Is there such a thing as a regulated market? In your opinion, should the transition to a regulated market be gradual or abrupt?

I don't know what a regulated market is, to tell you the truth, so I won't even try to approach that question. That's kind of a catch word that's being used these days. No, I think the question of whether it's going to be quick or slow has already been answered. It's going to be slow or it's not going to happen, and it all depends on what you mean by slow or fast. People like to talk as though what happened in Poland was a fast transition. That's not a fast transition; it's going to take five, ten, fifteen years. So I think the question that's more important is whether the reformers, assuming they're in power, come up with a coherent plan which is coherent in the sense that it makes sense whatever the time period given the structure of the original economy. And the only plan that's had any coherence so far is the Shatalin plan. It's not a practical plan, but it has coherence.

Though Gorbachev rejected the Shatalin Plan, didn't he use a lot of the same types of ideas in his own vision of how the Soviet economy must change?

None of the fundamental ones. One thing's clear, and that is that in March of 1990, Gorbachev met with his cabinet to talk with its reformers, and he came out of that meeting saying basically "These people are crazy! They're talking about privatizing everything. They're talking about selling off the land, selling all the property!" He says this is unacceptable. Then they went on and they moved to these reforms; and sometime in the summer Gorbachev said "Okay, now see if you can't reconcile the - it was not called the "Shatalin Plan" then. It was the plan of the RSFSR and the Ryzhkov Plan. And so, they got together and put Shatalin in charge of it. And they sat down and wrote a plan that was totally unacceptable tile moment Gorbachev looked at is, because the Shatalin Plan assumes that all ultimate power resides in the republics; and therefore any powers that the Kremlin might have are the powers delegated by the republics. That means it solves the problem of separatism by saying that the separate parts may go their ways. and in fact it was Shatalin who said - and it's written in the Plan - that the assumption of the Plan is that the various republics will realize that their economic self-interests, their ability to solve the economic problems, would be greater if they're a part of the greater union than otherwise. But he admitted that if they wanted to leave, they had a right to. The other assumption that the Shatalin Plan made very clear was that all forms of property were equal, which means that they would have full-fledged private property, which Gorbachev could never agree to. So those two sticking points, once it became apparent, that is once he looked at it clearly, his reaction was perfectly consistent to his opinion in March. And, that is, that it's unacceptable.

Comparing privatization in the USSR and Eastern Europe - how socially acceptable would that be in the Soviet Union, where there have never really been any historical antecedents to the notion of private property? At least portions of Eastern Europe had the historical base for democratic society and the flourishing of the private sector.

Well, there was some kind of private land at one time, but the fact of the matter is that surveys have shown that the Soviet population is not in favor of private ownership of heavy industry, not in favor of private ownership of large factories, not in favor of private ownership of the land; except that they are prepared to have certain farms that are near private property with respect to agriculture. But, in general, the population is not prepared to accept that form of capitalism. Therefore, the privatization that was going to happen has to take place in small stores, sort of small enterprises. The cooperatives were acceptable until they began to earn too much in windfall gains; and I think that, in that sense, Gorbachev recognizes in this case he's not out of harmony with the bulk of the population. And I have to says as an economist there's no question that privatization at the rate the Shatalin Plan calls for would involve really a travesty in terms of distribution of the wealth, because the people who are in a position to know would grab it off. I mean, some better way has to be thought out and they haven't come up with what it is yet.

Are you saying that people aren't in favor of owning their own homes in the Soviet Union?

Imagine telling someone who's living in an apartment - and has lived there all his or her life, and some of their family live there - "Guess what? We're going to sell you your own apartment!" Now if you put the selling in some other context so that they not only get to buy it, but certain other advantages come from owning it, fine. But that's just taking away another subsidy. There's an indication that people were prepared to buy into condominiums, and if the condominiums were better than the state apartments. There are still automobiles to sell and trucks to sell. There is more enterprise to sell. There are plenty of things to sell the private sector.

What structural changes are necessary for more participation of Western countries?

I think that U.S. laws restrain certain things and Soviet laws restrain other things. The problem with U.S. laws have to do with export to the Soviet Union. The Soviet Union is not going to be importing a lot of high-tech products, but I think they would import some. So for U.S. firms that do not plan to conduct business with the Soviet Union, who just want to sell technology to the Soviet Union, they're being restrained from trading in the Soviet Union. Secondly, the problem with investing in the Soviet Union is that you don't know who can give you title to property. You'd be crazy to buy something unless you had a title. You don't know whether the Republic can give you a title or the City of Moscow can give you a title or the USSR can give you a title. Secondly, you have uncertainty about what is going to take place with respect to the republics. I mean you have political uncertainty - unrest. All these kinds of things make investment in the Third World very profitable if you can get away with it because you expect to be able to get 25 percent return or better on your investment just because it is risky. It is very risky to invest in the Soviet Union because you don't know who is going to come out on top.

Western analysts see more movement toward the possibility of a Soviet Union under military rule. How would this affect investment and trade? Is the military opposed to purely economic aspects of reform?

I would have to take your initial statement and recast it a little bit. What you see is a more active military. Whether they're moving towards a military regime, we don't know yet. I think that anything that produced stability - political stability, economic stability - would improve the prospects for investment if, in fact, investment were still welcome. So, I don't think that it's anything that's kept Western capitalism from investing in petty dictatorships all over the world so long as they were stable. That's one side of it. The question is whether they can combine a continuation of what has been achieved in the way of glasnost, personal liberties, and democratization, and create enough stability to encourage investment. I think personally that they would have to resolve two of the most fundamental questions. One is a constitutional question of where does ultimate power reside and who delegates it to whom? Until that's resolved there will be no successful economic reform. The other is until they resolve the forms of property that they are prepared to honor and protect, then foreign investment is going to have great conflict with them.

What will be the form of investment and trade in the future? American-style ownership or majority control, or Soviet-style joint ventures where the state has majority ownership?

You see, I would say there's another possibility for what share the Soviet economy's going to be centrally planned or managed, and I'd say a large share, no matter what the outcome, a large share is going to be centrally planned or managed. They simply cannot run an economy that's not structured to be run any other way. And I think you can imagine, if you think about the U.S. Postal Service, they finally broke the monopoly enough to permit private firms to deliver certain classes of mail, and the mail service in the U.S. improved substantially. They still keep the monopoly on letters delivered to your home, but there is competition in other areas. But that is the best outcome they can hope for. As for letting foreign companies own land, I think far enough into the future, I think so. I think one of the problems of the joint venture is that establishing a joint venture involves so much bureaucracy that it's simply not going to move- very rapidly, and any time they allow foreign ventures to operate they will surpass joint ventures.

In a lecture you gave at the Woodrow Wilson Center you said that the average Soviet knows how the market system works since there is a thriving black market in the country. Do you think that a transition to a market economy in the Soviet Union is solely a bureaucratic problem, or do you think that the average Soviet would really be able to understand the principles of supply and demand?

There is a level of understanding how the Western markets work where the knowledge is not. There is no understanding of how it would work in an economy where enterprises sought to please the consumer. That's what happened to Soviet exports. Soviet exports have never been sold as to what consumers want and then designing a product. What they've done is to take a product that they have in excess, without any modifications, and try to sell it abroad. But that is what the U.S. did for many years. But because we were technologically rather advanced, Europeans bought a lot of our cars and though it was great until the cost of gasoline led them to have to design their own cars. The point is that it is very typical for a country with an economy as large as the USSR's, which has excess demand within its own confines, not to be good at exporting. But learning how to deal with finicky customers is something Soviet managers don't know. Even clerks in stores. You see it's not the buyer's side that doesn't know the market, it's the seller's side.

Doesn't it involve treating the workers differently too?

No supplier, if they know how the market works, wants to be in the market, because the market will ultimately put a burden on the supplier. Whether it's supplier of labor or supplier of product - doesn't matter which it is. So it's a kind of a question that's hard to answer. But in a way they know they have to go into stores and buy things. But they are amazed when they come to this country. They are stunned at the way it works.

Isn't there something particular about Soviets being used to a paternalistic society that will make economic reform even tougher than in other cases?

I'm not into the psyche or national character, but they know they have a number of welfare entitlements and they've led, up until the 1980s, a comfortable life. It was not a great life, a lot of things they had to do without; but they led a pretty comfortable life and they had all these welfare entitlements. Given a choice between living like an American or living like a Soviet, they might pick an American - that is, if you asked them point blank. But if you said: "We are going to transition you between this life of entitlements and one where you're on your own, you don't have job security, no subsidy for your apartment, no free medical care, public education at the college level is at your own expense," they might think it over a little more. This is not just to be looked at by population. It has to be looked at by age, by sex, by region of the country. They all have different attitudes.

Do you think Gorbachev is the main force which really binds the Soviet Union together? If he leaves power, will the republics go their separate ways?

No, I think he is still trying to finesse these two issues and I do not think they can be finessed. For the moment, they are in a situation of paralysis. Laws are being passed and nothing happens - they are just pieces of paper going out like the inflation in economics. There's legislation being turned out by the republics and by the central government that contradicts each other. If Gorbachev were to become decisive, he would have to decide to choose one way or the other, then he could be part of the solution. Right now he is part of the problem. Even if he goes, if he dies of a heart attack, if he is assassinated, if he steps down voluntarily, if he is removed by the military, the underlying problems will be solved by civil war in which one side wins, or it is going to be solved by the decision to let the separatists go and to try to entice them back.

Isn't the Soviet Union operating like a confederation at this moment? The republics have taken on so much responsibility by themselves because the central government hasn't. The republics are debating economic issues, environmental issues. . .

The crucial word is "debating," but as Yeltsin revealed once the central government started pushing people around in Lithuania, the KGB is a national institution and so is the army, the militia and the Communist Party. So, at least the structural power is still in Gorbachev's hands. So in that sense it is not a confederation; and it may be at the time he exercised the authority in all the republics at once, he would fail and the army would back down as well along ethnic lines and the KGB could prove ineffective. So there is maybe a logical solution in a confederacy of those who are willing to go along with the Union Treaty. The distance between that and the conception Gorbachev and his generation have of the Soviet Union is so great that I can not see him swallowing it. So, I think we are just waiting it out. It is like a poker game in which both sides are bluffing.

So the debates that are taking place within the republics are not going to amount to much?

This is part of the public education process. Gorbachev has moved enormously from his original position. When he took a good look at the Shatalin Plan he thought it would be suicide for the central government - absolutely unacceptable.

There were two conditions to the Shatalin Plan that Gorbachev could not accept One was that all authority would reside with the republics and the Kremlin would therefore be a derivative of power in a confederacy. The second point was that it provided no special status for socialist property and therefore did not provide for private property. Since then, the most important development has been the "Nine Plus One" Agreement, which still does not go far enough but goes a long way for creating the constitutional basis which I said was necessary for reform to take place. That does not mean reform is taking place yet because in a way there is constantly a fight between Pavlov and Gorbachev over the speed and type of reform. You can see power moving from the Supreme Soviet to this council of "Nine Plus One." This is what Gorbachev has continually done. He has moved the seat of power and keeps pulling the rug out from under the Party. And now who knows what will be next. This is how power is diffusing in Soviet society.

From the economic standpoint it means that power has not come to rest, and, therefore, it is too early for economic reform to work. The second issue I mentioned was about private property. No progress has been made that I can see in setting up a clear constitutional definition of what it means. They have made some progress on rules in making private enterprises and how they will operate.

What about the recent developments? Is Gorbachev still able to call the shots as he has done in the past?

Power keeps sliding out from under him. This is definitely a result of the election and the failure of the conservative surge. He has been able to move back to the center. He has always had power as long as he wishes to exercise it. The economy continues to be in a difficult situation because it is really still in limbo. It is neither moving towards a market economy nor operating the way it did previously.

That is an issue which President Bush has worried about in regard to giving aid to the Soviet Union.

I think that agricultural aid is a separate thing. It is really not an issue since it benefits our farmers and it is a small amount and can be managed. The real issue is whether the Western nations through the IMF, the World Bank, and European Community are going to put sizable aid money in the Soviet Union. I assure you that they will not do it until they resolve the question of where authority resides.

Do you see Yeltsin's election as President of Russia as a landmark change in our relationship towards the Soviet Union?

I think that this is another step of the movement of power to the republics. This is a clear example of one of the ways it happens. By visiting the United States, Yeltsin has shown his independence. I don't think the U.S. will make special deals with individual republics. They will make the deals with the "Nine Plus One," and that is where the aid will flow.

The real problem in agriculture is getting the grain to market, is it not?

The problem with the grain is getting it out of the fields of the rural areas to the cities. We can deliver from the U.S. What we are dealing with also here is a lot of hoarding, not just inefficiency, which is a problem with the republics themselves. What you are dealing with here is maintaining supplies so that there will be no hunger. Otherwise they would have to curtail the livestock because much of the grain is apportioned to feed the livestock. I think the reason the grain credits were never a real big issue is because there is a real benefit to American farmers, even if they take it and drop it in the ocean.

Of the "Grand Bargain" reform plan from Graham Allison and Jeffrey Sachs at Harvard, what should we expect from it?

I have talked with Jeffrey Sachs and I know what roughly it is. It is a plan to provide assistance on a fairly sizable scale. For it to be done conditional on the Soviet Union accomplishing certain economic and political reforms is democratization. For the economic realm, it's essentially the same conditions as in Sachs' reform plan for Poland: freeing prices, letting the exchange price float, converting the ruble, restraining wages, stabilizing the economy, using standard macroeconomic controls, pushing the cost of it towards the front end of the package. That is why it is called "shock treatment," because after a year or two things will get better. They will use the IMF and the World Bank to help out and be part of the package. What other Western nations are cooperating, and in what proportions, has me puzzled.

Do they envision the replacement of the Communists with leaders who are more reform-minded?

I don't think any of these people are experts of the Soviet Union, and I think they are aimed at making a thing for themselves, for Harvard. The people that have to have a proposal for it to work have to be someone like the Secretary of State, and it has to be done by the representatives of other economic agencies as well. I think they are getting a lot of publicity for themselves. I think they are serious in a sense that they see it as dealing a death blow to communism, and to get out there as one of the first in making a proposal. I think it is a bit premature in two senses. One is that the Soviet Union is not ready for reform because they put too many conditions in the package. Things have to get worse in the Soviet Union before they take it seriously. In Poland, you still have to see if things work out. There is no Walesa in the Soviet Union, no charismatic national leader, no Catholic leader, no Solidarity. Asking the Soviet people to accept the costs for taking this kind of reform, even if it works in Poland, will not work in the Soviet Union. I think that it is a formula for disaster.

Do you think Secretary of State Baker works well with Soviet Foreign Minister Bessmertnyk?

Baker, whatever he understands, is not the same international figure as General George Marshall. What is different is that Marshall spoke for the donor. The difference between this plan and the Marshall Plan is that the latter had several criteria and objectives; it was not detailed. The countries would have to get together and make a proposal, and I think this is a far better approach than for one bright Soviet economist and his staff working with some Harvard professors that will somehow come up with some plan that will work for the Soviet Union. I think that it is positive on balance, but it will not be accepted. If they have explicit political conditions they will turn it down. Economic conditions are possible. They can make it implicit if this is done in such a way that the republics have a say in the way it's done. It should not be raised as a set of political conditions. My conclusion is that there will not be aid right away. There will be some discussion about it. The "Harvard Plan" or "Grand Bargain" is not a plan that will be accepted. If they try to use the Polish model of "shock therapy." it will be the biggest disaster you will ever see. It would take a good year for the Soviet republics to put together a plan that would be acceptable to the Western nations and their economic institutions.

A seasoned observer, writer and lecturer on the Soviet economy, James Millar is currently director of George Washington University's Institute for Sino-Soviet Studies. James McA'Nulty is a staff member of the U.S. Center for Soviet-American Relations. Karen Sherman also contributed to this interview.