Make the Bear Dance
SHLEIFER, ANDREI
MAKE THE BEAR DANCE BY ANDREI SHLEIFER The statistics tell a devastating story. Soviet output fell 10 per cent in the first half of this year, faster than the U.S. economy shrank in the...
...Virtually all of them will probably try their own experiments, guided more by nationalism and populism than by economic principles...
...In addition, Western leaders want to preserve a strong center to reduce the risk of nuclear weapons falling into the hands of nationalists in the republics...
...The question is whether it will be the sort of stopgap support that merely delays what needs to be done or whether it will speed up the vital process...
...Still, if the West wants to help the Soviet Union move in the right direction, if it wants to make the bear dance, it has to direct its aid and advice where they will have the most impact—namely, to the republics...
...Without Lech Walesa's commitment, the reforms in Poland would never have survived...
...How can the West get the bear to dance...
...Such conflicts would devastate the republican economies, because they are extremely interdependent...
...The collapse of the Soviet economy makes some kind of aid virtually inevitable...
...But where that proves not to be the case, Western aid might again well be the single effective weapon available, for it can be employed against any region or republic attempting to interfere with trade...
...But with the demise of the Communist Party and the KGB, the two policemen of the central government, a resumption of planning is simply not feasible...
...If still others decide that they want to go slow, that they don't mind socialism, the West can tell them to go to hell...
...they alone are capable of energizing their people...
...Aid to the republics would definitely draw more sweat...
...If one republic agrees to "risk" the switch and another does not, the West can tilt its aid accordingly...
...This means recognizing the republics as sovereign states—which is what they are called in the new Union of Sovereign States anyway—admitting them to the World Bank and the IMF, letting them have their own ambassadors, and otherwise encouraging their independence...
...The Soviet Union today has no popular leader comparable to the Polish President...
...No major Soviet politician espouses a fundamental economic overhaul as his main theme...
...One hopes that the obvious consequences of trade wars will be sufficient to dissuade even the most nationalist republican leaders from starting them...
...Optimists are predicting more severe shortages...
...This is recognized even in the centralist Yavlinsky proposal for the economic union now being debated in the USSR...
...Indeed, a Moscow stamp on an economic restructuring proposal would probably be a near-fatal blow against it...
...republican nationalists, if they could, would aim nuclear weapons at Moscow, not Washington...
...They will also stir competition for investment from Western companies, which will go to the republics most receptive to business...
...By contrast, centrally directed aid would involve endless negotiations and compromises...
...Even after the unsuccessful August coup, there is a longing in the Soviet Union for economic leadership that "will make the trains run on time...
...It is also much easier for the West to do business with the central government, given its good translators and relatively competent bureaucrats, than with republican leaders who are often less informed and economically sophisticated...
...In principle, a return to the familiar, accompanied by severe penalties for failing to meet plans, for absenteeism and for diversion of goods to private markets, could bring about stability...
...No one can be sure, of course, that the economic maneuvers the republics are embarking on will work, with or without aid...
...As each introduces its own currency, some will trigger rapid inflation or even hyperinflation...
...Several factors explain this preference...
...With ethnic tensions heating up and shortages increasing steadily, trade wars among republics are a genuine danger, especially if some liberalize quicker than others...
...If the Ukraine liberalizes its prices and Byelorussia does not, Byelorussian farms and firms will sell their crops and products in the Ukraine, where prices are free, rather than at home, where they are controlled...
...The competitive forces that aid to the republics will unleash are not limited to the largess from the West...
...That leaves the alternative prescription, a rapid and dramatic movetoamarket economy—including immediate price liberalization, elimination of government management, and privatization—as the only one that can work...
...The republics did not help the U.S...
...As conflicts between the republics heat up, and the authority of the Kremlin continues to deteriorate, economic decline is bound to accelerate...
...They would have to alter their perspectives in order to establish relations with independent Soviet republics...
...The fear is greatly exaggerated...
...As some free up prices, trade wars and perhaps hotter conflicts with their neighbors will ensue...
...Most Western policy-makers, and the world's leading lending institutions, want to provide aid to the central government of the Soviet Union rather than to individual republics...
...economy shrank in the Great Depression...
...Third, and most important, dealing with the republics will give the West far more leverage for encouraging reform altogether...
...As privatization begins, corruption and massive bashing of former officials who are likely to buy assets will erupt...
...This will put enormous pressure on the Byelorussian government to free up prices so that its people can derive full advantage from their own output...
...The whole process would at the minimum delay, and possibly derail, critical action...
...The Ukrainians will get the goods, while the Byelorussians get the worthless rubles...
...The World Bank, the International Monetary Fund (IMF), and Grigory A. Yavlinsky, Deputy Chairman of the new Soviet Economic Management Committee, have all endorsed such a radical reform...
...Once carefully targeted Western aid starts liberalization rolling in a few strategic regions, the others will have a strong incentive to join in...
...For at least three reasons, taking these steps would bring about a much faster, more complete transformation of the Soviet economy...
...As unemployment resulting from liberalization starts to rise, many republics will respond with irresponsible laws forbidding layoffs...
...When a reticent republic sees investment going to an accommodating one, it will shift into high gear itself...
...It would, of course, also hardly contribute to gradually democratizing Soviet society...
...In the same way the average American thinks he is smarter than the average American, the average Soviet republic believes it is subsidizing the average Soviet republic through trade...
...And it means trading and arranging foreign investment with the republics...
...Then there is the fact that international aid agencies such as the IMF and the World Bank are chartered to deal with countries, not regions...
...It further means negotiating both structural adjustment and humanitarian aid directly with the republics...
...Challenging production goals would capitalize on this feeling...
...Soviet intellectuals are suspicious of capitalism as well, and are quick to mention that a market revolution might be as bad as the one that destroyed Russia in 1917...
...Thus the pressure for swift marketization will never come from below...
...As the example of Polandillustrates, the shift to markets is often painful and requires considerable sacrifices on the part of a country's citizens...
...To begin with, Western leaders would like to reward the Soviet Union, and Gorbachev in particular, for democratization at home and good behavior abroad...
...Two prescriptions are available: strong planning, or free markets...
...These are severe problems that are bound to be encountered on the path to a market economy...
...To get the Soviet Union to reform, the West has to enlist the heads of the republics...
...Despite the problems, I think the West should aid the republics, not the central government in Moscow, if its objective is to foster a market economy in the Soviet Union...
...If some republics express a readiness for privatization, the West can help them achieve it...
...In practice, this implies that economic changes are bound to occur slowly, and not always beneficially...
...As a result, shortages in Byelorussia will get worse and shortages in the Ukraine will disappear...
...They want no more revolutions...
...If others want substantial foreign investment and are willing to promise the security of foreign property, the West can assist them with the mechanics of providing those guarantees...
...First, it is not the central government but the elected republican leaders who have the power and authority to propose and implement changes in their local economies...
...After all, Soviet republics do not have much else to offer the West in exchange for its support...
...Unfortunately, sentiment for the drastic approach is quite weak in the Soviet Union...
...Few will gladly suffer the deprivations resulting from a program put forward by Gorbachev...
...Like the Marshall Plan in Western Europe, aid to the Soviet republics should have as its unwavering price their adoption of liberal trade policies...
...in the Gulf War, Gorbachev did...
...The Soviet economy clearly needs a potent remedy to reverse its plunge...
...The central government is running a huge budget deficit, inflation is mounting, shortages are getting worse...
...Conditional Western aid, however, could be a po werful force for moving the republics toward the market...
...Most political leaders are either newly elected populists whose agendas do not embrace economic restructuring, or else Socialists or nearSocialists, like Mikhail S. Gorbachev himself...
...The consequent competition among the republics is certain to have a positive effect...
...But perhaps the most productive competition aid to the republics will promote is local...
...Regrettably, another possible response to competition is the closing of borders, to prevent a republic's products from escaping...
...pessimists are predicting a famine...
...The bureaucracy that continues to run the Soviet Union after the August cleanup at the top is similarly ambivalent about radical reform, in part because its privileges would almost surely be sharply curtailed...
...The West would have few options, except to bargain with Moscow bureaucrats and then with a committee of republican leaders—some of whom are prepared to move faster than others, and all of whom, seeking a piece of the same pie, would argue instead of compete for a bigger slice...
...The majority of the people in the Soviet Union remain skeptical about capitalism, too, and are reluctant to accept more hardships than they have experienced already...
...Second, working directly with the republics will give the West a great deal more control over what changes are actually implemented, because aid can be tailored to each region's needs...
Vol. 74 • September 1991 • No. 10
