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`Gorby' Messed Up; Yeltsin Cleans Up

MOST Westerners blame communism for the economic mess in the former Soviet Union.

That's true in one sense. But poor fiscal and monetary policies - the kind of measures that often foul up economies in the West - "made a bad situation untenable," says Stanley Fischer, a Massachusetts Institute of Technology economist.

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In the 1985 Soviet budget, then-leader Mikhail Gorbachev allowed a massive deficit that set the Soviet Union on an inflationary path. The Soviet central bank, which foreign economists had usually regarded as highly disciplined, began printing money in grand style, financing the government deficit and the enormous losses of state enterprises. It was a recipe for disaster.

Moreover, Mr. Gorbachev vacillated between economic reform and communist-style control. He would move to get rid of central planning, then partially restore it. He would give managers of state enterprises more authority, then take it back.

The Soviet economy had done "reasonably well" through 1974, then it slowed down, recalls Mr. Fischer. In 1987, growth in national output slipped to 1.3 percent in real terms, 2.1 percent in 1988, 1.5 percent in 1989. Next the economy began to shrink - 4 percent in 1990, 13 percent in 1991, and likely down again this year.

Why did Gorbachev mess up?

Fischer, who as chief economist at the World Bank in 1990 helped launch a study of the Soviet economy for the Group of Seven major industrial democracies, figures it was partly Gorbachev's ignorance of economics. "It was also, a reflection of every government's reluctance to do radical things when they think they can get by with partial measures," Fischer adds.

"Gorbachev never had the guts to make a clear choice," Fischer told the initial conference of MIT's World Economy Laboratory this month. Gorbachev hoped to bring about reform gradually. But when an economic system must be switched from communism to capitalism, it takes "radical" measures.

Russian President Boris Yeltsin has been "brave and bold," says Fischer. Most prices were liberalized Jan. 2, some more earlier this month. Government subsidies have been slashed. The defense budget was cut enormously. A 28 percent value-added tax was imposed on goods. And so far public demonstrations against these measures have been modest.

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But more must be done. Fischer reckons the budget deficit, about 20 to 24 percent of gross domestic product last year, is down to 7 to 10 percent of GDP now. That compares with about 6 percent for this year's huge United States budget deficit. A vital difference is that the US deficit is financed largely by public borrowing; the Soviet deficit is paid for by creating new money.

Moreover, the Russian central bank is still financing the losses of state enterprises at a rate possibly equivalent to another 10 percent of GDP. No accurate numbers are available. So the growth in Russia's money supply, perhaps 75 percent last year, will continue at a rapid pace this year. That means more inflation.

Such inflation destroys the value of enormous amounts of savings in the former Soviet Union. Russians had insufficient desirable goods to buy. So they saved.

Both Fischer and another expert on the Soviet economy, Graham Allison of Harvard University, figure that the Russian government must do more to stabilize the "macroeconomic situation." Only then would a multibillion dollar fund aimed at stabilizing the exchange-rate value of the ruble make sense. Bush administration officials say work on such an international fund is being accelerated.

Fischer hopes that by June the Yeltsin government has a "tolerable" budget deficit and thus would be in better shape to receive Western help. But Mr. Yeltsin will need to put pressure on state enterprises to trim their losses.

The US government's new efforts to put together a Western package of aid for Russia and the other republics comes "not a moment too soon," says Fischer. He worked with Mr. Allison on the "Grand Bargain" proposal made last June to Gorbachev and President Bush. It called for Western aid in return for Soviet reform. Allison would like to see a clearer strategy in the Western efforts, offering incentives for reforms. "We still have a [Russian] government which is substantially discombobulated," he says.

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