USSR Developments Jude Wanniski May 21, 1991

The new spirit of compromise between Soviet leader Gorbachev and the restive Soviet Republics demonstrates a will to avoid the sort of chaos that now overwhelms Yugoslavia, the failed experiment in ethnic federalism. With the issue of the Yugoslav presidency still unresolved, the breakup of that nation represents a more acute danger to European stability in the short term than Soviet ethnic violence.

When I was in Moscow April 2-4, meeting with Soviet government officials and representatives of the Russian Republic opposition, I heard the first stirring of talks of coalition government. It was clear the country's senior leadership had contemplated the alternative of working out a political compromise — peering into the abyss of civil war -- and was thinking of a deal. I discussed with them Abraham Lincoln's deep insight that democracy cannot work as a political system if minority views could not accept the nation's ultimate majority decision, opting for separatism. A democratic structure would be biased toward fragmentation. In recent weeks, Gorbachev has demonstrated anew his basic commitment to democracy and a democratic solution, as has Boris Yeltsin. What we're seeing is a parallel with our own Constitutional Convention, the Republics working out the modalities of federation in this new framework. All the questions that confronted our Founding Fathers on the checks and balances of political power are now being thrashed out in the USSR. What should be centralized? What should not? What powers are located in Moscow? What powers are reserved by the Republics?

The one issue that should be beyond dispute is that the currency should be the province of the central government. This, the Republics have agreed to. One ruble. One central bank. If the monetary reform is done correctly, it will provide the foundation for rapid economic growth, which is all that is really needed to knit together the federation once the political structure is set. When asked last April in Moscow of the primary goal of my proposed Soviet Project, I answered: "The integrity of the federation." Even the Baltics, I suggested, might opt for federation if their political interests were guaranteed and they could see the economic benefits of staying with the union. In 1988, remember, I suggested that the two fastest growing economies in the world in the generation ahead would be the USSR and Mexico, perestroika and Salinastroika.

The proposal for a joint Soviet project with Polyconomics and the WEFA Group that I made April 2 in Moscow, to Deputy Prime Minister Stepan Sitarian and Deputy Foreign Minister Ernst Obminski, has been "approved in principle" by Soviet Prime Minister Valentin Pavlov. I met Friday in Manhattan with President Gorbachev's chief economic advisor, Oleg Ozherelyev, to discuss the mechanics of the project, advising him that it can proceed as soon as I have in hand a letter from the Prime Minister committing the government to a team effort. Ozherelyev, a bright young man in his forties, did nothing but indicate support for the project and its general approach, including my fundamental idea of a ruble deflation. He returned to Moscow on Saturday.

Meanwhile, a public relations blitz has produced stories in all the major Western newspapers about an appeal from Grigory A. Yavlinsky, said by The New York Times to be "considered by many Western experts to be the most competent Soviet economist well-placed in the Soviet Union." The Times began the blitz with a front page story Saturday about Yavlinsky, said to be the architect of the 500-day Plan which was rejected by Gorbachev earlier this year. Yavlinsky and Yevgeni Primakov, a Gorbachev aide also associated with the 500-day Plan, were said to tacitly represent Gorbachev's views in a letter sent to the Group of Seven heads of state, who will meet next month in London at the annual Economic Summit. The letter asks for financial aid from the West in exchange for economic reforms, presumably along the lines of the 500-day Plan.

What's going on? Yavlinsky and six other economists flew to Boston this weekend and met yesterday at Harvard with Professor Jeffrey Sachs, the Times tells us this morning. Sachs, of course, was the economist who advised Poland on how to reform itself, and when Poland sank under the weight of his zloty devaluations and tax increases, Sachs led the way in begging the West to forgive Poland's debts. The American taxpayers will foot the bill for Sachs' incompetence, President Bush having proved a soft touch. The real beneficiaries, of course, are not Poland's people, but Poland's creditors, the big banks which would now love to get the U.S. taxpayers to send Moscow megabucks, so the USSR could pay its hard-currency debts. Jeffrey Sachs, who I view as being a social worker and not an economist at all, is now begging the Group of Seven for $30 billion a year for five years, a $150 billion "Marshall Plan" for the Soviet Union. Part of the hooplah is coming from a Washington magazine, The International Economy, which has long boosted Jeffrey Sachs and is now boosting Yavlinsky.

The White House, which was asked about Yavlinksy yesterday at a press briefing, said the United States government has not even received a copy of the letter, but knows of it only because it has been trumpeted by the magazine and the press. In The Wall Street Journal this morning, we learn that Yavlinsky claims Mhe has received tacit support from Mr. Gorbachev," but that "he declined to be included in a planned Soviet economic mission to Washington, even though Mr. Gorbachev invited him. Still suspicious of the government's motives, he warns: 'You have to be very careful.'" Haimmm. The Washington magazine behind the hooplah ran a cover story last month on Treasury Secretary Nicholas Brady, portraying him in glowing terms that no serious periodical would consider.

As for Yavlinsky being the greatest economist within earshot of the Kremlin, we have seen no evidence he is any more competent than Sachs. Yes, the Western press has been relentlessly pounding on Gorbachev and Pavlov for their "hard-line" refusal to buy the 500-day Plan. We read the 500-day Plan, though, and applauded Gorbachev and Pavlov for rejecting it. Far too much of it is gibberish. Here, on p. 39, is what Yavlinsky, the architect of the Plan, recommends on the central issue of price reform:

Settling contract prices is of special importance. The present system of prices and the adjustment coefficients is distorted; therefore starting from the [sic] 1991 we suggest switching to contract wholesale prices. The fixed state prices shall be retained only for fuel, power resources, raw materials, and some other products determined by inter-public agreements. The contract prices, as well as the conditions of their adjustment, will be approved by the State contract system bodies that sign government contracts after negotiations with manufacturers, major customers and wholesale enterprises; such books will take into account costs, fixed prices, and the level of market prices, if they are known.

My own inquiries at the White House and the Soviet Embassy produced exactly the same response to the Yavlinsky bid: Not one penny of U.S. taxpayer's money can be given to the Soviet Union without attaching so many conditions that no Soviet government could possibly agree to them. Once you reflect on this thought, you must realize that Gorbachev would be wasting his time thinking of Western cash grants. In the last two years, I've met with literally hundreds of Soviet officials — in Moscow, Leningrad, New York, Washington, Denver and Prince ton — and have found not one who would waste a moment thinking of a Western bailout. The Western banks certainly know how to massage the U.S. government into Polish and Egyptian bailouts via their agents at the International Monetary Fund. But this is, as one White House official told me, "a non-starter."

The Soviet Union does not need welfare. The USSR is immensely wealthy, in its people and its resources. The last thing it needs is a bag of $150 billion in G-7 cash if only they will take the economic advice of Jeff Sachs and Grigory Yavlinsky. Instead, all it needs is a few helpful hints on how to get things up and running, which I believe will happen shortly.