RL 300/91 August 23, 1991 GORBACHEV THE ECONOMIST John Tedstrom During the past six years, Mikhail Gorbachev's record on economic reform has been a mixture of bold initiatives and half-hearted attempts at implementation. The results indicate that Gorbachev underestimated the power of many of the reforms he introduced. Two reforms that proved particularly uncontrollable were the partial introduction of "private" enterprise and the early steps towards decentralizing economic decision making. One of the questions the West will be focusing on in the coming weeks and months is "How, and to what degree, can the Soviet leadership conduct a serious reform of its economy?" The question is important because the degree to which the Soviet leadership is successful in reforming its economy will largely determine the future shape of the USSR, if not the very viability of the federation. Moreover, Western leaders have made it clear that economic and financial aid for the Soviet Union is dependent on economic reform. Although the role of "all-Union" structures has diminished significantly since August 18, Gorbachev is still under scrutiny, and his record as a leader is being examined in detail. In some areas, such as foreign policy and sociopolitical liberalization at home, it is clear that the briefly deposed Soviet leader presided over important steps forward. In the field of economics, though, his record is much more spotty. On the one hand, for six years the world looked to Gorbachev to introduce real economic reforms. On the other hand, the economic collapse of the Soviet Union was no doubt a key factor in the minds of those who deposed him. In evaluating Gorbachev the economist, several points need to be made. First, the development of economic understanding in the USSR during the Gorbachev period was nothing short of revolutionary. Sophisticated economic thinkers such as Stanislav Shatalin, Nikolai Petrakov, and others were promoted to important posts and were trusted presidential advisers, at least for a time. The Soviet press and academic literature were full of liberal economic ideas both from Soviet scholars and from their Western colleagues. Today in the Soviet Union, the fundamental principles of liberal economics are largely accepted. Gorbachev pushed that development, and allowed it to push him. By the time he was ousted, the Soviet leader was advocating the development of a market-oriented economy and a far-reaching denationalization of property. Second, Gorbachev took important steps to dismantle the centralized economic bureaucracy founded by Stalin and nurtured by Brezhnev. Gorbachev initiated this process almost immediately after taking the post of general secretary in March, 1985, and never allowed it to stop. Under Gorbachev the gentrified economic bureaucrats of the Brezhnev era were replaced with men who were, by and large, more positively disposed towards economic reform. The bureaucracy was partially trimmed, and thousands of planners and other do-nothings were relieved of their duties. Ministries were abolished and reorganized in a sincere and concerted attempt to loosen the political chains that had for so long enslaved the Soviet economy. Third, as he took away rights from ministerial bureaucrats, Gorbachev gave them to enterprise managers, whom he allowed more freedom to determine their product lines and to find suppliers. He granted managers the right to set wages and bonuses (although this led to problems as wages grew faster than output) and, to an increasing extent, to determine prices. Fourth, Gorbachev opened up the Soviet Union to the global economic system to a degree unparalleled in Soviet history. He courted foreign businesses, encouraged foreign investment, and sent bright young managers abroad to get a taste of how to run a business "Western-style." The USSR's foreign trade performance in recent years has deteriorated, it is true, but Gorbachev's period in office saw the dissolution of the Council for Mutual Economic Assistance (Comecon), attempts to rationalize the foreign trade pricing system, and the registration of over 3,000 joint ventures. (While the contribution of joint ventures to the Soviet economy is still small, no one thought before 1985 that these cooperative efforts would have developed in the USSR as much as they have.) Finally, and perhaps most important of all, Gorbachev allowed the door to private property to be opened, if only partially. As early as 1987, the USSR had a draft law on cooperatives, and a year later the final law was passed. The growth of the cooperative movement in the Soviet Union has been an uneven and difficult process, but cooperatives continue to spring up and are still attracting the best of the state's labor resources from more secure but less satisfying jobs. New laws on ownership and land reform, both at the all-Union and at the republican level, embrace, to one degree or another, private ownership of the means of production and of land. Soviet citizens used to be put in jail for even talking about these concepts in the early 1980s. Of all Gorbachev's contributions, this transformation is especially important because it undercuts the very foundation of the Marxist-Leninist-Stalinist system. Markets are one thing; they encourage economic efficiency. Private property gives economic freedom, a much more powerful force. Traditional Soviet leaders stomach "markets" much more easily than they do "private property" for obvious reasons. Still, Soviet citizens have had a whiff of private property, and that impression, however faint and ill-defined, is almost certain to play a role, if not the key role, in future economic reforms. Despite these steps forward, Gorbachev's record of economic reform is tainted, and the performance of the economy in the last five years testifies to that fact. One of Gorbachev's major weaknesses was that he did not understand the basic economic principles of the reforms he sought to introduce. Moreover, he seems not to have appreciated the strength of the social forces of freedom and independence that form the basis of modern, liberal economies. Once unleashed, these forces blossomed much more rapidly than the Soviet elite expected, or knew how to cope with. The uncontrolled and uncontrollable development of Soviet society is clearly one of the factors that led to the failed coup. Gorbachev knew from the beginning of his period in power that the old system was spent and could no longer meet the needs of the population or compete successfully with the West. Partial reforms had been tried in the past and did not work. The only available alternative was something more akin to a Western "mixed" economy. But as much as he may have believed it, Gorbachev found it difficult to embrace that reality fully. As a result, for six years he straddled the fence between tinkering with the existing system and introducing real reform. He was constantly bowing to pressure, first from the right and then from the left. A particularly sad example of this tendency occurred last fall, when he flip-flopped between the radical Shatalin-Yavlinsky reform plan and the more conservative program drawn up by his prime minister, Nikolai Ryzhkov, and ended up choosing an unimpressive and uninspired compromise. This indecision meant that, as the old system was withering away, a new one was not rising to take its place. Soviet and Western businessmen alike were uncertain what was allowed and what was forbidden. When entrepreneurs began to develop business relations from the ground up and proved successful (read profitable), Gorbachev allowed the KGB the right to inspect their businesses and confiscate their property without question. It is little wonder that, important reform legislation notwithstanding, robust markets and business relationships developed only in the shadows, away from the watchful eye of the police. Another important problem for the economy under Gorbachev, though, was the political disintegration of the Soviet Union. Gorbachev had less control over this process than he thought, and less than the Kremlin hard-liners of August, 1991, could tolerate. If the reforms that Gorbachev introduced in the last six years were to have any chance, they needed to take root in--to use Soviet terminology--a "unified economic space." The political realities of the 1990s ensured that that would not happen, and in the last two years the political disintegration did a good deal to cripple the Soviet economy and the central leadership's ability to deal with economic reform. On the whole, the West looks at Gorbachev's record in foreign and social policies positively. His reputation as an economic reformer is much less certain. To be sure, he must now cope with a legacy of half-hearted and half-completed economic reform measures. It is important to remember, though, that more was done to modernize the Soviet economic system during Gorbachev's period in office than during any other six-year period in the USSR's history. That Gorbachev did not fully grasp the underlying essence of the social and economic reforms with which he teased Soviet society is clear. That a return to orthodoxy in Soviet society and economics was bound to bring even worse results was also clear, not only to Western observers but also to the Soviet public.