A party line economy

James J. Mitchell

August 21, 1991|By James J. Mitchell

*TC PERESTROIKA, the slogan Soviet President Mikhail Gorbachev used to describe his economic program, means "to rebuild."

Nonetheless, Gorbachev's economic policies mostly involved tearing down the country's centralized planning system -- and not replacing it.

That's the major reason the Soviet economy has done so poorly in recent years. And that performance is one of the major causes of Gorbachev's removal from power Monday.

The Soviet economy "is in a no man's land," says Edward P. Lazear, a senior fellow at the Hoover Institution and an economics professor at the University of Chicago Business School. "It used to have a strong central structure that worked, in part, through intimidation."

But after Gorbachev introduced glasnost, or greater openness, and perestroika, the power of the central authority greatly diminished. And when Gorbachev didn't replace that central authority with market incentives, the economy broke down, Lazear says.

Under the old system, managers had a strong incentive to work hard to fulfill their part of the country's economic plan: promotion in the Communist Party. As the party declined in stature and power, "the incentive mechanism deteriorated," says John Litwack, an economics professor at Stanford University.

The last two to three years have been especially difficult for the Soviet economy, which "is falling apart at an accelerating rate," he says.

Litwack estimates that the country's economic output declined at an annual rate of 20 percent in the first half of 1991, 6 percent to 8 percent in 1990, and 1 percent to 2 percent in 1989.

Inflation, hard to estimate because many prices are controlled, has been from 30 percent to 60 percent a year in many key commodities, says Ilya Prizel, an associate professor at Johns Hopkins School for Advanced International Studies.

Any transition from a planned economy to a market economy is difficult, as the experiences of East Germany, Poland, Hungary, Czechoslovakia and Romania indicate. But each of these

countries seems to be making more economic progress than the Soviet Union, which has several disadvantages:

* It's so much larger, and its economy is so much more complex, which makes it more difficult to introduce a new economic system.

* It has been under communist rule longer. As a result, more serious economic mistakes have been made, and the skills and attitudes needed to make a market economy work are scarcer. Unlike the Soviets, "the Polish people know how to count money, to make money," says Yuri Medvedkov, a prominent Soviet demographer who left the Soviet Union in 1986 and is a geography professor at Ohio State University.

* It has stronger regional differences. When the central government was powerful, it was able to force regions to cooperate. But now, the inter-regional flow of resources has broken down, Litwack says.

* Much of the country is in Asia, untouched by "the legacy of Europe," Medvedkov says. As a result, many Soviets are not familiar with such concepts as local decision-making. They depend completely on the central government for direction and do not use any initiative. They also don't understand what a market economy is.

Despite these problems, the Soviet Union eventually will need to convert to a market economy. But that may not happen soon.

If the leaders of the coup retain power, they will probably try to restore the command economy. While that may work in the short run, it will only mean that the Soviet economy is less competitive in the long run. And no Soviet leader will find being less competitive an acceptable choice.

James J. Mitchell is a columnist for the San Jose (Calif.) Mercury 1/2 News.

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