19565 Febrlary 1992 SORGCIAL4ISTElCONOMIES REFORM UNfT CouNTy EcoNworcs DiwiATNT WORLD BANK WESTFIELPS INTERNATIONAL CONFERENCE CENTER CHANTILLY, VoiGINIA 71- FEBRUARY 27 - 28,1992 COLLOQUIUM ON THE FORMER SOVIET UNION FOR THE EXECUTIVE DIRECTORS OF THE WORLD BANK SOCIALISTECONOMIES REFORM UN1T COUNTRYECONOMICS DEPARTMENT FEBRUARY27-28, 1992 TABLE OF CONTENTS Agenda I. Summary of Main Points .i II. Presentations Lawrence H. Summers.1 Strobe Talbott ................................................ 6 Anders Aslund ............................................... 10 Abel GezevichAganbegyan ....................................... 14 George Soros ................................................ 17 Norbert Walter ............................................... 22 Richard Pipes ............................................... 28 Dimitri Simes .... ........................................... 32 Steve Meyer .37 Edward Luttwak .43 Henry Kissinger .47 III. List of Participants .52 Annex 1 Seminar on the Soviet Union .54 October 30, 1991 Colloquium on the Former Soviet Union for the Executive Directors of the World Bank Socialist Economies Reform Unit, Country Economics Department February 27-28, 1992 Westfields International Conference Center Agenda Thursdav,Februarv27, 1992 i 2:00 - 3:00 pm Light Lunch 3:00 - 4:00 pm Introduction and Impact on the World Economy of the Soviet Transition Presenter:Lawrence H. Summers,Vice President DevelopmentEconomics and ChiefEconomist 4:00 - 6:00 pm The Current Economic and Political Situation in the Various Republics Presenters:Anders Aslund,Stockholm School of Economics Strobe Talbott, Time Magazine Commentator:Abel GezevichAganbegyan, Academy of NationalEconomy, Moscow 6:00 - 7:00 pm Cocktails 7:00 - 9:00 pm Dinner Economic Reform in the Russian Republic and the Role of Foreign Aid Presenter:Jeffrey Sachs, Harvard University I Friday, Februazy 28, 1992 8:00 - 9:00 am Breakfast 9:00 - 10:30 am International Perspectives on Recent Events and on the Role of Foreign Aid Presenters: GeorgeSoros, SorosFund Management Norbert Walter,Deutsche Bank 10:30 - 10:45 am Break 10:45 - 11:45 am The Prospects for Political and Economic Reform: The Sovietologists' View Presenters:Dimitri Simes, Carnegie Endowment for InternationalPeace RichardPipes, HarvardUniversity 11:45 - 1:00 pm The Security Problem Presenters:Steve Meyer, Massachusetts Institute of Technology EdwardLuttwak, Center for Strategicand InternationalStudies 1:00 - 2:30 pm Lunch Presenter:Henry Kissinger, Kissinger Associates, Inc. COLLOQUIUM ON THE FORMER SOVIET UNION FOR THE EXECUTIVE DIRECTORS OF THE WORLD BANK SOCIALISTECONOMIES REFORM UN1T COUNTRYECONOMICS DEPARTMENT FEBRUARY27-28, 1992 SUMMARY OF MAIN POINTS Cheryl Gray On February27-28, the SocialistEconomies Reform Unit organizeda colloquium on the (former) Soviet Unionfor the World Bank's Board of Executive Directors. The goal was to provide an in-depthpicture of the currentpolitical, economic,and military situationin the region,prospects for the future, and the internationalimpact of these developments. Outside expertsparticipating in the program includedeconomists Abel Aganbegyan,Anders Aslund, Jeffrey Sachs, and Norbert Walter;Sovietologists Richard Pipes and Dimitri Simes; and political/militaryexperts Henry Kissinger,Edward Luttwak, Steve Meyer, and Strobe Talbott. The main points of the discussionare summarizedbelow. 1. The present situation in the former Soviet Union is marked by chaos and extreme fragility--inthe words of George Soros, the situation is "not just grim but potentiallycataclysmic." On the economicfront, output is falling rapidly across the region with no immediateend in sight. Interrepublicantrade is in threat of collapse, with potentiallycatastrophic effects on the economy of the region. On the political front, a variety of personalitiesfrom the former Communistparty, the military, and national minority groups are emergingin Russia to challengePresident Yeltsin. Althoughthey represent potentiallyantagonistic viewpoints, these groups are beginningto unite in oppositionto Yeltsin and thus to pose a growing threat to his already fragmentedbase of power (itself underminedby competingregional and local power bases within Russia). With regard to the other Republics, only the Baltics and Armenia appear to have relativelywell-established democracies with an influx of new, reform-mindedleaders. Old communistparty officials are essentiallystill in charge elsewhere, although with varying degrees of reform in political institutions. All republics except Russia suffer a severe shortage of economicand legal expertise. Becausepower in the former Soviet Union was highly centralizedin Moscow, the other republics face a virtual institutionalvacuum as they approach the tremendouslycomplex task of political and economictransformation. 2. Furthermore, Russian history does not providegreat cause for optimism that democratic institutionsand capitalisteconomic concepts will necessarilytake hold. Past attempts to create a liberal political environmenthave failed. As noted by historian Richard Pipes, communismgained control in Russia in part because it reinforcedcertain characteristicsof traditionalRussian political and economic culture. First, Russian folk culture has generallypreferred strong--butnot necessarily benign--government. (Ivan the Terrible was, in strict translation, really Ivan the "Awesome"and is not considered a particularlybad character in Russian history.) Second, concepts of private property and rule by law had shallow roots even in pre-communisttimes. Until two centuriesago, Russian monarchieswere all-powerfuland owned all property and even all people. The conceptof private land ownership was unknown in traditionalRussian communes;serfs were allotted relatively equal 7 Summary of Main Points plots of land to use, but ownership and responsibilityfor paying taxes was communal. Egalitarian notions are deeply embeddedin the Russian people. Third, Russian society has alwaysbeen atomized, with poorly developedlateral ties. Until the late 19th century Russians were not allowed to form independentorganizations such as politicalparties or trade unions. Thus the disintegrationof the state always meant the disintegrationof society. This failure to organize has persisted, and even now nothing like Poland's Solidaritymovement has emerged in Russia. Only the intelligenciahas been somewhatunited--but only in opposition. Attemptson their part to organize around a common consensushave failed. 3. There are, nevertheless, some signs of hope in the current situation. This is the first time in history that Russia has a chance to shed its old political and economictraditions and build a new society from the bottom up. There are signs that the last 70 years have been so traumaticthat the populationis truly willingto endure hardship if needed to bring fundamentalchange. The time for change is ripe and should be seized by insiders and helped by the internationalcommunity. This is certain to be a watershed period--forgood or for bad--in the region's history. On the economicfront, several republics are indeed taking unprecedentedsteps at reform. Russia is the most obvious, with its dramatic stabilization and price deregulationin January that reduced the budget deficit from 25 to perhaps 5 percent of GDP. Althoughthe enormousprice leaps and collapseof the ruble in January led to a correspondingfreefall in confidence,the significant appreciationof the ruble in the last two weeks is the first sign that stabilizationefforts may be grabbing hold. A large increase in oil prices is planned for April. It will dramaticallyshift the terms of trade--andpossibly the political and economictide--in favor of Russia against all other republics. Although the most visible case, Russia is not the only republicpursuing economic reform. Lithuania is moving vigorously, while Estonia, Latvia, Armenia, Kazakhstanand Kirgizstan are making some (albeit more limited) progress. Conditionsin Belarus and Ukraine are amenable to reform, but these republics in particular need technicalassistance from the internationalcommunity. The Central Asian Republics, Azerbaijan, Moldovaand Georgia are the slowest to pursue reforms. On the political front, it is striking how political pluralismhas broken out in certain parts of the region for the first time. As noted above, several centers of real power are emergingin Russia to challengethe Kremlin. Democracyis also well-establishedin the Balticsand Armenia. This coming of "real politics" would be easier if the economicconditions were not so harsh and thus so conduciveto the emergence of extremistpolitical groups. 4. Recent events in the Soviet Union also bode well for international security. Russia is increasinglylooking inward, absorbedby problems with its own national minorities and economic power centers. Orders for military equipmenthave fallen 85 percent, leaving military industries in a state of shock and rapid disintegration. Althoughthey are trying to export arms to recoup some of their losses, the level of exports is certain to drop dramaticallyfrom that pursued (throughsales and military aid) by the former communistregime. Althoughwidespread conversion of military industries to civilian uses is not feasible, some inputs (includinglabor) can be redirected over time. In contrast to rather alarmist speculationsin the press, the danger of nuclear proliferationhas not been enhanced by Soviet disintegration. The highly sophisticatedand complexcontrols on nuclear weapons will continueto