SOVIET ECONOMIC TRANSITION: GETTING FROM HERE TO THERE (SOV 90-10029)

Created: 6/1/1990

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Soviet Economic Transition: Getting From Here to There

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Soviet Economic Transition: Getting From Here to There

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Soritf Economic Transition: Ceding From Here to There

This paper isoordioatcd Directorate of Intelligence product. Itpeculative paper that reflects ihe viewj of its author, which were developedontinuing Office of Soviet Analysis seminar on the Soviet economic transition problem.

We have attempted to analyze how the Soviets could convert their existing economic system into st market system, including establishing freeand widespread privatemajor preconditionsarket system. Our purpose was to improve our understanding of the problems Moscow would face inransition and to provide another perspective on the ongoing economic reforms in toe Soviet Union

We believe that the plan we present addresses the major issues that the Soviets would have lo face in transforming their economic system. However, actual transition would be unlikely to proceed according to the sequence of steps presented in this plan or any other. Real life would involve numerous missteps, delays, and feedback effects that would require considerable tactical maneuveringinimum.

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Soviet Economic Transition: Getting From Here to There

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of the Soviet economy, in our view, depends on transition to an economic system in which free enterprise exists and most of the economy's assets are held privately. Although Moscow has not yet framed tbe issue in these terms, the severity of its economic problems is increasing the pressure to do so. To better understand the challenge that transition would pose for the Soviets, we have attempted toet of policies and reforms that could help them make the conversionarket system.

The Soviets could take many different pathsarket system, but they all mustajor role to privatization. Two basic approaches are possible: Idling state assets or making pants of them at no cost. We favor the grants approach primarily because it would sidestep the bureaucracy, local authorities, and othersested interest in tbe existingoviet decree passed8 that allows sales of state apartment, to tenants, for example, has had virtually no response, in part because ol* rein lance from local authorities. On tbe otherrants program, accompanied by widespread publicity of its basic provisions, could enlist the public's participation and power to offset tbe resistance of officials.

We argue that rapid privatization Is vital even though It might produce Urge disruptions initially. It would minimize the opportunity cost, of maintaining the existing economic system. These costs include thedeterioration of the economy, as well as longstanding problems of maiiivc waste and misaUocntion of resources. Rapid transfer of property rights from the state to citizens also would quickly give thetake in the new system and reason to hopeetter future

Our transition strategy would have two stages. The first would focus on market liberalization, whereby legal conditions would be established thateconomic activity, subject to reasonably low taxes and some basic restriction. Moscow could quicklyegal framework for business activity by adopting the uniform commercial code of West Germany or another country whose legal system hasith the existing Soviet system. This would save the large investment required toew code from scratch

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Stage two would focus on making grants of state assets to Soviet citizens. This could be done through legislation (or decree) that quickly provided clear title to state apartments to their current tenants and dear title toand farms to their current managers and workers as collective units .Omr title would Include ike ownership righi afright to sell assetsrice mutually agreeable to ihe owner and the buyer

The collective units of managers and workers would then be authorized to determine whether (be assets should continue to be held collectively or distributed to individuals. The government could provide ownershipmodels for guidance purposes. One model would be based on issuance and distribution of* transferable shares to members of the collective. Another might be based on sale to ainvestor, with proceed! of the sale divided among members. The final decision, however, would be up to the collectives thernsdves.

Tbe law also would provide for grants to Soviet dtir.ens not employed at enterprises or farms slated for privatization. Pensioners, for example, could be assigned to their former place of employment and provided the same rights as current employees. Others, such as housewives, public employees, or employees of industries remaining under state ownership, could be assigned to one of the enterprises or farms being privatized, accordingottery system. They could receive cither the same rights as an employee orartial set of them.esult, almost every adult would participate in the program, which should garner widespread support for ii

The transitionarket economy would drastically alter tbe nature of governmental responsibilities in the Soviet Union.esult ofthe government's present extensive rote in organizing and directing economic activity at the enterprise aad farm levd would become redun> dant. Consequently, tho ecooooaic ministries could be abolished, as well as tbe state committees for planning and pricing. At the same lime, the government could focus on building new institutions, including agendo charged with administering tbe tax system and the banking system.

New social welfare institutions also would be needed, especially to deal with increased unemployment Privatization would produce strongincentives that would result in layoff* of extra workers. Emergence

,|WfRSE BLAiyi

arket system would stimulate ihe closing of obsolete or redundant plants and farms, which also would release labor into Ibe unemployed ranks. Many other workers might have to settle for reduced wages.'

The prospect that tbe Soviets would actuallytrategy like the one we have developed is probably remote in tbe near term. While thereonsenius among the leadership and most Soviet economists that the current economic system should be abandoned, there is much lesson what tbe new system should be. Nevertheless, the last five yeanear evolution in tbe reform process toward giving privatereater role, and this irend probably will continue.'

Comenis

ScJpeNote

iii

Options

for Transition

Political Changes

a Sound Currency

Mcau of Transition: Assigning Private Property Rightsassive Scale

arket Liberalization

II: Trarttfer of Stain Aweis

Governmental Challenges

Western Role in Transition

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Soviet Fxonomic Transition: Cc tints* From Here to There

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President Gorbachev, seeing the prospect of economic ekdiac "hen be assaulted power, quicklyrocess ol refoetn in an attempt to rectify the problem After five years, however, the reforms has* not only faited to achieve their aim bul have also contributed to the ditariay that now characterizes the economy. In so doma. they bate rcplicaied tbe record ofreform attempts id the Soviet Union assd other socialist cwxairies '

Nevertheless, Gorbachev also hasntuition process that basomentum of its own. Glasno.it. the political reforms, and even theincreasing- disarray have eoatrlbuted todeep discrediting of ibe existingocue system Aseems to have emerged among tbe leadership and Soviet economists that tbe system Is deeply Hawed and must be changed, but there is much leu agreement aboul ihe definition of the new system Meanwhile, ideological and public opinion- including those against priviie economic sctiviiy that teemed unbreakable even one year ago arc loosening and could be significantly relaxednort time, as is happening In Eastern Europe

Soviel Optioas

Economic history indicates that Moscow's options forew economic system are strictly limited. To put its choices In their simplest terms, we believe ibe Soviets must decide between preserving thesystem of slate ownership oi most of therecs or movingn economyredominant private sector

Refoim economists in tbe Soviet Union and in oilier socialist coo nil ics have argued that tbe choice is not between slate ownership and private ownershipthe;pre^iosed "market socialism'*hird way, which combines stale ownerilnp with

maikcti. According to thia view, markets will develop to guide enterprise tnaaagen, much as they do in Western ecooomies. if centraleplaced by enterprise mi eager* making iter own input and Output decisions '

This system, although appealing in principle, hits not worked in practice. In particular, proponents of Ibis system appear to have greatly underestimated the persistence of govern ovenccliol of the economy under date ownership. Tbey also have ignored the essential role performed by private ownership of capital and land in deleirnioing market paces for these resources and therefore for other goods at well.

Hungary's experience wltb market socialismthe futility of attempting to debureaucratiie an economy while maintaining state ownership of roost resources.1 Hungary abolished ccairsl ptinnmc and gave enterprises lb* formal authority to make their own production, sales, and investment plans. As de facto owner of most of tbe economy's resources, however, the central bureaucracyits power to appoint and promote enterprise managers. Managers continued to owe theirprimarily to tbe ocatcr rather than toMoreover, markets for capital goods and land could not develop because these assets remained almost entirely under state ownership. Although ibe role of market forcesarket system could not emerge.

The Hungarian experience does not, to be sure, prove that the Soviet Union could not apply tbe market socialism model successfully. We believe, however, that historical evidence as well as economic theory strongly suggests that, in attempting to introduce market socialism, the Soviets would run inio the same problems as the Hungarians.

Poland end limitary, after years of pursuing market socialism, have openly taid that this waa waated time and (Jul Ibe aim of irannuoo shouldestern-ttyle market economyroaoounani private tector. Some Soviet economists and reformora arc now maboi similar arguments.

We believe thai, like Poland and Hangary. Moacow alao will eventually have to cboote between economic Stagnation or decline, or nyovemenia: g< I) private ownerthip system. Tbe end point of transition mightixed economy resembling many of Ibcie in Western Europe and eiiewhere. The ttate would maiotaia owsxrassip of railroads, the telephoneoul.tics, and other "nainraJase for stale owttership can be made, but the rest of ibe economy would be in private bands. Moscow has not yet framed ihe issue in these terms. Nevertheless, tbe discussion we present betow examines policies and measure* It could follow toarge private sector, if it were to pursue this aim.

("rrceod,Mas foe Traadrsoa

irit step in atteeopungtraiegy for economic liberalization and transfer of state assets to private ownership in tbe USSR, we have examined some key political and economic condition* that could set the stage fortrategy. This approachseful way to think about some of the many issues involved in transition. We do not believe, however. Out tbe process must proceed ia tkit fashsoa to succeed There arc numerousand many different paths would be possible

Major Political Cbaages

Communist domination of tbe government represents an important barrier toarket system, since Communist ideology is builtoral reactionrivate property. In addition, tbe power base Of party and government elite* largely derives from stale ownership and both groups will resist dcvtJoonsentarge private sector oa this count as

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President Cortsschev* democraUatsoD ilrttegy has resultedharp diminisha the political power of the party apparatus ia favor of govern merit matilutiofsi.trengthened pretidency, and Ihe repeal of the party, constitutionally mandated leading role all have sored to reduce tbe party'a posiiion. Moreover, grassroots demands for greater democracy have prompted the recent retirements of party officials la Volgograd. Sverdlovsk, and other provincial centers How much furtherrocess would have to proceed before Communist party power would no ledger constrainncertain, but Gorbachev ferns intent on further limiting lac party's role.

Getting Really Radical

Iji'ua Fiyazhevuoviet reform economittWestern economics for many years. Sheon the scene of Ihe economic reformprobably ihe most extreme views yetihe Institutional and policy changes requiredFor several years she published underbut9 has begun using herviews are

Increasingly finding resonance In ine USSR.

fiioifcevo advocates wide-state privatisation of own-ershlp of the means of production and land In all regions of the USSR, ihe abolition af central planning organisation and economicrogram for protection of private businesses, and slow growth af the manly supply, hi or cover, the has strongly eriti-cited ihe government's curves* economic planby Leonid Abalkln. Chairman of the Slate Commission for Economic Reform Plyasheva views this plan as largely comprising half measures andransition tokingdom af new todelUmecond wind.According to

elieves that the net! round of reforms could Include her Ideas.

The public* views toward private property would be an important factoreaden hipva-tiratina Glesnost baa underscored tbe many flaws of central planninj and has dooc much to pemiade populai opinion of the need for reform. The debate on property rights and new legislation on property arc also increasing the pubuc'a awareness of these issues. The increased access of tbe population to information on living standards and working conditions in West-em private enterprise economies mav be tlrongty influencing public opinion as well

The results of Soviet cewaon polk have to becarefully because of possible methodological problemi. Nevertheless, aome indicate surprisingly

strong supportystem based onee-ihip and markets. If Poland or other East European countries make significant economic gainsublic support for private property probably will grow.

Another important facto* influencing public opinion toward privaluaiioo will be tbe state of tbe economy is the neat few years Poland, forow engaged ia implementing radical economic measures following at leastears of poor economicworsening conuptioci, and expansion of the underground eccaomy.arge fraction of tbe population wai engaged ia the private sector, aad many ol theme who were not to Involved had probably concluded that preserving state ownership was useless According to official Polish data, private-sectorrepresentederceni of personal money incomeut one Western analyst estimates the actual figure atoerccQt after taking account of tbe underground economy and making other adjustment! to the official data. Such developments helped to create widespread public demand for radical changes. Tbe Soviet economy may have to follow the tame path as Poland before publiceady to accept the hardship* ol dismissing stale ownership and movingatket tyslem

USSR: Result*diasHNevrsoigtil PoB Concerning Approval of Priiat* Ownership

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The Soviet etcooeny cHticntly facet substantial lofta-tionary pressure brought on In large measure by high budget defidu (uningbe deftciu have caused ibe money supply to grow rapidly ia compart-son with ibe naVame of goods and aervscea We estimate inflation for consumer goods and services9oercent. Rapid money supply growth also has resulted in ihe accumulationarge stock of nibses by bouseholds and enterprises, since tbe administered price system bat prevented full adjustment through inflation This overhang ofpower baa cootributcd to shorts tea of coo-sornrr goods at state stores, barter, rationing,and expansion of the underground economy. Consequently, tbe ruble Is losing its ability to serveredible means of exchange

The weskr.ess of the ruble would complicatea large-scale privatization program. Inthe excess supply of rabies probably meant that,ransition per kJ. newly private enterprises would be able to charge much higher prices than those currently fixed by tbe state. If so, the population would tend to blame the private sector for cbaiiiag higher prices, even though the outmoded official price

structure and errant fiscal and monetary policies would ultimately be at fault Tbe political backlash could Kopardire the privatization programmajor initiative for esvcoBfaging pruneactivity reooperalive" private businesses)has faced substantial criticisms for bringing high prices, and. in response io these criticisms, new restrictions on the cooper at-re* have been imposed try tbe central authorities

Given the potentialacklatb. it could be argued that Moscow should reduce the real amount of rubles in the economy before embarkingull-scale privatiration program. More important, by the tame reasoning, tbe budget deficit should be reduced, lincc it ismajor cause of the rapid growth of the money supply Tbe problem, however, is that the poticse* most widely proposed lo achieve these goals also risk popular unrest, directed at the central government:

Under case proposal, centrally administered prices would be raised highpercent increases have been suggested as rseoetsary--so that balance is restored between tbe real money supply and the

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Moscow's but option might bo to raise prices, but to 1 oariety of means so that ibe responsibih Ity for inflation is parceled outumber of actors. For example, the government could increase the range of goods sold in retail stores at market prices- Moscow could abo tolerate increased price hikes by state enterprises and Implement some official price increases from the center, including those on heavily subsidized food items.rivatization strategy would complement this approach, since new private enterprise! charging high prices abo would absorb some of the blame for inflation.

volume of goods and services in the economy. As part of this policy, consumer subsidies abo would be reduced, which would cut the budget deficit and the growth of tbe money supply. These steps, however, would risk popular reaction that focuses blame for the price hikes on the government.

tbe -money reform- proposalthat Moscow shouldarge portion

'of the outstanding supply of money in Ibe economyurrency exchange, in which old rubles would have to be exchanged for new ones at adverse rates. Moscow apparently has considered Ibb option but has rejected it because millions of small savers, as well as those with Urge holdings, would have to suffer losses to make the policy effective

Thereo painless solution that can resolve ihe budget deficit and the ruble overhang problems.'

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Moscow has proposed measures in tbe last year that would result in more Rate goods selling at market prices. In January the government attempted tothe existing system of auctioning consumer goods, and in9 Leonid Abalkin,of the Slate Commission for Economic Reform, indicated that prices on fruits and vegetables would be completely decontrolled. Other similar measures probably are under consideration, includingew tier of retail stores thai would sell goods at close lo market prices. Moscow alto has raised prices for some key goods. The price of gold jewelry was increased in January byercent, and Ihe price of bard currency for Soviet travelers was increased byimes in9

The Means of Transition: Assigning Private Property Rightsastlie Scale

Transforming an economic system based on state ownership to one based on privateerculean challenge, unprecedented historically. The revolutions in Eastern Europeowever, have madeeal issue ratherheoretical one. Poland. Hungary. East Germany, and Czechoslovakia all have indicated an intention to privatize.rowing number of transition plans are being proposed both in the Easl and ihe West.

The privatisation strategy outlined below for (he USSR lake* account of tome of Lbetc plans, but goes beyood thetnumber ofIa particular, tbe stra testy we present give* much higher pnonty both to sidestepping the bureaucracy and to rapid

engage. Theolihely to everositive view of privalira lion and Indeed is likely to be

ebsiftrategy that recpiirea bttlcor ao

support from the bureaucracy therefore tsould have a

much greater chance of success.

A faat pace of change would mini mire tbe cppottut-iii costs ol* maintaining tbe existing system. These costs include the continuing deterioration of ihe economy. as well as longs landing problems such as massive waste and nusaUocalioo of resources. Rapid change alao aould quickly give thetake ia tbe rev. system and reason to bopeelter future, despite laltial hardship*

In developing our privaiiiaiioo Strategy, we also were guided by several other considerations'

The Soviet population probably includes anumber of would-be entrepreneurs,m bet of workers arc likely tonotproperty and private hire of labor, given the opportunity to earn higher real

It-.ejee Problem!

Homy rnierprises In the Sortel economy ore exclusive producers of goodsesult of decades of central planning Consequently, privailiailon of suchwould grant the new owneri and manager! lubitanilal umonopoly power

However, the problem of monopoly power Is often overeitlmaied. In our view, because other Important lourtst of competition are overlooked, and theI of monopoly power are discounted. Other tourers of competition Include the foreign lector, consumers' ability to lubitltute one good for another,change, and the prospecs that high profit! will attract new esurantt Into the monopolistsajor benefit of monopoly power is that largeprofits provide firmi with financial resources to modernize plant and equipment, carry outand expand capacity. Such resources would be In short supply If the government tightly restricted credit issuance and Investment subsidies as panolicy to curb Inflation and cut the budget deficit.

imniing, antitrust, and stock market institutions that hive developed over decades in marketre not essentia] for tbe tiansitioaureaucraticarket system. In out view, these are long-term resultsystem of private property rights and market coordination -not causes of, or precocditkcsarket tysiem.

The likely presence of powerful.monopolies among newly privatized Soviet enterprises, althoughegligible problem, need notritical Humbling, block to the economy's privatization

We have outlined two stage*rospective prtvati-zatioa program, constatingequence of step*iberaliic Soviet markets) turn over stale

assets to private owners

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The objective of the first stage would be to free individuals to set up businesses and makesubject only to reasonably low taxes and basic legal provisions concerning commercial coo tracts, workingollution and, for tome goods, minimal quality standard! Major change* La tbe constitution of the USSR could be enacted to guaraa-tee rights of private property, free enterprise, and other cavil rights. Moscow could quicklyomptehensire legal framework for bustacss activity by adopting tbe uniform commercial code of West Germany or another country whose legal system hat parallels with tbe existing Soviet'r-.n-

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1easure* would allow merchant-entrepreneurs lo establish Hiding businesses and also would provide the basis for priviie emerprism of all Imds.'would createretail andnumerous new distribution cliaonels would be formed. Al ibe tame time, although most credit and resource! would still be under state control, many other new enterprises could (till be created that would need only minimal inputs. In particular, manycould be formed to provide services toand state enterprises, with an initial investment of not much more lhan tbe entrepreneur's org.ini rationalroup of skilled workers, and basic tools and equipment

f private trade in foreign exchange would facilitate at least some growth of foreign trade and join! ventures- The opportuniiy to purchasegoods, even at extremely high prices in domestic rubles, would produce strong incentives for Soviet entrepreneurs sndoreover, imports wouldey source of competitive pressure, of importance in ihe second siage of privatization, when stale enterprise* with signiAcaat monopoly power would be turned over lo private owr.en

Slag* II: Transfer of State Aaaets Tbe second stage of privatization would consist of Ihe actual transfer of itale aaaets to private citizens. This would represent an immense political and ceorsomx challenge. In ibe United Kingdom during.

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Km tie Convertibility

In many countrirt. convertibilityurrency Into foreign exchange It restricted by government controls. These controls are often meant io restrict the outflow cd domestic capital, produce government revenue, or influence the mix of exports and Imparts. Within ihe country's borders, however, domestic currencycan be widely used lo purchase goods and services. In these coses, the posh to conreriibility ulargely consists af eliminating exchange controls, often in conjunction wlih reiningudget deficit and flowing the growth of tht money supply.'

The situation Is much different in ihe USSR, since the ruble locks convertibility in the domesticCentral administrators largely dtltrntint iht distribution of productr goods among enterprises on the basis of plans and Issuance of official per mill, not rubles. Similarly. Il Is currently illegal lo buygoods for malethers, and raiionlng of consumer goods It widespread

The key condition for convertibility of 'he ruble Into foreign exchange Is therefore first making the ruble convertible Into domestic goods and services. This condition would be partially met Ifactivity were liberalized. Foreigners, as well as Soviet citttens. would be able io freely purchase goods and services from the expanding private sector. Foreigners would need lo exchange their currency for rubles,arket for rubies would emerge.

The ruble would be only partially converlible since It still could not be used la purchase goods and services from the predominant siate lector Full convertibility

would have to wait on the transfer of state ainti to the private sector Ittagt II)

Prime Minister Thatcher soldtale-ownedto the private sector, but even this was aBy comparision. the Soviet economy hasenterprises and more0 statefarms. There also are scores of thousandsconnection, trade, and service enterprises.

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There arc basically two mechanisms available'juiion. uIq and crania (distribution al noure sale* approach would distribute stale assets to the highestore (ranis approach would

distribute assets for free on tbe basis of noo economic criteria. Many variations of these mechanisms would

be potaibtr. including torn* that acanbute tbe two

Under tbe talesovernment agency would probably be needed to organire and guide tbe program. Assets would need to be appraised, shares would hare to be (stood and sold, auctions might be needed, and financing miglu need to be arranged Poland, ia its transition plan, calls this the Office of the Plenipotentiary for Ownership Transfers.plans to call this body Ihe Stale Property Agency

However, governegulation probably would mean drawing out the processumber of years,

when speed ii very important. Tbe planninglocal authorities, and others withvested interest in the custiag system would be unlikely to stand aside and let aalea occur without theirThe problcmi of valuing state assets andsales are both complex and linve-eonsuming issues, as shown by ihe history of privaii/alion In Ihe United Kingdom and elsewhere Moreover, tbe salesprobably underestimates the abiliiy of the

nd others to enncb themselves through rnanipulaiieg tberoblem that Hungary and Poland already have eapeiierKcd.

haveariety of meanshistory to grant state-owned property to citizens. Most of these cases Involved land. Assignment of ownership rights to tenants (land reform) and to homesteaders are examples Eeortrsmic history,offers no precedent for the Soviet privatization challenge, which would involve not only land but also vast industrial assets

Nevertheless, in our view, giving away the state'sreferable so attempting to sell them,because the grants approach would not require Ihe cooperation of the bureaucracy nor entail theof valuation and nnanong sales. Such aawould rely on widespread publicity to make the public aware of the basic provisions of Ibeand then largely allow the populace itself toote provisions out.

For slate-owned enterprises and faaw (or government decree) would state that, asertain dale, clear title tottalcaaseuirm are to be given to the managers and workersollective unit CIior till* would Include ihe ownership right cdright lo sell assetsrice mutually agrteable to the owner and thei would iben

be up to tbe collective to determine whether the assets

should continue to be held collectively or dbtributcd in some form lohe law would specify

strict guidelineshe decisionmaking peocesa (for

example, one person /one- vote)

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Tbe government could provide (wo or ihrcc dlUeicn) ownership distribution models for guidance purposes. One model would be beted on bsuanee and dbinbu-lioo of transferable shares by tbe collective toi within (be coOectire Another night be btscd on sale lo awithof Ihe sale divided among members of the collective- It would be up to the collective* themselves, however, to cheese the model Ihey want.'

The la* aim would provide for participation by Soviet citizens ten employed In enierprites and farms alaied for privatization Pensioners, for example, could be assigned to their former place of employment and provided tbe same rights as workers. Others, such as housewives, public employees, and employees ofremaining under state ownership, could be assigned to one of (he enterprises or farms slated for prrvatixauon accordingottery system These persons could be given tbe same rights as an employee of the enterprise or farm, orartial set of them.

For hearsing, tbe stale wealdclear title al state apartments to tbeir tenants, at nouch iianilen would immediately make millions of citizens Ibe owners of private housing, foster civil locicty, and cause the developmentousing market. The zero coat not eery would avoad the peo&iem of tryingalue stale apartments, fast abo woaid take account of ihe very low rents that tenants currently pay. Many tenants would have link iniercst in borrowing to buy an apartment, sinceow sales price ecu Idortgage payment 'bit exceeds rnonlhly rentactor of two o> more

Under this approach, almost every adult In thewould become an owner of assets, although ibe mulling distribution of wealth surely would beHowever, snyound to be unequal. Moreover, Ibe majority ol the population might find ibis approach fab because il largely

'OiSwig

awaaal aak Sow hwtaia. al

tbe iniiiiiM trial

wertcn Dufhi to beibrir aptnmrau Irn.be iwsi

dflieiil lacWaiienhixibal lurkU ladci spaaideraiaafi

amounlsiantn individual's gains would basicallyailer of luck, depending oa where one happens to live and be employed, as wed as on the value of the assets after the emergencearket system. For example, market pricing could make the assetsundown plantonsumer good in high demand very valuable, while many heavy industry plants might emerge with low values because of low demand fee their output.'

The government's role would be largely limited to enforcing tbe guideline* on ihe decisionmakingissuing titles, and managing the tottery lysiem for those who are not employees or pensioners of privatised enterprises and farms.esult, the program could be carried out quickly. Probably *ot moreear would be reouired for cod relives to decide on. and cany out, an ownership plan

New Gaxnarawatal CttaDeage)

Tbe transitionarket economy would drastically alter tbe nature of governmental responsibilities in the Soviet Union.esult of privatization, thepresent heavy role in organizing and directing economic activity at ihe enterprise and farm level would become redundant Consequcatly. tbeministries could be abolished, as well as tbe state committees for planning and pricing At tbe same time, the government could focus on building new institutions. Including agencies charged with adminb-tering the tax system and the banking system

' li cu ba aifaeet OutawWua of OH iqhiqi inniWrmi aoaae imli-Mlaaia aaaM wn aaare niuii au-.iebon lot as abaIbaa bijgrnlin lo beumlemtio lime. Tbe ijmaaun of nfba* ibe audi,lvc theo cga

niied mwi aad blaea-marhaiaan. wbak leaving ibr lubeiantial

atarrWewith aotivl cT the picture Horroaei. >ht aaW approachcaepifiefr iba >aM onauiba-oaa the alwH popaunjan haiuitai Uaa liiaaaim of Btv aiaau ibrmat lb* iai lyataaa. laa nca. aad law balaf itiKLaida TV prvaiiaaliaaecteal reraciuaa Oat public! roll in Knaaiion of ibeec aiaeu by gaanns ibat aaaaoat eveay adult wnaldlaim of aoasa tsnd1UK aueu

4-cr-rrTilcBtial

social welfare Institutions alto would have to be formed. Tbecooomic systemarge BCCial welfare cornpooeol bated oo job guarantees, low price* for food,large lubsldic* to atate enterprises and farma. Transitionarketweald brgetj eliminate theac prorisiont, aad new one* would be Deeded.

Moreover, the raced to provide lupoort foe large numbers of unemployed wenhers could emerge Quickly once privallratioo began:

The transfer of ownership rights from (be itate to individuals would produce powerful economizing Incentives that would result in lavofTi of many workers.

The formationarket system would stimulate the ctosing of many obsolete or redundant plants and farms. Just as many workers in heavy industry in Western economies have bad to move to new jobs, so would many Soviet workers, although the scale of employment shifts reouired wculd undoubtedly be much greater.'

Finally, tbe abolishment of economic ministries and other aacocica would retail in the layoff of many government' workers.

In response, the government couldystem of unemployment benefits. Tbe Supreme Soviet already Itraft law on employment tha( calls foreeks of unemployment benefits and provision

of an "employment fund- that would financeof job vacancy Information and retraining. How-

ever, benefits could be very low, given the need to

restrain government spending and tbe many workers

that may eventually need aid.

Inflation also would probablyeature of tbe transition period. Pnvviiions such as indeting ofand rationing could be made for penaioeisert and others dependent on feted Uvrcene*

* Labor BMbtin,eatricied by ibe iborup ofthat Miau icroaf much of tht USSR. Iloacver. ihr iini of ckar

tiiW af IU'< aeanawouhai HumiLi< UMavroaSi bwxaj mirtn ihiiftatl) cipaad 1W

cveravanilin forin -tihoal an laacne inaf hooilur

The Western Role ba Traaautioa

Moscow probably should make full integration into the world economy one of ihe primary goals of Its transition strategy. Such openness would encourage improved efhoeocy of donsettic production through We*:em investment and imports competition.would bring with them technology, management skilb. and access to foreign markets, which are in scarce supply la the USSR today. Imports would represent aa important, tource of compesiiive pressure for domestic producers and generate substantialfor workers starved for modern consumer goods.'

Under the privatization plan we have presented, some work collectives probably would choose to sell their assetsoreign investor. However, foreign investors might primarily be attracted by the opportunity to build new production facilities. Very low laborarge consumer market, and the economy* need for massive reconiimctioo would attract foreign capital and entrepreneurs from around thelong as they could gain dear title to assets, buy and sell ruble* and domestic goods and services, and basically face the same laws at cVonsestvc firms,the level of foreign interest in tbe Sonet economy would be an eicellcni barometer of liberalization

Outlook

onsensus among the leadership and Soviet economists on the definition of the end point of economic transition hat not yet emerged, the latl five yearslear chelation in the reform process toward giving privatereater role Tbe political and institutional obstacles remain huge,ecision by Moscow to focus oa large-scaleot asrospect as it teemedew years ago:

The prestige and authority of ibe Commuabl Party have declined substantially since IW.

Hi

L.iji'u'eulUI

Gorbachev has garnered substantial oewindependent of tbe party, which could allow him toough itahalizatne program and radical reforms adverse to paly ideology

Consumer market disarray and tbe decline alcoordination among industries are creating pressures for radical change.

The revolutions in Eastern Hurope are leading to tbe adoption of economic transition programs that em-pliaaiie privatization, and these prog rams arc beingn Moscoweadership virtually desperate for economic policy guidance

A number of recent signals indicate that President Gorbachev isew set of reforms: the appointment of Nikotay Petrakov as bit personal economic adviser, Gorbacbev't jnaagural speechhe intends to use his new powers to further econoemc reform, and official reportsew package of measures is under consideration There is still no evidence, however, that privatiraiion willajor clement of reform In Ibe near future.we cipect tbat inexorableeconomic, and intellectual -peobrNy will push the Soviet reform process in tbe direction of radical change, includingentral role to

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