Several years ago, the Soviet economy reached a point where (1) the command economy system had been fatally damaged while (2) the minimal institutions required for a private sector market economy to function had not been put in place and (3) the state had made almost no progress towards creating for itself the public finance system of a mixed economy. Many things have changed in the interim but these three broad statements remain basically descriptive of the state of affairs. From a macroeconomic standpoint, this had all the marks of an unsustainable situation—and, of course, it has not been sustained. Russian industrial production has declined by more than 30 per cent at the same time as the economy is now entering hyper-inflation.
To belabour the obvious: the depression in the Former Soviet Union fits neither Keynesian nor Monetarist theory and certainly not Real Business cycle theory. The ruble inflation also has features that make it sui generis. Western macroeconomics, whether traditional or modern, does not provide a ready-made guide to how the present fsu dilemmas should be dealt with. It appears that every economist and newspaper columnist around feels able to offer the Russians advice purported to be more valuable than the price charged for it. The truth is that we need to understand the situation better. While I have had some first-hand exposure to the problems,footnote1 the views expressed in what follows are not those of an expert.
I will sketch three themes: the first concerns the structure of industry, the second money and finance, and the third some of the legal and political aspects.
The manufacturing sector built up under central planning is characterized by a high degree of vertical industry integration and reliance
A large proportion of the final goods output of this industrial structure has been what we call ‘defence production’ when referring to the United States or ‘armaments’ when talking about other countries. Military production on anything like the old scale will no longer be sustained but conversion to civilian production is far more difficult in the fsu than in the us. In the United States, land, labour and capital trickle away from military into civilian uses via thousands of market channels. These markets have yet to develop in the fsu. Besides, the mania for gigantic plants combined with a mania for secrecy created a number of towns totally dependent on military production and utterly lacking alternative employment opportunities. The Russians, therefore, are more or less forced to convert existing plants to entirely different uses. Western defence firms have not been successful at this kind of conversion, although they have no difficulty changing the mix of inputs that they buy. The Gosplan input-output table is far more inflexible, making the difficulties of switching a particular plant from tanks to refrigerators all but insurmountable.
The Gosplan system was not only larger than Russia, it lapped over the borders of the Soviet Union into the ‘satellite’ Eastern European nations. The plan prices underlying the terms of trade between political units bore little relation to potential market prices. Trade was based not on mutually recognized gain but on Moscow’s political hegemony. The loss of it, therefore, has a lot to do with the breakdown of the system. The collapse of cmea trade already showed how vulnerable the system was. From early 1991 onwards, new tensions among the republics of the Soviet Union began to disrupt trade between them also. The threat to withhold deliveries became part of the political game between republics even before the break-up of the ussr and the creation of the cis. The Gosplan legacy of vertically integrated industries of gigantic plants made such threats highly effective: cessation of deliveries from one republic could seriously disrupt production in others. When Yeltsin and Kravchuk torpedoed the Union, the result was a ‘commonwealth’ within which the relationship between republics came to be negotiated very largely through threat games of this sort.
The Gosplan legacy would have made rapid progress on market