Speaking Of: : Transforming An Economy

The Soviet Union’s looming transformation from a government-owned socialist economy to a market-based system requires profound changes in everything from the value of its money to the basis of its laws; from the way it distributes refrigerators to the way it pays its factory workers.

It’s a job that requires change on many fronts, and an economic challenge that will last long beyond any lingering euphoria over political reforms.

In the main, the transition will be one of popular attitudes: After decades of socialism,much of the public is suspicious of capitalism and the unequal rewards it will bring to Soviet citizens. For 70 years, Soviet officials have emphasized collective well-being over individual ambition. In free enterprise, those values are often reversed.

Beyond shifts in attitude, the transition will entail changes in law, policy and entrenched business practices.

A huge challenge will be to convert military production to civilian needs. More than a quarter of the Soviet economy is currently estimated to be devoted to the military sector.

What follows is meant as a layman’s roadmap through the thicket of the coming economic transformation--changes that will have to be made whether the Soviet Union is a unified federation or individual, independent republics that seek to shift to a market-based economy.

Changes to date in the Soviet Union are only a prelude. Under perestroika, limited economic reforms led mostly to economic confusion and only accelerated the decline in living standards. Much more fundamental steps are now expected, even though they will not meet universal acclaim.

“There’s no painless way” to make the full transition from communism to free enterprise, said James R. Wilburn, an economic historian who is dean of Pepperdine University’s School of Business. “It’s going to be difficult for a lot of people, and I don’t think anybody’s figured out a way for it to be otherwise.”

Overhauling a Physical Infrastructure:

A modern economy requires modern links between producers, distributors, retailers, and customers in order to function properly. In a country as large as the Soviet Union, it’s all the more important. But such links--both physical and economic--are currently sadly deficient . . .

* Telecommunications. Earlier this year, Soviet officials reportedly estimated that the country needs 60 million new telephone lines. Currently, modern hotels with hundreds of rooms may have just one telephone available for international calls; telephone books remain precious commodities. And it’s virtually impossible to send a fax between Soviet cities given the poor quality of the phone lines. Western companies are already working to improve the system, but the task remains huge.

* Highways and railroads need to be upgraded. While it is nearly two-and-one-half times as large as the United States, the Soviet Union has only about one-fourth as many roads. And one-fourth of what it has are unpaved and subject to disappearing when the spring thaw turns dirt tracks into impassable quagmires. Entire trains disappear, only to be found weeks and months later, their cargoes stolen or damaged. There are few refrigerated railroad cars, and farms generally have inadequate storage facilities.

* The highly bureaucratized, state-owned construction industry is so inefficient that it has long been said in the Soviet Union that one is never sure at a building site whether the structure involved is going up or being torn down.

Problem: It costs a lot of money to build buildings and highways and improve telecommunications. Meanwhile, the government is impoverished and foreign aid for such projects is uncertain. The collapse of the union only exacerbates the problem.

Overhauling an Economic Infrastructure:

* Banking. A banking system that enjoyed public confidence would attract depositors whose money could then be used to finance business expansion. With the collapse in the value of the ruble, Soviets by the tens of millions will buy any product they can find on the market, instead of banking their salary, and then use that commodity to trade for something they want.

Problem: Lack of trust in the banking system. Also, there aren’t enough trained financial experts to support such a modern system.

* Agriculture. The links between the collectivized Soviet countryside and its urban centers are in danger of collapse. Collective and state farms offer little or no incentive forindividuals to grow more food. City dwellers rely on farmers to provide the food they can’t grow for themselves. But the cities don’t produce enough of the equipment and tools that farmers need. What’s more, urban residents can pay for farm produce only with rubles of little value. This winter, long lines and empty shelves are particularly threatening. The problem of repairing these links is complex, but part of the answer is to let farmers sell their wares at free market prices and share more fully in the profits.

* Wholesale trade. This function, all but non-existent in the centrally planned system, provides a crucial information pipeline in a market-driven system, warning producers of changing customer demands.

Problem: The emergence of wholesalers and distributors requires a level of sophistication about the market that is in short supply inside the Soviet Union.

* Stock Exchange. This is a way of shifting the ownership of the country’s enterprises beyond the state into private hands. It allows people to buy and sell ownership shares, and encourages entrepreneurs by providing investment funds for fledgling or cash-starved companies.

* Commodity Exchanges. Hundreds of such markets--in effect, industrial swap meets--have already sprung up to take the place of the reeling planned economy. A Siberian oil refinery needs machines and a machinery manufacturer needs industrial fuel. So they trade. But the proliferating commodity exchanges have sprouted with little regulation. As a result, there are few safeguards against cheating.

Revamping the Legal Structure:

* Rights to own land, homes and other property, and to pass that property on to one’s heirs--rights which Americans take for granted--either do not exist or lack a firm foundation of legal guarantees inside the Soviet Union. Fear that the state might at any moment reclaim these possessions makes them less valuable and discourages investment to improve them.

Problem: Opposition to private ownership goes so deeply to the core of the old Communist design that even many Soviet reformers oppose an unfettered system. And even some reformers say that in the current, unstable situation, temporary limitations on selling property in order to restrict blatant speculation may be appropriate.

* There exists only the beginnings of a legal basis for business contracts. Yet it is anecessity for efficient domestic and international commerce as the formerly all-powerful state, which had an excellent credit rating abroad, fades from the picture. If one organization purchases another, for example, it must be clear that the new owner is required to honor existing obligations to customers or suppliers.

* Civil codes governing relations among individuals must be established and modernized. Product liability and other legal protections for consumers are virtually unknown inside the Soviet Union, for example.

Making Money Meaningful:

Without a credible currency, a nation loses something invaluable--its money as a common medium of exchange. Instead, individuals are forced into time-consuming efforts to find barter deals. The ruble is so discredited that even the central government must arbitrarily assign different values to it depending on the transaction involved. The result is chaos, rampant black marketeering, and other ills.

* The first interim step toward stabilizing the ruble and establishing its true value is to devalue it--a move that will push prices for necessities such as food zooming upwards and could sow the seeds of widespread unrest.

* Another step is to halt or slow government printing of money. This would restrain inflation and enhance the value of money already in circulation.

* Other steps to stabilize the ruble: Allow it to circulate freely on world currency markets where its international value can be determined. Government officials may then link the ruble’s new value to the state’s enormous reserves of gold and other raw materials. Problem: Prices are bound to skyrocket, and people get mad when you raise prices. Those on fixed incomes can be partially protected by automatically raising their pensions to compensate for inflation. However, such a safety net would be expensive, and public finances already are already a disaster.

* Market prices, while painful, will ultimately provide the incentive that producers need to meet real public demand. As the marketplace begins to set prices--first, perhaps, for raw materials; later for food--the black market which has emerged for the exchange of everything from clothing to televisions and industrial goods should fade away.

Encouraging Individuals to Join In:

* The tax system must be overhauled so that it doesn’t penalize people who take initiative and make profits.

* Efforts to encourage various forms of private ownership must be pushed so that entrepreneurs can flourish and ordinary citizens can own a meaningful share of the nation’s wealth. Despite Marxist dogma, they’ve actually had little real stake in the system that has existed until now.

* Schools must begin developing the skills that the market demands rather than those that bureaucrats deem appropriate. Under the old system, bureaucrats in Moscow dictated how many students in distant Siberia would study engineering or any other subject.

The Question of Aid:

* Emergency food aid may be needed to prevent starvation this winter.

* The Soviets need technical assistance across the spectrum of Western management know-how, from bookkeeping and accounting to inventory control and quality assurance.

* Joint ventures or strategic alliances between Soviet and foreign companies will both aid Soviet managers to learn new methods and establish a standard for other domestic firms to emulate.

* Private foreign investment can do much the same.

Problem: The Soviet lack of understanding of free enterprise, as well as a Western lack of knowledge about the Soviet Union, have impeded many such cooperative efforts in the past.

The Bottom Line: Transforming an Economy There is no simple formula that leads from socialism to capitalism, as ongoing struggles in Eastern Europe attest. The Soviet Union is attempting a leap into the unknown. To land successfully, it will have to:

* Upgrade its physical infrastructure. Improve telephones, roads, housing and storage facilities.

* Develop a new economic infrastructure. Create modern systems of banking, finance, distribution and wholesale trade.

* Revamp the legal structure. Clarify legal rights affecting property owners and basic business dealings.

* Create Capitalists. Give people the skills and incentive to produce more, better and faster.

* Persuade the West to help. Encourage other countries to provide knowhow, technology and investment.