for the economy's abysmal performance.
The Soviet Union's inability to reconcile
economic reform and political freedom
could cause a repressive political swing to
the right in which both will be lost.
The increasing shortages of consumer
goods?both a symptom and a cause of the
worsening economic situation?are de-
stroying the already poor system of distri-
bution. Leningrad has had to issue ration
coupons for soap, sugar and salt. Many
basic goods are no longer available to all.
And although consumer durables have ex-
tremely high official prices, especially rel-
ative to Soviet wages, they too have gener-
ally disappeared from the shelves.
Black Markets
The rise of nationalism is also contrib-
uting to the economic breakdown. The Bal-
tic states and other Soviet republics are
preventing the shipment of locally made
products to other parts of the Soviet Union
and denying Soviet citizens who are not lo-
cal residents the right to buy things in
their stores. The Moscow government has
retaliated by announcing that Soviet citi-
zens from other republics who visit Mos-
cow may not buy consumer durables, im-
ported products and other desirable goods
that may happen to be available.
This disintegration of the regular mar-
ket in consumer goods encourages black
markets and widespread corruption. The
Soviets readily acknowledge that retailers
and others involved in the distribution sys-
tem help themselves to consumer goods
that can be sold on the black market for
much more than official prices or, better
yet, for dollars or other hard currency.
The combination of shortages and of
rapidly rising prices for the limited range
of goods for which price increases are per-
mitted is destroying the value of the ruble.
Although it is illegal for Soviets to trade
rubles for foreign currency, this trading
has become blatant. The official exchange
rate is $1.60, while the rate on the street is
only 10 to 20 cents a ruble.
A primary cause of the shortages and
price rises is the government budget defi-
cit, now estimated at more than 10% of
gross national product. Although a deficit
need not be inflationary if it is financed by
issuing bonds that crowd out private
spending, the Soviets do not issue bonds
but finance their deficits by adding to the
cash in the hands of Soviet workers. In a
Western economy, such an excess infusion
they fear that price decontrol would lead to
skyrocketing inflation. Such inflation is po-
litically unacceptable in a nation where
Lenin's promise of price stability has been
repeated for more than 70 years. Moreo-
ver, since Soviets do not own shares or
homes or other assets that would preserve
their value during inflation, a rapid infla-
tion would wipe out the life savings of ev-
ery Soviet citizen?hardly a propitious
start for a government that wants to de-
velop confidence in capitalist ways!
The prerequisite to price decontrol and
the establishment of a market economy is
therefore appropriate anti-inflationary
Board of Contributors
Soviet citizens want a higher standard of living but do
not see how that will follow from market forces.
of cash would cause prices to rise. Soviet
experts privately estimate their inflation
rate at nearly 10% even though most
prices are not allowed to rise. And with
only a limited number of prices free to in-
crease, the excess cash chasing a limited
supply of goods causes shortages.
The fear of future inflation encourages
people to spend their savings before the ru-
ble's purchasing power decreases even fur-
ther. With the interest rate limited to only
3%, any kind of good that can be stored for
future use is a better investment than
money in the bank.
But the shortages reflect declines in
production as well as increases in demand.
One cause of the reduced output is the new
system of factory management in which
managers are elected by the workers and
have some discretion over pay and work
requirements. Without the discipline from
owners or creditors, managers have raised
wages and met production quotas by ac-
counting gimmicks. In addition, workers
and farmers whose income is related to
their own effort frequently have cut back
because the rubles that they would earn by
extra effort are of such limited value.
What is needed to rescue the Soviet
economy is a radical reform of the price-
setting process and a move toward a much
more market-oriented economy. Mr. Gor-
bachev's economic advisers recognized
that two years ago but have now aban-
doned those proposed reforms because
macroeconomic policies. First, the excess
infusion of cash by the budget deficit must
be stopped. Soviet officials acknowledge
this and say that they will cut the budget-
ary money growth in half during the next
year by a combination of reduced defense
outlays, increased revenue from the sale of
imported consumer goods, and the use of
bond finance. But eliminating a budget
deficit of 10% of GNP will not be possible
without raising taxes, cutting subsidies or
reducing the already low standard of pub-
lic services. Any such painful changes will
inevitably be criticized in the press and re-
flected in votes against Communist Party
candidates in contestable elections.
Even more important than deficit re-
duction is raising the interest rate that
households receive on their bank deposits.
That rate must be high enough so that
households will want to leave their past
savings in the bank when prices are decon-
trolled, rather than spending them and
thereby bidding up the prices of available
goods. At a minimum, that is likely to re-
quire an interest rate that exceeds the in-
flation rate, a substantial rise from the
current token rate of interest. Such a rise
in interest payments would be unpopular
with a Soviet public raised on the commu-
nist ideology that all capital income is un-
fair. Moreover, since the ownership of sav-
ings is highly concentrated, paying higher
interest rates would conflict with the egali-
tarian standard of fairness that the Soviet
.--eet?s.6 44
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I public has come to accept.
Popular opposition to economic reform
extends not only to the policies required to
prevent inflation but to the basic market
reforms themselves. While most ' Soviet
' economists continue to recognize the ne-
cessity of price decontrol and movement
toward a market economy, they report
that these notions are not supported by the
mass of Soviet people.
Soviet citizens want a higher standard
of living but do not see how that will follow
from market forces. Instead they see price
reform as eliminating the subsidies on
bread and rent and adding to a general
price inflation that would lower their al-
ready low standard of living. And they un-
derstand that with fewer regulations some
individuals will become much richer than
others, in sharp conflict with their values.
With democratization, such popular opposi-
tion inevitably increases the political reluc-
tance to act decisively.
Some Possibilities
, The deteriorating economic conditions
make the continuation of current policies
I very unlikely. One possibility is that the
. leadership will accept the political risks of
adopting radical reforms that simulta-
neously contain inflationary pressures and
move toward a market economy. Or, Mr.
, Gorbachev might lose power to a politician
prepared to adopt the needed reforms.
But there is a darker possibility. The
Soviet public and many of those in govern-
ment or military circles may conclude that
inflation, shortages, strikes and corruption
are all evidence that the Gorbachev gov-
ernment is too weak. They may yearn for
a government that can bring back price
stability, crack down on black marketeers
and stop the nationalist political move-
ments. Such a political change could spell
! the end of economic perestroika and of po-
litical liberalization. The very fear of such
a political ouster might make Mr. Gorba-
chev and his colleagues adopt a tougher,
less reform-oriented stance themselves.
Those of us who want to see an increase
! in pluralism, democracy and market
forces in the Soviet Union can only hope
that the current government will have the
courage to adopt the needed reforms be-
fore it is too late.
Mr. Feldstein, former chairman of the
president's Council of Economic Advisers,
is a professor of economics at Harvard.
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