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Advisers Hone Advice As Experience Grows

By David R. Francis / May 22, 1992



WESTERN economists are revising their economic advice to Russia and the other republics of the former Soviet Union.

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"There has been a little rethinking," says Stanley Fisher, an economics professor at the Massachusetts Institute of Technology. He flies to Moscow next week for four days of talks with officials at the Russian central bank, carrying with him a paper that proposes some important changes in Russian economic strategy for the conversion to a market-based economy.

If alterations are not made in the strategies being insisted on by the International Monetary Fund and the World Bank on the Commonwealth of Independent States, "a lot of money is going to be wasted," says Jan Vanous, chief economist of PlanEcon Inc., a Washington, D.C. consulting firm specializing in the economics of Eastern Europe and the commonwealth.

Altogether, the commonwealth got about $12 billion in foreign assistance last year.

In an article in International Economic Insights, Lawrence Summers, chief economist of the World Bank, says it is necessary "to take stock and to look forward."

"If ever an event caught the economics profession unprepared, it was the death of communism," he writes. "Five years ago, there was not a single book or article on the problem of transforming an economy from the communist to a market system. Today, governments in more than 20 countries with nearly one-third of the world's population are embarked on programs directed at replacing administered economies with systems organized around markets."

The most common Western counsel to communist nations has been that they adopt the "Big Bang" approach: Make changes as quickly and as comprehensively as possible. Reform will cause major economic dislocations. But soon the market will come to the rescue, reviving production and living standards.

Now economists are modifying their advice.

"Surely the most significant surprise in the reform effort so far is that the anticipated short recession in output has turned into a protracted depression," notes Mr. Lawrence. Output has declined from its 1989 level by 18 percent in Czechoslovakia, 11 percent in Hungary, and 19 percent in Poland.

Russia, which had a per capita purchasing power under communism in the range of such low-income European countries as Greece, Portugal, and Spain, has seen its living standard drop to a level similar to that of Mexico or Poland, says MIT's Mr. Fisher.

Lawrence says "zealous reformers" have underestimated the magnitude of the reform task. The "chasm" that communist countries must traverse is much broader than it was for West Germany or Japan after World War II or for a few successful Latin American countries more recently. "About 18 percent of Mexico's economy was in public hands at the peak, compared with more than 80 percent in Eastern Europe," he notes.

Further, Western experts had not anticipated the sudden drastic decline in trade between the East European countries and the commonwealth. This reduced output by perhaps 4 percent in Poland and 8 to 9 percent in Hungary and Czechoslovakia, Lawrence says.

What's to be done about this economic disaster?

Fisher sees no alternative to the communist nations moving ahead quickly with "macroeconomic stabilization" - that is, reducing government deficits dramatically and slowing the creation of new money so as to lower the inflation rate. Rapid liberalization of prices is essential, he adds, especially when shortages are pervasive, as in Russia. (Earlier this week Russia quintupled the price of oil.) Also, he welcomes Russia's plan to make the ruble convertible to hard currencies on Aug. 1.

However, he does see a need for "gradualism" in privatization and the restructuring of industry. "One has to go slower," he says. "These problems are not susceptible to rapid change."

By contrast, Lawrence, who succeeded Fisher at the World Bank, calls for moving ahead with privatization "as rapidly as possible in any way that is feasible." Lawrence sees "a realistic chance that Russia will again be an economic power, though not a superpower, within a generation."