The New Soviet Plan

Ed A. Hewett

From Foreign Affairs, Winter 1990/91

Article preview: first 500 of 8,353 words total.

Summary:  Analysis of the 'Shatalin plan' to introduce a market economy within 500 days.

Ed A. Hewett is a Senior Fellow in Foreign Policy Studies at The Brookings Institution in Washington, D.C. He is also editor of the journal Soviet Economy and Chairman of the National Council for Soviet and East European Research.

Among the many conflicts in the U.S.S.R. in the summer of 1990, none was more riveting or important than the clash between Mikhail Gorbachev and Boris Yeltsin, the chairman of the parliament of the Russian Soviet Federated Socialist Republic (R.S.F.S.R.). Since last May Yeltsin has been on the attack, accusing Gorbachev of dragging his feet on the introduction of market reforms and of denying Russia its sovereignty. The demand for sovereignty has been popular among Russians convinced that their lives would improve dramatically if they could only liberate their republic's resources from the hands of Moscow bureaucrats. For other republics it was an immense boost to have Russia-the core of the U.S.S.R. and Gorbachev's power base-join their side in their battles with the central government. The call for a rapid move toward a market economy also found enormous resonance in a population frightened by the combination of a chaotic economy and a government helpless in the face of the decline of the Soviet Union.

For Gorbachev, skilled politician that he is, Yeltsin's approach and its appeal could hardly have come as a surprise. The Soviet president must have watched with a tinge of envy as his old rival used his advantage as a leader of the opposition to insist that the problems were easier to confront than the leadership supposed and, in particular, that introducing a market economy need not be painful if only it were handled well.

II

Yeltsin's message was welcome news to a population already feeling pain long before the government got around to considering a market system. As 1990 unfolded the Soviet economy was sliding downward, with no realistic prospect of a reversal. Official statistics in the spring were already showing a fall of between one and two percent of GNP, and a realistic adjustment for inflation would have yielded an even greater decline. Inflationary pressures were building as the government printed rubles at record rates to accommodate a deficit equal to between five and six percent of GNP and to allow wages to grow at about nine percent per annum-although labor productivity was actually falling. Consumer savings began to swell as the growth in wages far outpaced real output. The government estimated that consumers held approximately 165 billion rubles (equal to about a half-year's consumption expenditures) in "hot" money-so called because consumers were likely to spend it quickly whenever goods appeared. Finally, sheer governmental mismanagement, compounded by the oil-price shock that began in August, left the Soviet Union several billion dollars in arrears on suppliers' credits, leading to a dramatic plunge in the Soviet credit rating in international financial markets.

Prime Minister Nikolai Ryzhkov's government tried to respond, submitting to the Supreme Soviet in May a plan for introducing a market economy. As an economic document this was a major improvement over previous efforts. It recognized the need to create a market economy, and the approach it proposed made sense in many ways. But it was vague on how quickly a market economy would ...

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