The Soviet Economy

TIMES are bad, according to the Soviet people. An official government poll indicates an astonishing 90 percent of those surveyed believe the economy is in bad to critical condition. Virtually all the accepted performance indicators suggest there is no growth and that a recession may already be under way. Top Kremlin officials offer little encouragement. The deputy minister in charge of economic reform, Leonid Abalkin, recently launched a conference on the economy by saying that the next two or three years could bring even greater economic hardship. President Gorbachev himself speaks of a crisis situation.

Nevertheless, the Soviet economy does not face imminent collapse. By international standards, it remains strong, if unhealthy.

Although official Soviet figures show nearly 3 percent growth in industrial production for the first half of 1989, they ignore inflation. The Soviet government has quietly admitted to a 2 to 4 percent inflation rate. The Central Intelligence Agency estimates inflation in consumer prices averaged over 5 percent last year, a significant increase over the year before. Some Soviet economists and Western experts believe inflation is now in the 8-10 percent range and rising.

In addition to the lackluster industrial sector, oil and coal production have declined, agriculture is expected to gain only minimally over 1988, and imports and exports have been flat. Shortages of food and consumer goods are compounded by an inefficient distribution system. For the consumer, this means too many rubles chasing too few goods, and long lines for the goods that are available.

The absence of growth would be acceptable in a period of reforms if there were evidence they would eventually result in greater efficiency and productivity. There is little such evidence. Instead, the fear of inflation getting out of hand has caused the leadership to postpone adoption of the most vital part of perestroika - price reform, the key to sustainable improvement.

But one should not be excessively pessimistic about Soviet prospects. A balanced assessment would take into account the inherent strengths of their economy. With its huge oil and gas reserves, the Soviet Union is the only major industrialized nation that is energy self-sufficient, and it has vast supplies of other natural resources including ores, minerals, and precious metals. It must import food to supplement domestic production, but there are adequate supplies at relatively low prices on the world market, and the Soviets can afford to import food. While the gross hard currency debt (around $40 billion) is substantial, it is manageable. In fact, Western bankers would like to lend the Soviets more. The Soviet Union lags behind the West technologically, but its industrial output is impressive. In some areas, such as defense and space, it remains competitive. It has an educated, skilled labor force.

The present inflation rate is comparable to levels experienced by many other industrialized countries in recent years. Much the same can be said about the budget deficit, which has increased greatly since 1986. The seriousness of the deficit problem has been somewhat exaggerated by a lack of understanding about the peculiarities in the Soviet government budget and financial systems. For example, the debts of industrial firms, which in the US would be considered private debt, are included in the overall Soviet budget.

Some of the agricultural reforms seem to be taking hold as farmers get used to making their own decisions about what and when to plant, and how to market their crops. Joint ventures and foreign investment are gradually increasing, although it will be some time before their success can be evaluated. Cooperatives (a euphemism for private businesses) have gained a foothold.

Most importantly, Gorbachev and the leadership seem firmly committed to reform and are pushing forward doggedly. Earlier efforts to reform the Soviet economy were undermined by opposition within the leadership. Restructuring is advocated even in the defense sector, largely on economic grounds. Although reliable estimates cannot now be made, it appears defense spending is being cut.

The clearest sign that economic reform may do better than generally expected is a recently announced government plan that amounts to a stabilization program for 1990. Under it, there would be a reduction in investment for the heavy industries, a shift in production in favor of consumer goods, and a major reduction in the deficit.

Stalinist central planning has failed, and the current system isn't working all that well, but it is much too soon to write off the Soviet economy.