Perestroika: An Obituary

A DEATH is an opportunity to reflect on a life - what it was all about, what was accomplished, what was tried without success, and what we might learn from it. Perestroika - economic reform - went with glasnost and democratization, and these latter two clearly are also in jeopardy. It was a powerful trio, potentially embodying fundamental values and strengths developed over centuries in Great Britain, the British Commonwealth, Europe, and the United States. Freedom of speech, of religion, of assembly. Governments chosen by the people and thus accountable to them. A market economy.

Glasnost and democratization were, in part, handmaidens of perestroika. Without the ability to criticize the controlling bureaucracies of the Communist Party, the military, and the KGB, change would be impossible.

Both proceeded faster than perestroika, which was to be, as Gorbachev claimed in a book by that name published in the West, nothing less than a revolution. But perestroika remained an infant, never developing the strength to affect the real world.

The encouragement of cooperatives beginning in 1986, perestroika's greatest success, generated a few hundred thousand small businesses free to hire a limited number of people and sell at whatever prices they could get, and these businesses were successful. But they were widely - and correctly - viewed as operating with the connivance of bureaucrats, enriching themselves and the bureaucrats at the expense of others. It was necessarily so. Their ruble earnings could not be used to place orders for additio nal suppliers, as suppliers could deliver only in response to the central economic planners' state orders.

Cooperatives were deeply resented, and the political crackdown followed in due course - higher taxes, price controls, and finally a prohibition against reselling goods from government channels. The confiscation of large denomination ruble notes and the KGB's new authority to enter and investigate businesses were the final blows.

The success of the cooperatives demonstrates that the entrepreneurial spirit is alive in the Soviet Union. Envy was, of course, in evidence, but Russians and other citizens of the Soviet Union have lived for three generations in an economy that is a zero-sum game: one person's gain is another's loss. In such a situation it is no doubt difficult to find pleasure in another's success, and especially difficult even to understand the potential of a market economy.

Meanwhile, the command economy - the centrally controlled system based on state orders on what to produce and where to deliver it - broke down. A December 1990 study by Western international organizations noted that ``the traditional centrally planned system has largely collapsed but has not been replaced by a functioning market system.''

SOVIET leaders wanted the benefits of a market economy. They saw these benefits widely demonstrated not only in the major capitalist economies of the world - America, Japan, Europe - but also in the paired comparisons that belied any excuses for the failure of the socialist system: West Germany and East Germany, Taiwan and China, South Korea and North Korea. They wanted these benefits not because they wanted a free economy driven by consumer preferences, but because ultimately a strong national defense depends on a strong economy and because the dearth of consumer goods made the population restless.

A few of their economists and philosophers understood what it was all about, but most of the leaders and most of their advisers did not. In the Russian Republic, provisions were made for peasants to own land and to pass it on to their children, but not to sell it - at least not for 10 years, not at a market price, and certainly not to anyone but the state. Housing reform went the same way: legislation provided for home ownership, but for sale only at the price one paid for it.

In the years that decrees and the Law on Cooperatives encouraged entrepreneurship, no concrete proposals for privatization of state-owned enterprises reached a point of serious development and debate. The leaders of the Soviet Union wanted a market economy, but it was to be ``regulated'' or ``socialist'' or ``planned.'' They never grasped the crucial role of private and transferable ownership of both enterprises and financial institutions and the role of capital and capital markets in the economic proce ss.

Perestroika failed primarily because Soviet leaders were not ready to accept the fundamental institutions on which a market economy is based. In the West, we know and can describe what those required institutions are - the rule of law, private property, contracts, the separation of the economic and political realms, an independent judiciary, decisions on production and investment made by privately owned businesses in response to market prices. But we still do not know how to guide the transition from a socialist, centrally controlled economy to a market economy, and to do it in such a way that the benefits come quickly enough to maintain political support for the transition.

The death of perestroika is really the death of the career of Mikhail Gorbachev as a political reformer. But it may live on in the hearts, minds, and actions of many of the new leaders of the Soviet republics.

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