Reformers Face Task of Overhauling Ruined Economy

DESPITE the unending flux in the former Soviet republics, one constant remains - the pressing need for economic reform.Goods and services must be restored to a deprived people on the brink of disaster. But communism's demise has so far brought only increased hardship without any sudden rise of capitalism. Even as Mikhail Gorbachev's failure to halt the economic slide led to the shift in power to the republics, reformers there have also been reluctant to take the bold measures needed for fear of political consequences. They have yet to lift subsidies, close money-losing state industries, impose price hikes, and tighten fiscal policies to end free entitlements - from transportation to health care - that burden government budgets. United States Central Intelligence Agency Director Robert Gates, a longtime Soviet watcher, worries that "the enormous economic and social challenges facing most of these new democratic forces may overwhelm them." Indeed, public patience has snapped for reforms that, since perestroika's introduction in 1985, have done little more than disrupt daily life with food and fuel shortages, suspension of social services, and unemployment. In the midst of instability, the question remains whether the republics can move quickly enough to stave off total economic collapse. While ethnic and nationalist conflicts flare up and the armed forces are restless, Soviet centrists such as President Gorbachev and Soviet Foreign Minister Eduard Schevardnadze say such a collapse might come in the difficult winter ahead. Mr. Gates echoes an oft-expressed fear in Moscow that coming hardships "could produce a return to authoritarian government, whether led by reformers desperate to feed the people and stave off an explosion or by nationalists driven by a xenophobic, atavistic vision of Russia." The reform challenge is complicated by breakup of the centralized state into independent republics and the new Common- wealth of Independent States. The main hope for reform rests with Russian President Boris Yeltsin, the leader of the largest, richest, and most populous republic. The former boss of the industrial city of Sverdlovsk has long been accused of doing little on the economic front, falling back instead on populist rhetoric. But Mr. Yeltsin has finally embarked on a radical reform program (see story at right) drawing praise from foreign analysts. "They're working at an extraordinary pace now, but it's hard to see, because it's behind closed doors," says Anders Aslund, director of the Stockholm Institute for Soviet and East European Economics, who was in Moscow last week to discuss reform prospects and progress with Yeltsin and his chief economic advisor, Yegor Gaidar. "Clearly, the Russian reforms are all-out liberal," adds Mr. Aslund, who warned that Yeltsin's previous go-slow approach was perilous. Mr. Gaidar acknowledges the program is full of political risks, as unemployment, soaring prices, and housing shortages set in. He has said publicly that it will be tough to sustain support for these "very unpopular" measures. Plans to privatize huge state monopolies (see Part 2 tomorrow) and to make the near-worthless ruble convertible - essential early steps in reform - are still on the back burner. Last week Russia postponed until Jan. 2 its first tough action on reforms - the plan to lift price controls. Other republics have embarked on uneven reforms, and half-way measures have created more problems than they have cured. The most pervasive problem across the former Soviet empire is that, as privatization gets under way, former Communist bureaucrats are commercializing state property for their own gain. In the Ukraine, for example, local leaders have emphasized privatization. Selling off state assets to the emerging private sector ideally releases the government of its costly obligation to shore up inefficient industry, reduces the budget deficit with proceeds from sales, and helps establish a market economy. While over 1,500 such companies have been formed in the Ukraine, state assets - from machinery to plants - have been purchased by former Communist officials who are relatively well-off and, given their close connections to the state enterprises, well-poised to pay very low prices. Aslund says the line between what's fair and what's embezzlement has not been drawn. Prices are still fixed and far from being determined by the market. Kazakhstan, the largest of the Central Asian republics, is busy establishing private property laws. It is among the richest of the republics in raw materials, with enormous potential for economic growth if local and foreign investments can be stimulated. While the republic's leaders clearly recognize that private property is the seed from which capitalism grows, they are at best "enlightened despots," says Aslund, an advisor to republican economic planners. As the Central Asian republics now intend to join the new Commonwealth of Independent States, most republics will need to press for key reforms: price liberalization, a revamped distribution system, a new legal framework for a market economy, financial institutions that can help pay for reforms, and a social safety net to catch the millions of workers that will be displaced by plant and farm closures. Conversion of the vast Soviet military-industrial complex - which has accounted for more than 25 percent of economic activity - is a top priority. Huge investments are needed from local and foreign investors to help shift defense production to the manufacture of consumer goods. State resources are also needed for transportation and communication networks and to provide credit for a fledgling private sector to purchase plants and equipment.

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