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Commission of the European Communities EUROPEAN ECONOMY Directorate-General for Economic and Financial Affairs 1993 Number 49 Manuscript completed in June 1992 © ECSC-EEC-EAEC, Brussels • Luxembourg, 1993 Printed in Belgium Reform issues in the former Soviet Union m Abbreviations and symbols used Countries B Belgium DK Denmark D Germany GR Greece E Spain F France IRL Ireland I Italy L Luxembourg NL The Netherlands p Portugal UK United Kingdom EUR9 European Community excluding Greece, Spain and Portugal EUR 10 European Community excluding Spain and Portugal EUR 12- European Community, 12 Member States (including West Germany) EUR 12+ European Community, 12 Member States (including Germany) USSR Union of Soviet Socialist Republics Currencies ECU European currency unit BFR Belgian franc DKR Danish krone DM Deutschmark DR Greek drachma ESC Portuguese escudo FF French franc HFL Dutch guilder IRL Irish pound (punt) LFR Luxembourg franc LIT Italian lira PTA Spanish peseta UKL Pound sterling USD US dollar SFR Swiss franc YEN Japanese yen CAD Canadian dollar 6s Austrian schilling R Russian rouble Other abbreviations ACP African, Caribbean and Pacific countries having signed the Lome Convention ECSC European Coal and Steel Community EDF European Development Fund EIB European Investment Bank EMCF European Monetary Cooperation Fund EMS European Monetary System ERDF European Regional Development Fund Euratom European Atomic Energy Community Eurostat Statistical Office of the European Communities G-7 Group of seven major industrialized democracies (Canada, France, Germany, Italy, Japan, UK, USA) GDP(GNP) Gross domestic (national) product GFCF Gross fixed capital formation LDCs Less-developed countries Mio Million Mrd I OOO million NCI New Community Instrument OCTs Overseas countries and territories OECD Organization for Economic Cooperation and Development OPEC Organization of Petroleum Exporting Countries PPS Purchasing power standard SMEs Small and medium-sized enterprises SOEC Statistical Office of the European Communities toe Tonne of oil equivalent Not available IV Glossary CMEA Council for Mutual Economic Assistance, also known as Comecon glasnost transparency, openness Gosbank State Bank Goskomstat State Committee for Statistics lzvestia news - Soviet daily newspaper Komsomol youth association of the Soviet Union kolkhoz cooperative farm NEP New Economic Policy (economic policy in the Soviet Union from 1921 to 1928, which allowed private ownership of enterprises, etc.) RSFSR Russian Soviet Federative Socialist Republic V Contents Introduction by Joan Pearce and Jean Pisani-Ferry IX Part 1: Macroeconomics 1 The budgetary system in the USSR: impossibility of transformation by Sergey Alexashenko 3 Inflation in the Soviet Union by Andrey Vavilov and Oleg ~~n n Rouble convertibility in the context of Soviet economic reform by Andrei Vernikov 55 Part 2: Structural reform issues 71 Soviet market legislation: ownership rights in Soviet legislation by Philip Hanson 73 Labour market issues in the USSR by Susanne Oxenstierna 97 CMEA collapse and Soviet trade with European CMEA countries by Olga Ivanova 119 Foreign trade liberalization and redeployment by Gerard Duchene and Claudia Senik-Leygonie 135 Part 3: The inter-republic dimension 153 Union and republics by Vladimir Maschits 155 The regional implication of the monetary crisis by Jacques Sapir 163 Options for a monetary framework for the areas of the former Soviet Union by Peter Bofinger 181 Part 4: Political economy and economic culture in the transformation process 195 The political economy of transition in the Soviet Union by Gerard Roland 197 Problems of economics culture change by Yaroslav Kuzminov 217 VII Reform issues in the former Soviet Union - Introduction Joan Pearce and Jean Pisani-Ferry Contents 1. Introduction XI 2. Macroeconomics XI 3. Structural reform XII 4. The inter-republic dimension XIII 5. Political economy and economic culture XIV IX Introduction 1. Introduction We finally decided to publish these studies, however, for three reasons. First, a large part of the underlying analysis remains valid for today's successor States of the former The papers in this volume were prepared by independent Soviet Union. Even issues which have for several months experts from Western Europe and the former Soviet Union been about to be settled, such as the introduction of new at the request of the Directorate-General for External Re­ currencies or the convertibility of the rouble, remain unde­ lations (DG I) and the Directorate-General for Economic cided. Second, post-Soviet reform debates have been charac­ and Financial Affairs (DG II) in the framework of the Com­ terized by an extreme focus on the very short term. The mission's efforts to analyse and assess the process of reform studies will give the reader an opportunity to take a longer in the former Soviet Union. view on these debates. Third, this volume is also a contri­ bution to the history of economic policy in the former Soviet Union. Although this is not its main purpose, we thought This research was initiated after the Commission had com­ readers would be interested in the analysis and the views it pleted its own study of the Soviet economy1 and launched presents. its first technical assistance programme. At that time (spring­ summer 1991), it was clear that a major research effort into the economics of Soviet transformation was a necessary The volume is organized in four parts. Part I deals with companion to the European and Western assistance pro­ macroeconomic issues. Part 2 is devoted to structural reform. grammes. As in the case of the countries of Central and Part 3 specifically addresses the inter-republic (or interstate) Eastern Europe,2 it was therefore decided to commission dimension. Part 4 is wider in scope, as it envisages the empirical research by Western experts. Fruitful professional transformation process in its political economy and cultural contacts established during the preparation of the Com­ dimensions. mission study gave the opportunity, a few months later, to commission parallel studies by young Soviet economists associated with reform circles. As events developed in the 2. Macroeconomics autumn of 1991, it turned out that most of these people became more and more involved in the definition and in­ At the end of 1991, the Soviet Union had been experiencing ternal implementation of reform policies. Most of them were several years of macroeconomic deterioration. Against a nevertheless able to complete their studies, and to participate background of stagnation in real income, the succession of in a seminar in Brussels on 24 and 25 October 1991. Final high and rising budget deficits had led to the accumulation manuscripts were received at end-1991 or at the beginning of involuntary savings which became conventionally ident­ of 1992. ified as a 'monetary overhang'. Successive ambitious but unimplemented reform plans had helped to educate policy­ As editors of the volume, we hesitated to publish it when makers in the issues of reform design, but were also respon­ events accelerated dramatically with the break-up of the sible for widespread confusion regarding the aims and the Soviet Union and the implementation of radical economic pace of economic policy. Furthermore, permanent disputes reform in Russia. As the reader will observe, some of the between the Union authorities and emerging republic leader­ issues which are discussed by the authors have been settled ships contributed to procrastination and confusion. After by history. This relates especially to the discussion - whose being appointed in the context of the conservative backlash echoes can be found in many of the papers - of the costs of end-1990, the Pavlov government launched a stabilization and benefits of decentralized as against centralized reform. package. However, the measures it took were both partial Other topics already seem very distant in time, such as the and poorly designed, such as the ill-conceived monetary discussion of Gorbachev's economic policies.