Inside the Collapsing Soviet Economy

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Mikhail Gorbachev and his country's struggling reforms produce a deeply ambivalent reaction. The Soviet leader's policy of glasnost, his willingness to seek an end to the Cold War, his ability to set free more than 120 million Eastern Europeans— all exceeded our wildest hopes for the end of the twentieth century. When Time early this year named Gorbachev "Man of the Decade," it was no more than a dramatic reflection of popular American sentiment. In a recent Harris survey Americans gave the Soviet leader a higher approval rating than George Bush.

But with the fall of the Berlin Wall and the collapse of communism in Eastern Europe, our euphoria has been replaced by much darker expectations about the Soviets' own future. To most Americans the continuing outbreaks of ethnic conflict, the secessionist movements in the Baltics, the turmoil of Soviet politics, and, most important, the apparently intractable problems of the gigantic Soviet economy add up to an impossible situation, too large for control, and doomed to a fateful outcome.

Within days of Time's "Man of the Decade" issue the journal Daedalus opened the nineties with a much more ominous assessment of the future of the Soviet leader and his nation, by the anonymous "Z." The author foresaw only collapse and chaos for the Soviet Union, and failures for Gorbachev. Weeks later, in The Washington Post, a highly regarded Sovietologist even named the military figures he thought might soon replace the Soviet leader. When CNN reported in January that Gorbachev was about to resign, the Tokyo stock market fell, and Secretary of State James Baker waited twenty-four hours before denying the rumor outright.

Among America's European allies there is a growing sense of puzzlement at our mood swings and especially our gloom. I talked not long ago with one of West Germany's top bankers, a man who travels frequently in the Soviet Union and Eastern Europe. "You Americans seem overwrought about Gorbachev," he told me. "He is stronger now than he has ever been politically. The ethnic minorities are a problem, yes— but taken together, the Baltics and Central Asians are no more than five percent of his population, and you seem to forget he still has a four-million-man army. The economy is his problem, and the bureaucratic resistance to change— but he doesn't need you to tell him that." Prime Minister Margaret Thatcher takes an even more optimistic view: back from a recent visit to the USSR, she told reporters, "I believe perestroika is now set on its course— and will go through to success."

Some of America's top experts on the Soviet economy seem just as perplexed by our popular sense of an imminent collapse— especially when it centers on the Soviet economy. Vladimir Treml, a professor of Soviet economics at Duke University, says simply, "Economies this size don't collapse." John Hardt, the Congressional Research Service's top Soviet analyst, likewise sees neither imminent collapse nor any immediate threat to Gorbachev's political future.

Jerry Hough, a Brookings Institution political scientist, whose judgments about Gorbachev are highly regarded, is blunt: despite its current problems, he expects the Soviet economy to begin showing significant improvement within the next two to three years, and he says that when he raised the issue of Gorbachev's possible downfall with a broad range of Soviet citizens on a recent trip, "they looked at me with a blank stare." Hough says that "no one I talked to has the sense of an imminent popular uprising" or of widespread collapse.

But can Gorbachev in fact survive? And can his economic reforms work?

An Evening's Meal

I HAD DINNER AT THE HOME OF A SOVIET FRIEND IN Moscow not long ago. Set in a ten-year-old high-rise complex south of the Lenin Hills, my friend's small apartment is nicer than many but not at all distinctive by Moscow standards. What surprised me was the sumptuousness of the meal I was served. Delicious hors d'oeuvres of pickled vegetables, served with Georgian wine, were followed by roast duck with fig potatoes, and beets, accompanied by Moldavian champagne, and by a dessert of cream cakes and chocolates. The meal ended with Armenian brandy.

Obviously, it wasn't in any sense a typical Russian evening meal. I was a foreign guest, my hosts (he a psychologist, she a high school teacher) were upper middle class; but even so, the variety and richness surprised me, given all the complaints both the Western and the Soviet press record about food shortages and growing consumer discontent. Like everyone else in Moscow, I had watched the long lines gather each evening outside stores, and had seen just how poorly the shelves of those stores were stocked— even compared with a few months earlier. I asked my hostess how she had managed what seemed to be culinary magic.

The pickled vegetables had come from her garden, and she had canned them herself. (The garden was attached to their dacha— a small one-room wooden cabin located just east of the Moscow Ring Road.) The duck was from a private market down the street— very expensive at thirty-five rubles (three days' wages for the average Soviet citizen), but, as my hostess said, "Of money there is no shortage right now." The cakes were from a neighbor, a retired woman who liked to bake and then sell her wares to others in the building, for a few rubles each. The champagne had been brought back from a summer vacation; the figs came from a "relation" in Georgia. The wine and chocolates had been bartered for theater tickets my friends couldn't use. Only the potatoes, beets, and brandy had been bought in public stores.

"You know," my friend said when his wife finished, "we Russians have a saying: To, schro ne videsh v magazinakh, videsh na stok. What you don't find in the store, you find in the home."

Soviet living standards have been declining for the past two years, as scarcity and suppressed inflation have surged through the economy. But for more than seventy years the Soviet people have survived— and in many cases prospered— by trading on the wisdom summed up in my friend's aphorism. Anyone who has spent more than a few days in the Soviet Union knows what a complex strategy its citizens have developed to maintain and improve their lives amid perpetual shortage. But the sheer dimensions of the world in which they pursue this strategy— and its role in daily life— are hard for most Americans to grasp.

The largest part lies in a vast gray area that Western economists sometimes genteelly call the Soviets' "second economy." Blat, tolkachi, shabashniki, fartsovshiki, are terms the Soviets use to describe elements of the world that lies beyond the view of Moscow's statisticians. Roughly translated, they cover aspects of life that range from a generous tip for securing hard-to-find merchandise to the black-market realm of the Soviet Mafia. All economies include such netherworlds, but according to estimates by Gosplan, the Soviet central-planning ministry, this one may account for some $150 billion a year, which is equivalent to about 11 percent of the Soviet gross domestic product.

The Soviet economist Nikolai Shmelev cites survey research showing that 83 percent of the population buys goods and services in this vast second economy. In cities almost half the apartment repairs, 40 percent of auto maintenance, a third of appliance repair, and 40 percent of all tailoring and shoe repair happen beyond the gaze of Soviet statisticians. Owing to waiting lists at Soviet hospitals, anywhere from 4 million to 8 million of the abortions performed annually are done illegally, and 15 percent of all new housing construction— some 170 million to 180 million square feet a year— goes on outside official channels.

This immense second economy supplements not just Soviet consumption but incomes as well. Something like 20 million people, according to Shmelev, make their principal living in it, and millions more moonlight in it. When the Sovietologist Gregory Grossman, of the University of California-Berkeley, surveyed recent èmigrès, he found that among those from Leningrad's working class other sources of income had yielded an average of 38 percent of official wages, while among those from Armenia, Georgia, and the Central Asian Republics (where Marxist orthodoxies have never been strictly observed) second incomes had yielded as much as 179 percent of official earnings.

The official economy itself also provides a labyrinth of consumer opportunities. Few Westerners seem to realize that much of the official Soviet retail trade goes on not in the stores but in the factories and offices where people work.

Stalinist planners years ago settled on building giant enterprises that concentrate production in a few hands (the Soviets have something like 700,000 enterprises, as compared with some 17 million in the United States). Along with production, these enterprises have been charged with responsibility for everything from providing workers' housing to repairing and replacing tools and equipment. As a consequence, over the years these enterprises have come to look and function like the vast, mainly self-supporting feudal estates that covered medieval Europe and that lived on in czarist Russia well into the nineteenth century.

These behemoths offer their workers a host of in-plan goods and services that might range from delicatessens to dry cleaners, clothing, and consumer electronics. When a Soviet worker buys a new refrigerator, he is more than likely to do so by ordering it through his enterprise. Nearly half of Soviet meat production passes through factories, schools, and ministerial canteens and shops. And many enterprises go a step further— raising food and manufacturing their own consumer goods for employees' consumption.

To Western eyes, this Soviet fixation on enterprise self-sufficiency and the neglect of normal retail markets can seem bizarre. More than 20,000 factories and large construction sites now have their own agricultural departments, raising everything from sheep to lettuce to beets. The practice is so widespread that the Presidium in late 1987 reprimanded the Ministry of Non-ferrous Metallurgy because only three out of every four Soviet metal smelting plants had their own herds of cows. What was wrong, the Presidium wanted to know, with the other plants?

Even retail shops have their own peculiar Soviet twists. Although shortages are commonplace, they frequently are what Soviet economists call "rolling shortages": one store may be out of a certain kind of shoes but in another store two blocks away the shoes are in stock. Or typing paper available in one store on Monday may be gone Tuesday, only to reappear on Thursday. Shoppers have learned to cope by buying "for the shelf." One survey, for example, found that 80 percent of Muscovites will buy goods even when they have no immediate need for them. This tendency to hoard has grown worse in the past two years, as Soviet incomes have soared. The same survey found that the average Moscow home now keeps nineteen pounds of sugar on hand, and the economist Nikolai Shmelev claims to have a friend who has seven years' worth of soap and laundry detergent stockpiled at home.

All this amounts to more than just a footnote for Kremlinologists. According to Richard Ericson, of Columbia University's Harriman Institute, while food shortages are endemic at the retail level, there is no evidence of a fall in nutritional intake by Soviet families. Vladimir Treml, of Duke, says that he sees large cities like Moscow and Leningrad suffering public-market (though not private-market) food shortages, but that these appear to be the result not so much of outright production failures as of delivery failures and hoarding by local authorities and households. In Leningrad public-market shortages have worsened also because the neighboring Baltic states have sharply reduced their role as the city's principal suppliers in the course of escalating their demands for independence.

Not long ago I asked Vitaly Korotich, the editor of the popular magazine Ogonyok, how bad life had become for ordinary Russians, expecting a pessimism to match what the stores seemed to show. But Korotich, a leading reformer who has consistently attacked the slow pace of reform, surprised me by sharing a poll that his magazine had just commissioned. Asked how perestroika had affected their standard of living in the past three years, 23 percent of Soviets said life had gotten worse, while more than half (52 percent) said it was the same, and another 23 percent said it had actually gotten better.

The Black Box of Soviet Production

WHEN AMERICANS THINK ABOUT THE SOVIET Union, they often tend to think about scarcity. That, after all, explains the lines, the discontent, the seeming perennial shortage of goods.

The peculiar fact is that the Soviet Union produces an enormous abundance of goods. When you look at primary production (in what is still the world's second largest economy), the Soviets come out first globally year after year in things like oil, natural gas, iron ore, and steel. In 1988, for instance, they produced nearly twice as much steel as the United States did. Taken together, all the things that Marx, Smith, Ricardo, or any other classical theorist of capitalism would tell you are important to industrial success are hallmarks of the Soviet achievement. That's what makes the current disarray of Gorbachev's Russia seem so peculiar at first glance. The disarray down the line leads everyone— Soviets and Westerners alike— to debate what is going on, and why.

Harold Willens is an interesting person to ask about problems on the shop floor, where much of what goes wrong with the Soviet system occurs. Willens, a well-to-do retired businessman from Los Angeles, describes himself as a "card-carrying capitalist." Politically active and long interested in East-West affairs, Willens decided in 1988 that he wanted to learn more about just how his Soviet counterparts worked. He says, "I was born in Russia, and left with my parents when I was eight, just after the Revolution. I'd be the first in the family ever to go back." With glasnost and joint ventures the rage in Moscow, Willens wrote a letter to a Soviet newspaper which said simply, "Successful American businessman available to consult to Soviet enterprise, without charge." The letter brought 4,000 replies.

Sifting through the responses, Willens settled on a brassiere manufacturer in Moscow; he had once been a clothing manufacturer in California.

Arriving at the Cheryomushki sewing factory late one summer afternoon two years ago, he was "shocked" at what he found. The plant itself was huge, employing more than 2,000 workers. It had been built a half century ago, and showed little sign of maintenance or repair in the intervening years. But inside the plant, Willens discovered, the equipment was relatively new— two to ten years old, and for the most part in good condition. The managers and workers' representatives were enthusiastic— "overwhelmed, really, by the idea someone had come nearly 10,000 miles to help them." The first day, Willens recalls, was spent in toasts, welcoming speeches, and an endless round of hand-shaking and smiles.

Over the next two weeks, as Willens and several associates he had brought along spent time with managers, bookkeepers, shop foremen, and workers (talking through interpreters), the dimensions of the plant's troubles became clearer. As with almost all Soviet enterprises, the appropriate ministry determined labor and material inputs and set production goals. The factory obediently churned out 22 million bras each year, and turned a profit on the books by selling its product back to the ministry. The problem, though, as the plant's veteran manager, Liudmilla Palchunova, explained it, was that Soviet women wouldn't buy the bras. Production was, in the Russian phrase, "for the warehouse." The Soviets were being forced to import bras from the West.

Willens decided that a little market research was in order. He conducted an American-style focus group. Among the seventeen women who gathered at the first meeting, there was initially a lot of nervous laughter at the sheer novelty of being asked what a consumer might want. After an hour or so, though, reticence gave way to candor: not one of the women was wearing a Soviet-made bra; fewer than half believed that the Soviets could make a bra a woman would want to wear.

Back at the plant, senior staff told Willens they thought they could solve the problem, if only they could import some foreign-made lace that would soften the feel of their product. But their ministry, short on hard currency, prohibited it. It was more important, the bureaucrats insisted, to focus on output— seven minutes per bra was the new work-norm decree.

Willens had met with officials in the ministry, including its head, and realized that skepticism was the kindest word to describe their feelings toward this Westerner and his presence in their back yard. So the American decided he needed to demonstrate the solution on his own.

Willens decided on a blind test— a Soviet lingerie version of the Pepsi challenge. Through a friend who owned a successful brassiere company in the United States, he arranged for the manufacture of a hundred bras, using precisely the same specifications and the same materials that the Soviets used, down to the thread— but including the imported lace the Soviet factory manager wanted. He also had the Soviet factory make a hundred bras with the imported lace. Willens then deliberately mislabeled fifty of the American-made bras as Soviet and fifty of the Soviet bras as American, and distributed all the bras among a new group of Soviet women, who agreed to return three weeks later to discuss their opinions of the "American" and "Soviet" bras they'd been wearing.

Packaging beat product. Bras labeled American were the women's favorite. Bras labeled Soviet were the subject of general derision, whether in fact they were Soviet- or American-made. The results made clear to Willens and his associates just how deep a prejudice Soviet citizens hold against the products of their own economy.

When Willens explained the labeling switch, there was much laughter and some chagrin. But Willens, who had taken care to have ministry officials present along with factory staff, was pleasantly surprised when a deputy minister congratulated him on his "little school lesson." Several weeks later hard-currency authorization for the imported lace appeared. Within months new orders came in for what the factory's managers now proudly called "world-class" bras. Willens says he still wants to work on improved packaging and rudimentary marketing, but he feels that the Soviet people he worked with have learned something important.

He says he also has a new understanding of the difficulties Soviet industry works under— and a newfound respect for the capacity it has. He believes that continued bureaucratic interference remains the chief threat to Gorbachev's reforms and that what he calls the "for want of a nail the kingdom was lost" problem arises daily throughout the Soviet Union. He also worries that Soviet consumers, so long abused, will be slow to see any improvement in goods even when improvement exists— a measure of how deeply distorted the economy has become in seventy years.

What Perestroika Has Done

MIKHAIL GORBACHEV CAME TO POWER IN 1985 because the perception of economic stagnation had grown pervasive at the highest levels of the Soviet government. His claim to leadership rested on his ability to convince particularly the younger generation of Soviet leaders and their advisers that he could do something about the stagnation. "He might have a good smile," Andrei Gromyko is said to have told the Politburo, "but he has iron teeth."

From 1985 through 1989 the Soviet gross national product grew— by official measure— at better than three percent a year. Even by the CIA's much more skeptical estimates, the economy has grown on average nearly 1.5 percent— not especially bad considering the tumult that Gorbachev's reforms and the resulting unrest are putting the Soviets through. Agricultural production has risen: 1989's grain harvest, at 211 million tons, was up 26 million tons from the previous year, and barely missed being the best harvest of the decade. Meat, milk, and egg outputs are all measurably up. The production of consumer goods (a centerpiece of Gorbachev's plan) is up 10 percent, and overall industrial production is up, in Western-calculated real terms, by 14 percent. Domestic wholesale and retail trade is up by a similar amount, and construction by nearly 30 percent. Foreign trade is also up, particularly with the West. Soviet incomes have risen even more dramatically— last year they rose nearly 13 percent.

What's more, many of Gorbachev's key reforms seem to be making headway. Beginning in mid-1987, at the nineteenth Party plenum, Gorbachev and his supporters have pushed through a dizzyingly complex array of reforms, including new laws on enterprise management, cooperatives, and joint ventures. The law on enterprises was a giant step toward turning the 50,000 industrial enterprises that make up the core of the Soviet economy into something like full-fledged businesses, no longer answerable to ministries but responsible for their own profits, products, and investments. The law on cooperatives legalized small and medium-sized businesses for the first time since the 1920s, and left them free to decide what to sell, whom to hire, and what to charge. The law on joint ventures, by abolishing the state's monopoly on foreign trade and legalizing foreign investment in the USSR, allowed Soviet businesses large and small to seek foreign partners, trade abroad, and spend hardcurrency profits without ministerial control.

As critics in the West have pointed out, roadblocks were thrown up by frightened officials. Ministries fought to keep control of the "state orders" for goods. Co-ops were prohibited from entering a range of businesses, from videotape rental to selling religious icons (a monopoly given to the Orthodox Church). Firms seeking foreign partners faced a myriad of obstacles and noncooperation from officials, and started with little knowledge of world markets and almost no hard currency.

But barely three years later what those changes have actually achieved is significant. After seventy years of operating often with only a dim awareness of their costs and profitability, nearly 90 percent of enterprises are making money— in some cases (such as construction and engineering) so much money that there is debate whether profits of 35 or 40 percent are "socialist." By the end of last year reportedly 25 percent of transactions were taking place directly between enterprises (instead of through ministries). The Soviet economist Abel Aganbegyan says that he thinks the percentage will grow to 70 percent or so in the next year, as areas of the country go over to regional cost accounting, further weakening the hold of ministries. Even supposing Aganbegyan's estimate is rosy, The Economist recently noted, "if [ministry control] falls only half as much as that, it still implies a huge cut" in the amount of business conducted as usual.

Similarly, if the three-year-old co-ops are sometimes unpopular— as they clearly still are among older and poorer Soviets, because of "speculation" and high prices— they are nonetheless booming. At the end of 1987 the nascent co-ops employed fewer than 200,000 people. By early this year they employed nearly 5 million, with no end to their growth in sight. Co-op sales in the same period went from less than a billion rubles to nearly 30 billion, and by the end of this year should top 50 billion— one eighth of all Soviet retail sales. That's the equivalent of adding the top ten U.S. retailers— Sears, J. C. Penney, Safeway, K-Mart, 7-Eleven, and the rest— to the U.S. retail market in twenty-four months, a not insignificant feat.

After a shaky start, joint ventures seem to have gained surprising momentum. The world's largest McDonald's, in Moscow, whose opening was widely covered by the American press, is only one of more than 1,200 joint ventures registered in the past two years (by comparison, just thirty-six ventures were registered in the first year). Pizza Hut has followed the golden arches to Moscow; Gulfstream Aerospace is negotiating to develop a new line of high-priced corporate jets with Sukhoi, better known for the SU-27 fighter. Fiat is building a new plant to manufacture 300,000 cars a year; Ferruzzi Group, Europe's largest agribusiness, is developing some 1.5 million acres of prime Soviet farmland. A consortium of five of Europe's largest banks has joined with Soviet partners to launch the Moscow International Bank, which will both train budding Soviet bankers and finance new trade and investment. Chevron, Johnson & Johnson, and Procter & Gamble have all begun to make multi-billion-dollar investments. Even H. R. Haldeman, Richard Nixon's former chief of staff, has turned up in Moscow, as the developer of a new hotel.

So why the gloom and the near-universal sense that the Soviet economy is "coming apart" or "collapsing"?

Between Ministries and Markets

THE FIRST ANSWER, AT LEAST ACCORDING TO many economists, is inflation. Historically, the Soviet economy, as part of its tradeoff of affluence for security, has kept not just unemployment but also inflation at near-zero levels. As Gorbachev pressed his reforms, inflation started to appear— at, to the Soviets, alarming levels.

Part of the price for having pried enterprises loose from central controls and demanded that they become profitable immediately is that, given their giant size and their control of industry, they are quickly learning to behave the way John D. Rockefeller and the Standard Oil trust behaved. Faced with an almost endless demand for their products, they raise prices, guaranteeing profits.

But because price controls are still extensive, the inflation isn't always overt. To escape government regulators, the manufacturer may announce a "new" product, with a new and much higher price, that turns out to be nothing more than an old price-controlled model with a new coat of paint. Or it may produce the "same" price-controlled product but substitute poorer quality materials. As a consequence, Western specialists now estimate, unreported Soviet inflation has risen from three or four percent at the beginning of the Gorbachev era to eight or nine percent today.

Soviet TV and newspapers, liberated by glasnost, are filled with stories about these rising prices and their consequences. In late 1988 Soviet soapmakers began to shift from low-cost to higher-cost brands, as Gorbachev's new economic ground rules came into play. Consumers in response began scooping up the lower-priced soaps, fearing an impending shortage. As the shortage then naturally emerged, they turned to any soap they could find— and Moscow found itself faced with the howling resentment of citizens who couldn't find soap at any price on the shelves. Rationing was instituted, striking Soviet miners made more soap one of their demands, co-ops were discovered selling soap at six times the regular price, and doctors in Tadzhikistan reported patients whose tiny homes were so full of stockpiled soap that the inhabitants were suffering allergic reactions.

Repeated hundreds of times over, the great Soviet soap crisis illustrates the dilemma now facing Gorbachev and his economic advisers. The economy is caught part-way between the old command economy and a new one meant to respond to market signals and consumer demand. But inflation isn't the only problem Gorbachev must confront: by forcing reforms that have loosened wage and profit restraints while maintaining still-extensive controls on prices, Gorbachev has created an unprecedented deficit crisis. In effect he has become what some economists once upon a time charged Ronald Reagan, that other great economic reformer of our era, with being: a "turbocharged Keynesian." The deficit rose from 14 billion rubles in 1985 to nearly 92 billion last year. A few years ago the U.S. deficit approached seven percent of GNP; the Soviet deficit now tops nine percent.

But the deficit, like the inflation, has a peculiarly Soviet cast to it. The economy has reached a midway point between a Stalinist past and a Gorbachev-envisioned future. As enterprises have boosted profits, they have also paid out higher and higher wages— well above what would be supported by gains in productivity. Last year, for example, Soviet incomes rose 13 percent, an average of $800 per household. Designed to buy a measure of social peace as the economy is re-structured, the increases have achieved the opposite. They outpace the production of goods, and workers with more to spend sweep goods off the shelves; the government, unwilling so far to decontrol retail prices, must pay more and more in subsidies for food, housing, and other fixed-price goods. As a result, the deficit rises.

What Gorbachev Must Face

PATRICK COCKBURN WAS the Moscow correspondent for London's Financial Times from 1984 to 1988, and reported regularly on Gorbachev's first three years in power. He left Moscow to spend a year as a Carnegie Endowment fellow in Washington, where he continued to follow Soviet developments. He has since returned to the Financial Times, and reports from London. Like many others who have watched the Soviet leader at close range and then spent time in Washington, he is constantly surprised by the wide mood swings in American opinion.

"What you must realize is that Gorbachev, each time he reaches a roadblock, raises the stakes," Cockburn says. "It doesn't matter whether it's with the Politburo, the Party, or the bureaucracy— or you Americans. It's important to understand that all the while you were preoccupied with his conservative opposition— Ligachev and the Brezhnev holdovers— you seemed not to realize that whenever he was weak, his opponents were weaker. In 1964, when Brezhnev and Kosygin took over from Khrushchev, it still was plausible within Soviet leadership to think that the system was basically sound and just needed some tinkering with. Twenty years later no one believed that."

Today, five years into Gorbachev's reign, Cockburn believes that what was true then is even truer today. The Central Committee is almost entirely of Gorbachev's own choosing, and more than three quarters of the Party and government leaders down to the regional level are new. His ability this spring to force the Party to renounce its seventy-year monopoly on power, Cockburn says, and to press through sweeping new powers for himself as President are dramatic symbols of Gorbachev's secure position.

When Ed Hewett, the Brookings Institution's Soviet-economy specialist, and John Hardt, of the Congressional Research Service, try to look into the Soviet economy's future, they see not so much a general collapse as a series of distinct problems that seem more manageable to Western economists and business people than to the Soviets, because of our familiarity with them. How quickly the Soviets can become familiar both with the problems and with solutions remains for Hewett and Hardt the real question.

"Right now," Hardt says, "I think Gorbachev's problems are twofold: first, structural bottlenecks, and second, managing the financial crisis he's in." The energy and transport systems are the bottlenecks that give Hardt the most cause for concern, because of their effect on everything else. Last year's coal-mining strike held down performance in the rest of the economy, and by late fall even prompted concern in the Western press about a winter disaster— a disaster that didn't happen.

The transport bottlenecks are just as acute. The Soviet economy relies much more on its rail system than Western economies do, and the system is beset by problems— last year rail tonnage actually fell by two percent. The near-record harvest placed heavy demands on the system, as have rising Soviet imports, which end up waiting weeks at ports while rail officials search desperately for trains to move the freight. When conflict broke out last year between Armenians and Azeris, it tied up more than 10,000 rail cars, which in turn caused breakdowns in the system nationwide.

Financially, what both Hardt and Hewett fear is inexperience among Soviet officials, who for decades have lacked the opportunity to develop either the intellectual framework or the practical experience for dealing with inflation and deficits. At the international level Soviet traders and financial officials are "world class," according to Hewett, but their expertise has yet to filter down to domestic officials. Meanwhile, Hewett describes the Soviet economics profession as being in "full chaos," as it attempts to absorb almost overnight macroeconomic traditions established over a half century in the West.

Taking the Next Step

LATE LAST NOVEMBER, WHILE WESTERN EYES watched democracy galloping across Eastern Europe, Mikhail Gorbachev took a second giant step toward turning the world's oldest communist regime into its latest social democracy.

Leonid Abalkin, the Deputy Prime Minister for Economics, rose to address 1,400 of the Soviet Union's top managers and economists in Moscow's grandiose Hall of Columns. Standing beneath a scowling bust of Vladimir Lenin, he presented what the Financial Times has called "the most radical document on the future of Soviet economic reform yet to emerge."

"We have become convinced," he declared, "that there is no worthy alternative to the market mechanism....It is also the most democratic form of regulating economic activity . . . ." There was no choice, he said, but to move toward a consistent denationalization of the entire Soviet economy.

Over the next five years (anticipating this year's debate on the forthcoming thirteenth Five-Year Plan), he said, the Soviet Union would have to accept:

  • New forms of property that include not just the nascent co-ops but also long-term leasing by managers and workers themselves of what are now state enterprises, stock ownership and a stock market, and wide-ranging smallscale enterprises.
  • The liquidation of money-losing factories and farms, deep cuts in defense and large-scale investment projects, and long-term leasing of agricultural lands to farmers, with the right of inheritance.
  • The creation of a full-fledged banking system, the use of credit (rather than central planning) as a means of macroeconomic adjustment, and the introduction of anti-monopoly laws to break up concentration in industry.
  • The removal of subsidies, the release of enterprises from ministry-set pricing, and further encouragement of foreign trade and investment, including the creation of free-enterprise zones and, eventually, full convertibility of the ruble.

Abalkin left little room for doubt about what all this would mean. "The diversity of forms of property, their equality and competition, is the fundamental condition for the economic freedom of citizens," he told his listeners. No one in the room doubted that Abalkin spoke with Gorbachev's blessing.

Some Western observers have taken to calling the Abalkin speech the beginning of stage three of perestroika. Stage one, Gorbachev's first year and a half in office, served as prelude, a chance to test Andropov's ideas and to consolidate power. Stage two began in mid-1987, with the rash of legislation on enterprise management, cooperatives, and joint ventures, and was Gorbachev's true inaugural as the Soviet Union's most radical reformer. It also taught the Soviet President that to achieve his goal of making his country an economic (as well as military and political) superpower, legislation would not be enough. The corruption of the Communist Party, the entrenchment of the bureaucrats, and the disillusion of his people had gone on too long for policy measures, however far reaching, to achieve his goals. And so there would have to be more.

Looking back over the past two years, the outlines where Gorbachev is headed are clearer. If the Party will not change, the Party no longer has a right to monopoly power. If the centralized ministries and plans cannot promote growth and prosperity, then the time has come for the enterprises themselves— the workers and managers— and local officials and leaders to take charge of their own destiny. If the isolation of the Soviet system from world trade and competition has retarded the economy and distorted its parts, then the Soviet Union must open itself to the world, and learn from it and grow. And if superpower confrontation and the Cold War, the domination of the restive nations of Eastern Europe, and foreign adventure all have done nothing but impede the Soviet Union in its quest for its rightful place under the sun, then they too will have to end.

This year the economy will be shaken again, and likely won't show much, if any, growth. But in the midst of such enormous restructuring, it probably shouldn't. No one— least of all Gorbachev— seems to think that the next steps toward economic reform will be easy, since so much needs to change. But with no effective political threat in sight, Gorbachev has the room to keep moving forward. And his advisers have for the first time given him plans that offer real hope of success.

Will they produce the "world-class" Russia that Gorbachev has always said he wants? Not without further steps and even then, as Abalkin acknowledges, not until after the century's end. Will the economy get worse meanwhile? Quite possibly. As government controls loosen prices will rise. Closing inefficient factories and farms will mean unemployment. Gaps between incomes will grow. But five years after taking power Gorbachev seems as determined as he was at the start to follow this course, to bring the Soviet Union to the edge of the twenty-first century with a refined sense of both greatness and power. How he succeeds will affect us all.

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