Prospects for Economic Reform in the U.S.S.R.

Abstract

The extraordinary crisis facing the economy of the U.S.S.R. is a direct result of lax monetary and fiscal policies. The magnitude of these excesses led to the emergence of a sizable budget deficit in 1986, an imbalance between wage and price deregulation in 1988, and a loss of political control over the state budget in 1990. The ensuing shortages have resulted in a sharp decline in real national income, and a deterioration in the nation's debt and foreign trade positions. This paper analyzes the reforms that were proposed and describes the main difference between the Shatalin—or 500-day—program, and the government program. The Shatalin group opted for a loose confederation of states, a swift balancing of the budget, a gradual introduction of free prices, and fast privatization through sales; the government wanted stronger central power, a reduction in the budget deficit, regulated price increases, and slow privatization. The government line has prevailed in principle, but the economy has not responded. The budget deficit reached 20 percent of gross national product (GNP) in the spring of 1991. Prices are about to be raised, but the real (inflation adjusted) wage increase is likely to be so large that it will compound the crisis, and no effective anti-inflation measures are in sight. The U.S.S.R. seems ripe for hyperinflation, with a sharp fall in national income opening the possibility for some kind of authoritarian stabilization.