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Economy of the Public Disclosure Authorized USS-J% Public Disclosure Authorized 9047 The Economy of the Public Disclosure Authorized USS-J% Public Disclosure Authorized International Monetary Fund The World Bank Public Disclosure Authorized Organisation for Economic Co-operation and Development European Bank for Reconstruction and Development Public Disclosure Authorized FILE COPY The Economy of the USSR Summary and Recommendations International Monetary Fund The World Bank Organisation for Economic Co-operation and Development European Bank for Reconstruction and Development The World Bank Washington, D.C. @ 1990 International Monetary Fund; International Bank for Reconstruction and Devel- opment/The World Bank; Organisation for Economic Co-operation and Development; and European Bank for Reconstruction and Development All rights reserved Manufactured in the United States of America First printing December 1990 This study has been prepared by the staffs of the International Monetary Fund, the World Bank, and the Organisation for Economic Co-operation and Development, and by consultants to the designated president of the European Bank for Reconstruction and De- velopment. The findings, conclusions, and interpretations expressed in this paper are those of the staff concerned and should not be attributed to the International Monetary Fund, the World Bank, the Organisation for Economic Co-operation and Development, or the European Bank for Reconstruction and Development, to the executive boards or council of these organizations, or to their member governments. Library of Congress Cataloging-in-Publication Data The Economy of the USSR: a study undertaken in response to a request by the Houston Summit: summary and recommendations/International Monetary Fund ... [et al.]. p. cm. Includes bibliographical references. ISBN 0-8213-1768-7 1. Soviet Union-Economic Conditions-1985- 2. Soviet Union- Economic Policy-1986- 3. Perestroika. 4. Economic assistance- Soviet Union. I. International Monetary Fund. HC386.26.E28 1991 330.947'0854-dc2O 90-28630 CIP Table of Contents 1. Introduction 1 II. Summary 1 M. The Current State of the Economy of the USSR 2 1. The traditional system 2 2. Economic developments under perestroika 3 a. The 1985-87 "campaigns" 3 b. The 1987-88 reforms and their effects 4 c. Developments in 1990 9 3. Union and republic relationships 11 IV. The Present Course of Reform 11 1. The presidential guidelines 11 2. Macroeconomic policies and outlook for 1991 14 V. Alternative Approaches to Reform 16 1. The essential requirements for successful reform 16 2. Conservative versus radical approaches 18 VI. Main Elements of a Recommended Strategy 19 1. Macroeconomic policies 19 a. Fiscal adjustment in the short run 19 b. Structural fiscal reforms 20 c. Monetary policy 22 d. External policies 23 e. Incomes policies 24 2. Systemic policies 24 a. Price reform 24 b. Enterprise reform 26 c. External trade reform and foreign direct investment 29 d. Financial sector reform 31 e. Social safety net, labor market, education and training 32 f. Legal reform 34 g. Accounting, auditing and statistics 36 3. Sectoral issues 36 a. Environment 37 b. Distribution, transportation and telecommunications 38 c. Agriculture 39 d. Energy sector 40 e. Metal and mining 43 f. Manufacturing sector 44 g. Housing 46 VII. Criteria for, and Forms of, External Assistance 47 VIII. Endnotes 48 Text tables 1. USSR: Output and Expenditure 4 2. USSR: Fiscal Developments 10 3. USSR: Balance of Payments, 1986-90 10 4. USSR: Balance of Payments Scenarios for 1991 16 5. USSR: Domestic and World Energy Prices 42 Appendix tables I. USSR: Incomes and Prices, Money and Credit 49 II. USSR: External Trade, External Debt and Reserves 50 III. USSR: Distribution of Population, NMP and Budget Revenue by Union Republic, Social Indicators 51 Charts 1. USSR: Fiscal and External Imbalances 5 2. USSR: Money, Incomes and Prices 6 3. USSR: External Debt and Debt Service 8 4. USSR: Energy Production and Trade 41 5. USSR: Employment by Sector 45 iv The Economy of the USSR I. Introduction authorities discussed the various reform propos- als that have been tabled in recent months and At the Houston Economic Summit in July 1990, their implications; they also released much infor- the Heads of State and Government of the seven mation thathad hitherto been unavailableoutside major industrial democracies and the President of the USSR, but have not provided information on the Commission of the European Communities gold and foreign exchange reserves. requested that by the end of the year the IMF, the As requested by the Heads of State and Govern- World Bank, the OECD and the designated presi- ment, we have maintained close contact with the dent of the EBRD, in close consultation with the Commission of the European Communities Commission of the European Communities, un- throughout the course of this study. Information dertake a detailed study of the Soviet economy, has been exchanged on a regular basis; a number make recommendations for its reform, and es- of joint meetings were held in Moscow; and tablish the criteria under which Western economic meetings were also held in Brussels, Paris and assistance could effectively support such reforms. Washington. Our main findings and recommendations are summarized in this study; a series of background H. Summary papers, pulling together the substantial amount of material that has been collected and which un- The deceleration of economic growth, evident derpins our views, will be issued shortly. from at least the early 1970s, has recently turned Members of the four organizations met with a into a fall inoutput and employment, accompanied wide variety of civilian interlocutors at both the by evident and growing imbalances. The old union and republican levels, and were received planning system has broken down but has not with much courtesy and helpfulness. The staffs of been dismantled; meanwhile, the structures vital the Ministry of Foreign Affairs and the State For- to the functioning,of a market have yet to be put in eign Economic Commission of the Council of place. This will require an early and effective Ministers organized most of the discussions. The clarification of the division of responsibilities be- Gosbank, Goskomobrazovaniye, Goskomstat, tween the union and the republics. Goskomtrud, Goskomtsen, Gossnab, Gosplan, Three points are worth stressing. First, there is Ministry of Finance, Ministry of Foreign Economic no example of a successful modern centrally Relations, the State Commission for Economic planned economy. Second, attempts to enhance Reform of the Council of Ministers, performanceundertheoldsystemhaveproved to Vneshekonombankandmany other organizations be counterproductive: central control was reduced and individuals provided, at an already excep- but market signals and discipline were not estab- tionally busy time, unstinting assistance. ahelished. And, third, the revolutionary opening up 1 of public debate has cast doubts on earlier enterprises would generally begin with their achievements while exposing the extent of the commercialization;' all of this in the context of the economic deterioration and creating uncertainty. imposition of a hard budget constraint on enter- Ideally, a path of gradual reform could be laid prises remaining under state ownership and ac- out which would minimize economic disturbance companied by an opening up to foreign trade. and lead to an early harvesting of the fruits of The authorities face an enormous task, involv- increased economic efficiency. But we know of no ing reforms of the legal, financial and trade sys- such path, the more particularly given the difficult tems and also of vital sectors of the economy, starting conditions. Indeed we doubt that a return especially agriculture, distribution, energy and to central control is a viable option, and would manufacturing. These changes cannot be made in urge the authorities to move rapidly to give sub- a matter of weeks. But the imperative is to make stance to their commitment to a market economy. sufficient progress at the beginning so that reform This involves addressing simultaneously issues is seen as an irreversible break with the past and of stabilization and structural reform. the process gains an unstoppable momentum. In our view, the restoration of financial stability The necessary economic reform program cannot will require a very sharp reduction in the deficit of beimplemented withoutan initial declinein output the general government-the equivalent of the and employment, but delays in implementation state budget-from its 1990 level of some 8 percent would lead to an even larger and longer decline. It of GDP; the absorption of excess money holdings; is therefore essential that a safety net be in place at a strong hold on credit creation; and movement the start of the program. towards positive real interest rates. In the short The rest of the world can help the reform pro- runthis should be supported by anincomes policy cess. Technical assistance, in which the private whichwould setbothafloorfor social reasons and sector could play a substantial role, could be a ceiling on the growth of incomes. Given the provided over a wide area and would be of great weaknesses in other control instruments, incomes value in preparing for the introduction of markets. policy seems indispensable at least for the transi- There is also a case for humanitarian assistance, tion. provided that the distributional problems can be Financial stabilization by itself does nothing to solved, as well as for well defined programs in the establish a
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