Macroeconomic Issues of Soviet Reforms

Abstract

The Soviet Union entered the era of economic reform with very little economic reserves, and large deficiencies of both economic and social infrastructures. Early and partial decentralization reforms toward a market system failed to produce supply responses; instead, through monetary and credit expansion and a rise in wages it greatly increased the state of disequilibrium, especially in consumer markets. "Soft budget constraints" and lack of financial infrastructure added to the problems. Since 1985 also the size of the state budget deficit has expanded substantially and reached more than 10% of GNP by 1989. This was the outcome of pressures to raise expenditures, including rapid rise in subsidies, inadequate tax system, the temporary nature of some major revenue sources, and the lack of appreciation of the importance of a balanced budget. The state of disequilibrium blocks the option for an orderly reform, or at least creates the need for a stabilization program before or together with the reform. This paper rejects the option of a "big bang" approach, since the Soviet Union hasn't yet developed runaway inflation, and since the resulting open inflation is a difficult environment for a serious reform. Instead, this paper advocates a reform consisting of a one-time major change in the level and structure of prices accompanied by the elimination of subsidies; and the additional absorption of the "monetary overhang" by the sale to the public (or long leasing) of housing, land, and enterprises under a program of a credible reform in the structure of property rights.