Report to Bush, allies predicts Soviet waste of aid until economy is overhauled

December 22, 1990|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun

WASHINGTON -- A report by four major Western financial institutions said yesterday that direct aid to the Soviet Union would be wasted until the Soviets undertake the "enormous task" of overhauling their impoverished economy, which resembles that of many Third World nations.

The report was requested by President Bush and the leaders of the chief industrial democracies at last summer's economic summit in Houston. It said financial aid from the West should be confined for now to technical assistance needed to transform the Soviet economy into a market-driven system.

At Houston, Mr. Bush said direct aid to the Soviet Union would be premature while its economy remained in disarray. He opposed the urging of French President Francois Mitterrand and German Chancellor Helmut Kohl, who wanted the summit leaders to go on record in favor of a large package of direct assistance.

In a compromise, the summit commissioned the International Monetary Fund as well as the World Bank, the Organization for Economic Cooperation and Development and the new European Bank for Reconstruction and Development to assess the Soviet economy and make recommendations. Most of the work was done by the IMF staff.

The report appeared to raise questions about how far the United States would go beyond President Bush's emergency package of $1 billion in federally guaranteed loans, announced last week, to allow Moscow to buy food and the Bush proposal to let the IMF and World Bank give technical advice to the Soviet Union.

The report said the Soviet Union cooperated with the study, giving access to economic data previously withheld from release outside the country. But the Kremlin still declined to provide information on gold and foreign exchange reserves.

As its central recommendations, the report suggested that the Soviet Union "move rapidly" toward ending government

ownership, freeing up its price controls and imposing limited restraint on wages in the short run to avoid hyperinflation.

"The imperative is to make sufficient progress at the beginning so that reform is seen as an irreversible break with the past and the process gains an unstoppable momentum," the report said.

In the transition to a market-driven economy, the report said, it was "essential" that a safety net be created to protect vast parts of the population because output is likely to decline initially and unemployment rise.

To ease the impact, once the program is implemented, the report said, the Soviet Union could become a member of the IMF

and World Bank and be eligible for loans to protect the poor and jobless. According to the report, a "significant part" of the Soviet population falls below the poverty line.

dTC A central recommendation would make the ruble's value more realistic, similar to the steps taken by Poland with the zloty a year ago. The exchange rate of the ruble, like that of the zloty until it was freed, is controlled by the government.

By creating a currency with a realistic value, the government would discourage the hoarding and bartering of goods and draw more scarce goods back onto the store shelves, the report said.

Under the Polish reform, prices were completely freed while restraints were placed on wages, with the result that Polish stores are well-stocked but most people cannot afford to buy the goods.

In time, Warsaw hopes that prices will decline as more goods are drawn into the market and wages will rise as the economy becomes more efficient.

The report said that the Soviet Union, which faces a potentially explosive situation, should phase in its currency reforms and its dismantling of government ownership over three to five years.

It also said that subsidies might have to be continued for a time on such important consumer goods as bread.

Despite denials by the Kremlin that unemployment exists in the Soviet Union, the report said Soviet officials estimated informally that 1.5 percent of the labor force is unemployed.

Inflation was estimated at about 12 percent this year.

The report said the Soviets have been actively converting their defense industries to civilian production, with the production of civilian goods rising by 9 percent a year between 1988 and 1990.

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