What Is To Be Done? Proposals for the Soviet Transition to the Market Merton J. Peck and Thomas J. Richardson Editors With Contributions by Wil Albeda Petr 0. Aven Richard N. Cooper Alfred E. Kahn William D. Nordhaus Kimio Uno Foreword by Stanislav S. Shatalin An IIASA Study Yale University Press New Haven and London Copyright © 1991 by International Institute for Applied Systems Analysis. All rights reserved. This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press), without written permission from the publishers. Set in Baskerville type by The Composing Room of Michigan, Inc., Grand Rapids, Michigan. Printed in the United States of America by Vail-Ballou Press, Binghamton, New York. Library of Congress Cataloging-in-Publication Data What is to be done? : proposals for the Soviet transition to the market / Merton j. Peck and Thomas j. Richardson, editors; foreword by Stanislav S. Shatalin. p. cm. "An IIASA study." Includes bibliographical references and index. ISBN 0-300-05466-1 (cloth). - ISBN 0-300-05468-8 (paper) I. Soviet Union-Economic policy-1986- 2. Economic stabilization-Soviet Union. 3. Privatization-Soviet Union. I. Peck, Merton j. II. Richardson, Thomas j., 1958­ III. International Institute for Applied Systems Analysis. HC336.26.W43 1992 338.947-dc20 91-30064 CIP The paper in this book meets the guidelines for permanence and durability of the Committee on Production Guidelines for Book Longevity of the Council on Library Resources. 10 9 8 7 6 5 4 3 2 Contents List of Tables VII Foreword by Stanislav S. Shatalin IX Acknowledgments Xl List of Contributors Xlii About the International Institute for Applied Systems Analysis XVII Chapter One Introduction 1 Merton J. Peck Chapter Two The Soviet Economic Crisis: Steps to Avert Collapse 19 The Chairmen of the Study Groups and Others Chapter Three Price Deregulation, Corporatization, and Competition 38 Alfred E. Kahn and Merton J. Peck Chapter Four Stabilizing the Soviet Economy 83 William D. Nordhaus Chapter Five Opening the Soviet Economy 116 Richard N. Cooper Chapter Six Moderating the Social Costs of Unemployment 133 Wil Albeda Chapter Seven Privatization and the Creation of a Commercial Banking System 149 Kimio Uno vi Contents Appendix A Economic Policy and the Reforms of Mikhail Gorbachev: A Short History 179 Petr O. Aven Appendix B Participants in the Economic Reform and Integration Conference at Sopron, Hungary, July-August 1990 207 Index 213 Tables 3.1 Ratio of input costs to producers' price for selected consumer goods, 1989 3.2 Distribution of Soviet manufacturing product groups according to the share of the largest producer in total output, 1988 3.3 Distribution of concentration ratios: Soviet product groups and U.S. 4-digit manufacturing industries 4.1 Growth in national output in the Soviet Union: (a) historical data; (b) recent data 4.2 USSR: incomes and prices 4.3 USSR: money and credit 5.1 USSR: domestic and world energy prices 5.2 Hourly compensation in manufacturing 5.3 USSR: external debt and reserves 6.1 Estimates of unemployment with varying transitions to a market economy 7.1 Size distribution of industrial enterprises in the Soviet Union 7.2 Size of state retail shops 7.3 Consolidated balance sheet of the present Soviet banking system, December 1990 7.4 Balance sheet of the central bank in the two-tier banking system 7.5 Balance sheet of commercial banks in the two-tier banking system 7.6 Comparison of the proposals made in this chapter with those of the new Soviet banking legislation A.l Soviet annual growth rates A.2 Excess equipment in inventories at beginning of year A.3 Distribution of profits of state enterprises A.4 Decentralization of capital investment in the state sector A.5 Growth of wages and personal incomes A.6 Growth rates of selected indicators, official data Foreword I am pleased to add a brief foreword to this book, for it represents the culmination of a project that I initiated in the fall of 1989. My view was, and continues to be, that Western economists could con­ tribute to formulating plans for the very difficult transition of the Soviet economy to a market system. I further thought that the Inter­ national Institute for Applied Systems Analysis would be the best forum for providing such assistance. The record of the last eighteen months has vindicated my views. This Institute was able to attract distinguished Western economists to study and to write about the problems of the transition. During several conferences, they engaged in a true dialogue with my Soviet colleagues that we found very helpful. In their preliminary reports presented in the summer of 1990, these Western economists pro­ vided valuable materials for the report of the Working Group formed by thejoint decision of M. S. Gorbachev and B. N. Yeltsin. I was the head of the task force that wrote the report, also known as the Five-Hundred-Day Plan. This book is the final report of the Western economists who were enlisted in this project by the Institute. It offers the best analysis by Western economists of the problems of economic reform in the Soviet Union, and it presents proposals that would create an effec­ tive market system for our economy. This book, written in a lively style, is a major contribution to the scholarly literature concerning the transition of centrally planned economies to a market system. Economists, policy makers, journal­ ists, and all those who are concerned with how the largest European nation can share in and contribute to world prosperity should read it. I highly recommend it. Stanislav S. Shatalin ix Acknowledgments This book is a product of the Economic Reform and Integration Project at the International Institute for Applied Systems Analysis (IIASA) rather than the work ofa single scholar. A large number of individuals contributed to the project. We are pleased to recognize them here. As the introduction explains, the project owes its inception to the vision of Academician Stanislav Shatalin, who saw the need for an analysis of Soviet economic reform by Western economists. He launched the project and has been its steadfast supporter through­ out. Professor Evgenii Yasin, department chief of the USSR State Commission on Economic Reform, has worked closely with us in planning our work. He attended all ofour conferences. Petr Aven served as project coordinator with the responsibility for organizing the work ofSoviet experts for the project and undertak­ ing the coordination with the USSR State Commission. To both the authors and editors he made available his great knowledge of the economic institutions of the Soviet Union and of the previous re­ form efforts. His contributions enabled us to make our work more realistic and to reflect better the current situation in the Soviet Union. IIASA directors Robert Pry and Peter de Janosi fully supported this unique project and provided valued advice. Professor Friedrich Schmidt-Bleek, leader of IIASA's Technology, Economy, and So­ ciety Program, ofwhich this project was initially a part, taught us the mysteries ofplanning international conferences and gave us counsel on the substance ofthe project. Considerable help was given to us by IIASA staff members Janos Gacs, Shari Jandl, Gabrielle Schibich, Christoph Schneider, and Sabine Malek. Eryl Madel and Robert Duis of the IIASA Publications Department helped prepare the final manuscript. Much of the editing was done in New Haven, Connecticut. Roberta Dulong typed successive drafts ofmany ofthe chapters with dispatch. Yale students Tyrone Agar and Carolyn Kalhorn were able research assistants. Martha Ullberg typed the drafts of chapter 3. xi xii Acknowledgmenls As the introduction indicates, the main outlines ofthe ideas in this volume were developed at a conference in Sopron, Hungary, inJuly and August of 1990. About fifty economists from East and West were willing to interrupt their busy schedules and family vacations to contribute their knowledge to our discussions of economic reform. They are identified in Appendix B. We pay particular tribute to the five study group chairmen: Wil Albeda, Richard N. Cooper, Alfred E. Kahn, William D. Nordhaus, and Kimio Uno, who wrote the various memoranda that form the chapters of this book. This was truly a labor of love and one that made this book possible. Financial support for the project was provided by the USSR State Commission on Economic Reform, the Ford Foundation, the Pew Charitable Trusts, theJapan Foundation, the Sasakawa Foundation, and IIASA. Ofcourse, these organizations and the individuals who have helped us are not responsible for the views expressed here, which are solely those of the authors. The editors thank all those who have made our work possible. Merton J. Peck and Thomas J. Richardson Contributors Wil Albeda is the Belle van Zuylen Professor of Social Economic Policy at Utrecht University (Utrecht, Netherlands) and a part-time professorofeconomics at the University ofLimburg, Maastricht. He studied economics at the University ofRotterdam. Professor Albeda has written on economics, social policy, and labor relations; his most recent book was Neocorporatism. He also participated in a study on tripartism sponsored by the International Labour Organisation, for which he wrote the section on the Netherlands. Professor Albeda was minister of labor for the Netherlands from 1977 to 1981, and chairman ofthe Scientific Council for Government Policy from 1985 to 1990. He is currently chairman ofthe Public Service Advisory and Arbitration Committee in the Netherlands. Petr 0. Aven is a research scholar at the International Institute for Applied Systems Analysis (Laxenburg, Austria). He received his M.S. and his Ph.D.