Western Loans Not Soviet Answer

Should we help the Soviet Union? What help could we give? How could we assure ourselves that our help would not be wasted? How could the Soviets assure themselves and us that they are not so disorganized that further decline cannot be avoided?

Put aside discussion of starvation, disease or some other catastrophe. Emergency relief is distinct from economic assistance. The United States has a long and honorable tradition of assisting people after a disaster.

So far, there is not much reason to expect a famine. Carry-over food stocks are said to be large. Many are held as private stocks, not official inventories. The bare shelves in state food stores that TV likes to show are a small part of the story. Nevertheless, contingency planners should prepare for disaster relief.

A bigger part of the story is that the Soviet Union is well on its way to hyperinflation. Government revenue is down, and government spending is up. This produces a soaring budget deficit, financed by running the money printing presses. News reports say the state bank is printing money as fast as it can. Inflation is high and rising.

How high? No one can be sure, because most prices remain controlled by the government. Price controls do not stop inflation. They repress it. Activity shifts to the black market, where prices more clearly reflect what is happening. Also, farmers hold on to goods to avoid selling at controlled prices, as required by law, and to profit from future inflation. The breakdown of government adds to the problem by raising the prospect that food and other consumer staples will be very valuable if deterioration leads to a total collapse.

A central problem for the Soviet Union is that the ruble is rubbish. It does not serve as money because it does not give the holder command over goods. People want to sell for dollars or marks. They barter or trade for other goods. If they sell goods for rubles, they give up goods that are rising in price for useless rubles that are falling in value.

The destruction of money through inflation will continue as long as required by budget deficits. Budget deficits can’t be closed until prices are decontrolled to end consumer subsidies and inefficient state enterprises are reorganized or closed to stop their losses. Loans to the Soviet Union will be needed again and again until reforms are made. But unless the economy is reformed and the deficit stops, loans or aid will be wasted.

Harvard professors have developed a “grand bargain” to tie assistance to reform. Others talk of a Marshall Plan for the Soviet Union or all of Eastern Europe. Neither proposal makes much sense.

Analogies to the Marshall Plan are badly flawed. The Marshall Plan enabled Western Europe to rebuild railways and highways, to replace machinery and equipment destroyed in the war, to reconstruct what had been. A trained labor force went to work. Output surged to its prewar level and beyond.

Few of the preconditions for development exist in the Soviet Union. A competitive private sector hasn’t been destroyed; it never developed. Management, accounting systems, private property, a legal system that protects ownership, a commercial code and other necessary conditions are not in place. There is no financial system. And the political system is fractured. Who can sell property? Who can sign contracts? Who will enforce them?

The West cannot answer these questions. The Soviet Union, or whatever takes its place, must establish the rules and institutions under which they will live. Until they do, no one can know whether investment in the Soviet Union is a risky but attractive opportunity or a waste of money. A Marshall Plan for the Soviet Union, or development loans under another name, will not reproduce the success achieved in Western Europe.

Even if all the conditions for capitalist economic development were in place, Western governments should not lend to the Soviet government or the republics. Loans from the U.S. government to the Soviet republics would be financed by selling U.S. government bonds and U.S. private assets to foreigners. Foreigners who purchase these assets would get a relatively safe investment in the United States. In return, U.S. taxpayers would get a risky investment in the Soviet Union.

A much better plan is to get the Soviet Union to sell its assets to foreigners. The Soviet Union is a wealthy country. It has extensive undeveloped or underdeveloped mineral wealth. It can sell gold, diamonds, coal, platinum mines, oil reservoirs, gas fields and much more. It has steel plants, auto plants, tractor factories, etc. If it is concerned about patrimony, it can enter into long-term leases, thereby retaining title.

Private owners--unlike the government lenders--will bring technology, management and know-how. They will do what is most needed: bring private ownership, management and incentives.

Although France and Germany push for aid to the Soviet Union, neither has moved aggressively to lower trade barriers so that the Soviet republics can export when they have something to sell.

Recently, the European Community discussed modest reductions in agricultural trade barriers to help Eastern Europe sell food in the West. The French scuttled these proposals by refusing to allow small quantities of beef imports. The Germans sat on their hands. The result: severely restricted imports.

If barriers to trade remain, aid to Eastern Europe or the Soviet Union will not help. The future for these countries as market economies depends on their efforts, but the success of their efforts depends on how open the trading system becomes.

The West can and should help the Soviet Union. But help does not mean government loans.

We should open the economies of Europe and North America to trade. And we should encourage the Soviets to open their economy to private investment by selling assets.