In the middle of 1986, the first discussions on the necessity of changing the system of ownership took place in Soviet economic literature. The discussions about forms and methods of privatization or " destatization" in industry continue. To all but the members of the top level of bureaucracy, it is now absolutely clear that the chief causes of the low standard of living in the USSR. It is the inefficiency of its government-owned and bureaucratically managed enterprises that misuse the Soviet Union's skilled workforce, scarce capital, and raw materials.

At present, the share of state property in the Soviet Union is the highest in the world 95.4 percent, while the private personal property of the people equals 2.8 percent and the property of cooperatives is 1.8 percent.1 Moreover, irrespective of all so-called " market reforms" of Mr. Gorbachev's government, the share of state property in national wealth has increased by 7 percent by 1980 (absolute rate of increase of the value of the state property was 165 percent, cooperatives 19 percent, and private property only 11 percent).2

Recent experience has demonstrated rather clearly that privatization is first and foremost a political rather than an economic process. Many well developed programs of privatization have failed because this factor was overlooked. In essence, privatization is above all a political process with economic consequences. In the absence of deep political changes in both the Soviet Union itself and in the individual republics, it is impossible to expect that bureaucracies will voluntarily initiate market reforms based on privatization.

While the necessity of major reforms in the sphere of ownership is widely understood, bureaucrats, communist politicians, and the fraction of the population under their influence (about 25-30 percent according to public opinion surveys and the results of Russian elections) are unprepared to accept the hardships and uncertainties that will be brought about by genuine and widespread privatization. Even fewer individuals at the level of the All-Union Communist Party or the industrial bureaucracy support the notion of total or even partial privatization, as it directly threatens their future economic security. Government and party functionaries in the Soviet Union have come to believe that state property belongs to them. Given that such people " plan" and manage state property and economic life in general in their own interest, it is not surprising that bureaucrats became the economic elite described by Milovan Djilas in his classic work The New Class: An Analysis of the Communist System. According to official Soviet data, the number of these bureaucrats in 1989 was roughly 15 million.3 These elites wish to maintain their economic and political power. Nobel laureate James Buchanan has observed that " rent seeking" - that is competition for government largess and protected profits - emerges as a significant social phenomenon as institutions move away from ordered markets toward the near chaos of direct political allocation.4 Soviet experience indicates that the resistance generated by the bureaucrats who have been responsible for directing enterprises is one of the leading causes of the failure of privatization programs. Reluctant to relinquish their power and privileges, high level government, party, and industrial officials have many opportunities to delay and obstruct any privatization program. Advocates of " communist perspectives" claim that any attempt to initiate real market reforms is an attempt to restore capitalism. They support government programs that employ " expropriatory methods" in combination with price increases and the printing of additional billions of rubles.

The currently adopted Law on Denationalization and Privatization prolongs the period of reform for 5 years and seeks to create favorable conditions for the Soviet party, bureaucratic, and technical elite to become the new owners of state property.5 " Spontaneous privatization" takes the most ugly uncivilized forms. Moscow Kuryer reported that the top officials of the Council of Ministers of the USSR " privatized" their state-owned dachas with the estimated value of 160 million rubles.6 These officials " bought" these properties for less than 10 percent of their nominal and 3 percent of their market value. It is very clear that the Soviet nomenklatura has chosen the strategy of creating a so-called regulated socialist market economy in a purely bureaucratic way. They want to create such a " regulated market" from the remnants of the planned economy that has existed in the Soviet Union since the Stalinist era.

All of the programs of economic reform that the All-Union government is now trying to effect are directed toward the creation of two illusions. First, the illusion of change in the system of ownership in order to induce workers to work more productively for the same amount of pay, and second, the illusion of radical market reform in the Soviet Union which is designed to elicit massive economic assistance from the West. Meanwhile, there has been numerous attempts to invent " socialist" models of privatization or " destatization," as well as efforts to prolong the period of reforms, or to develop different programs of " planned" privatization. For example, the so-called anti-crisis (Pavlov) plan adopted in April 1990 calls for the " destatization" of the economy by transforming medium and large enterprises into shareholding companies with shares held by the union and republican governments with a small portion distributed among the employees. This plan was so ill-devised that even the former economic advisor to Gorbachev, Mr. Nikolai Petrakov, called it " a ruse to convince our Western partners that we are going to abide by the ideas of a market economy." 7

The Soviet Union now faces a serious dilemma. The necessity of major reforms in the sphere of ownership is widely understood, probably even among the more rigid representatives of the Soviet bureaucratic elite. At the same time, however, the bureaucrats, the politicians, and indeed, the majority of the population is unprepared to accept both real and imaginary hardships that will be brought about by genuine and widespread privatization. Paul Craig Roberts points out that the hardships involved in the transition to a market economy should not be overestimated: if the Soviets could endure communism for seventy years, they can endure privatization.8 In his opinion, a radical privatization is the vital step in the solution to the current crisis. He argues that these measures cannot be realized without a stable government enjoying the people's trust. Without deep political reforms within the Soviet Union and in separate republics, it is impossible to expect any real attempt to start market reforms on the basis of privatization. The market economy drastically reduces the number of economic decisions to be taken by authorities, and thus allows a reduction in the size of the bureaucracy as well as their political power. This spin-off effect of the market has so far been underestimated in most command economic oriented societies. In the case of the USSR, this explains the stubborn resistance to reforms by the state and party bureaucrats. Unfortunately, even some of the reformers in the Soviet Union fail to understand that the present system cannot be reformed or improved and that there is no chance that socialism will work, nor " social democracy" or a " welfare state." A mixed economy can be established in the USSR due to the very low level of economic development.

The Transition

This transition from a command economy to economic freedom implies private property and private decision-making in the allocation of resources. For this reform to succeed, certain macroeconomic conditions also need to be fulfilled.

What are the proper functions of government? What is the desirable extent and nature of government regulation, of expenditures and taxes, and of counter-cyclical monetary policy? These matters are the subject of vigorous debate in the Soviet Union today. The prevailing views shared by the genuine reformers are that the state's inlerventionist role in the economy must be dramatically curtailed. Private property in the means of production is not enough for economic success. Prices for all goods and services must be free to reflect real market conditions. Regulations, taxes, tariffs, and credit manipulation all distort the pricing system. They also allow bureaucrats to retain their control over the economy.

It is necessary to understand that the functions of the government imminent to the centrally planned economy should be abandoned completely, while the new functions and responsibilities for providing (but not necessarily producing) public goods and for trying to offset the distortions caused by externalities should be introduced. A full theoretical discussion of government activities would take us too far afield. So, we will concentrate here on the immediate steps which ought to be taken to secure the positive role of the government in peaceful transition to the market economy.

Evidence from previous cases of reform do not, however, necessarily imply that future reforms must follow the same path. We will never know what kind of growth rates and increases in living standards South Korea, for example, might have achieved had it fully liberalized trade and did not subsidize select industries.

There are certain lessons to be learned from the experience of the newly industrialized countries. The most important one concerns the value of stability, credibility, consistency, and coherence in the economic reform policy. South Korea, Singapore, and Taiwan implemented mild measures of coordinated trade, industrial and credit policies to promote so-called infant industries. In the USSR, today the importance is placed on the reliability on the legal framework for business activities as well as on credibility of prices.

Legal Reform

A market economy cannot function without a legal structure that is consistent with its underlying institutions of private property and freedom of contract. Any reform of the Soviet economy must be undertaken in concert with the institutionalization of the traditional understanding of the rule of law where the legal code is primarily directed toward defending person and property against invasion, either by the state or by private parties. The rule of law is central to any political and economic reform in the Soviet Union. Governmental decisions must be rooted in the consensus of the governed, acting through structures designed to prevent individual oppression or political tyranny, and procedures are subject to appraisal by an independent judiciary rendering judgements based on law. It stands in contrast to decisions based on arbitrary fiat of power, political rent-seeking, or personal gain. But more significantly, as it was stated by John Norton Moore of the University of Virginia, the rule of law " encompasses much more than simply the opposite of these negative images. Individual judgements differ as to the core underpinnings of the rule of law, but I believe there are at least five principle tenets - each with a number of fundamental sub-tenets." These five highest tenets are:

• Government of the people, by the people, and for the people;
• Separation of powers and checks and balances;
• Representative democracy and procedural and substantive limits on governmental action against the individual (the protection of human freedom and dignity);
• Limited government and federalism; and
• Review by an independent judiciary as a central mechanism for constitutional enforcement.9

Thus, government maintains a framework of security and order within which liberty can be secured. Individual rights of person and property are treated as normatively prior to government, as standards that take precedence. Governments are instituted among people so as to secure and protect those rights. Obviously, the republics of the USSR are as far from this ideal as can be imagined. And Gorbachev's government is far from having embarked on meaningful legal reforms in this direction. Richard Thornburgh notes that " the basis of Gorbachev's new reformed communist state is still the Utopian dream of a propertyless, classless society. Protection by law of nearly all forms of private property, including the ability to assign, sell and alienate, is still not simply regulated (as in the West) but prohibited unless the law allows exceptions. Perestroika still has not changed this." 10

The transition to free markets requires a radical overhauling of this system. It requires sonic means for individuals to readdress grievances against government officials; some means for protecting the rights of minorities against the will of the majority; some means for separating the powers of government offices; and some means of checks and balances to prevent one branch of the government from encroaching upon the functions of another. More importantly, the rule of law requires some means for the peaceful overthrow of unacceptable rulers. This system is general called a multi-party democracy. With this, all legal reforms, and economic reforms for that matter, are likely to succeed in the long run.

Inflation and the Price Level

One of the most important objectives of the economic policies of transition must be that of the stabilization of prices. The republics of the USSR are already facing hyperinflation. Stable prices and a convertible currency are the basis for any healthy economy. In addition, containing inflation is a crucial condition for both economic and political stability. From another hand, the inflation of the money supply is a rather profitable endeavor for government officials: it provides them with economic rents and makes further regulation inevitable. Gorbachev, like his predecessors, has used this ancient technique to fund the state bureaucracy. The growth of the money supply averaged 10-15 billion rubles annually in 1987-1990, and will be undoubtedly higher in 1991-1993. Former economic advisor to President Gorbachev Nikolai Petrakov predicts, for example, that in 1991 to meet financial obligations before the military industrial-complex, KGB, and armed forces, the Soviet government will increase the amount of paper money in circulation by 20 billion rubles. To compensate the price increases to the " marginal groups" (over 100 million people!). Prime Minister Valentin Pavlov promised to allocate 34 billion rubles. As a result, the State Bank of the USSR will be forced to print over 50 billion rubles.11 This step alone will lead to a rampant inflation created by the government. As a result in the USSR, 234 out of 277 basic consumer goods included in the " market basket" of the Soviet public are absent from the state distribution system. The power of the government bureaucrats has not diminished, as was expected by the advocates of reform, but increased enormously.

What should be done, given circumstances, is obvious: remove price and wage controls and abolish subsidies. In the long run this policy will encounter the inflationary spiral and fill the shops with goods. Unfortunately, in the short-run, this policy is likely to increase inflation and reduce the real standard of living. Further anti-inflationary policies, especially a program of industrial restructuring, will generate high levels of unemployment. While necessary and beneficial in the long run, these policies will no doubt be extremely unpopular. Unless pursued with vigor and along with more radical political and economic reforms, they could in fact become unacceptable and result in social calamities. The total decontrol, however, eliminates dislocations and restrictions while giving the free market the capacity to stimulate entrepreneurial activity through increasing production enormously, and directing resources away through increasing production enormously, and directing resources away from misallocations and toward the satisfaction of consumer needs. An excellent example of such rapid economic recovery is West Germany after World War II under the financial leadership of Ludwig Erhard who initiated the dismantlement of the entire structure of price and wage controls at once on July 7, 1949.

The Monetary System

One of the major causes of the economic crisis we are witnessing in the Soviet Union is a currency which is neither a store of value, nor is convertible in other currencies. The convertibility of currency is both a goal and prerequisite for establishing a viable market economy. There were no precedents of securing the convertibility of currency under the planned economy (Soviet experience with partially convertible golden chervonets in the 1920s was based on the gold standard and reintroduction of the market economy through the New Economic Policy). The necessary conditions for effective monetary reform are the full-scale privatization of the economy and the securing of private property rights which requires the absence of mandatory price controls. The absurd restriction on the circulation of foreign currency should be eliminated completely and immediately. Free circulation of the foreign currency along with the national one is the most important precondition for convertibility. The recent experience of Poland led to at least partial convertibility of the zioty shows that the elimination of the obsolete, unexplainable restrictions on the operations with foreign currency can immediately give impetus to the start of a process of convertibility. Part of the immediate aim of Ludwig Erhard's 1949 economic reform was to make the Deutschmark convertible into hard currencies. Given the realities of the current economic situation in the Soviet Union, there are several options to take: the development of a " managed fiat system," a " currency board system," the formal or informal introduction of US dollars, or the use of a " gold standard."

Option I: Managed Fiat Monetary System

This system is the most common for Western market economies. The managed fiat monetary system implies it is independent from the government central bank that determines the money supply and often, the interest rates. The system is characterized by the circulation of money which is not based on the gold standard. Exchange controls over the existing national currency allow market pressures to bear upon its value, bringing the currency down to its true market value, and afterwards resisting pressure to re-peg currency to some state-set floor or ceiling currency has some semblance of economic value left in it so as to be applicable to the Soviet Union at present. It can reemerge with the massive privatization program and rapid elimination of deficit spending by the government. This approach will without a doubt be the most radical one, but given the fact that the elimination of the deficit spending may cause such a rise in unemployment which will be politically unacceptable and could be used as a pretext of restoration of the command economy and totalitarianism.

Option 2: Currency Board System

Within the confines of market economies, it is possible to organize the monetary system in a variety of different ways. Hong Kong and Singapore are prime examples of creative approaches to this issue. These small and extremely aggressive economies have employed the currency board option, a system in which the central bank is replaced by a special currency board. Hong Kong, for example, has no central bank and no centralized monetary policy. It has only a currency board that exchanges Hong Kong notes for dollar notes on demand at the going rate of 7.8 Hong Kong notes for one US dollar.

The use of such a currency board requires the issuance of a domestic currency which is readily convertible into a foreign reserve currency at a specified and fixed rate. It also requires that domestic currency be backed by liquid reserves held by the board that are equal or greater than the value of the domestic currency issued and denominated in a foreign reserve currency. The main advantage of such a system is that it has an established mechanism for disciplining convertibility at a fixed rate with reserve currency backing. As a result, domestic currency enjoys a high level of reliability and confidence. The currency board system depoliticizes the monetary system, and the existence of a reserve currency prevents irresponsible politicians from overprinting paper money. Another advantage is that the currency board system captures non-inflationary seignorage because their liabilities are non-interest bearing, while their reserve assets are, in large part, interest-bearing bonds, which are held on deposit by the issuing banks.

This system also has limitations. The central banks of the major economic powers have the ability to create high-powered money by engaging in open market operations. They can and frequently do vary their discount rates in short term money markets in order to create what they consider proper financial conditions. The currency board of Hong Kong has no such power. It has no role in credit markets, no ability to influence interest rates in a direct way, and no discretionary power. It is simply a currency swapping agency constrained to operate at a fixed rate. In essence, the central bank of Hong Kong is the Federal Reserve Board of the U.S. over which Hong Kong has no control and very little or no influence. Thus, in a very real sense. Hong Kong has surrendered sovereignty over its monetary policy to the United States. In terms of monetary policy, the currency board arrangement is the same as the US dollar circulating in Hong Kong, with the difference that it is a separate currency with its legal tender connotation and with the seignorage accruing to the owners of the currency board - the government of the colony.

Theoretically this system could work rather effectively in the republics which decided to be politically and economically independent from the Soviet empire. A currency board would replace the republic's central bank. The new board would set aside foreign exchange assets in hard currencies sufficient for a 100-110 percent reserve against a new note issue. The total amount of foreign exchange that the currency board would need depends upon the exchange rate between the new notes and hard reserve currencies. The best approach for determining this rate is to allow the old currency to float against hard currency, as the ruble does now on the black market. This will ensure that the exchange rate is an actual reflection of the currency's true market value.

The principal task of the currency board is to maintain a " proper" market rate for the new currency with respect to its reserve currency or currencies. If the independent states that appear in the place of former republics do not have enough foreign exchange, they should have the opportunity to borrow additional reserves either from the West or from international organization. The board's gross profits would arise from the difference between the interest on it investments and its note issue, which would pay no interest to note holders. After some period of time, if the interest rates on a board's investments exceeded it borrowing rates, it could raise a considerable amount of foreign exchange for support of note issue.

Former Soviet republics will face two major problems in attempting to adopt a currency board. The first is lack of foreign exchange. The central government of the Soviet Union controls and redistributes all currency and state gold reserves. Under these conditions, the amount of foreign exchange available to politically dissident republics is sharply limited, and obtaining the necessary reserves from Western governments or international organizations will undoubtedly prove to be very difficult. One innovative proposal in this regard is the use of the so-called " mortgage potential" of republics as a basis for the granting of the necessary loans.

The second, and perhaps the most important problem, is that the success of the currency board system depends on widespread citizen and business confidence that politicians of the designated reserve currency country or countries will not decide to devalue the currency, even though they have the power to do so. Inflationary monetary policy on the part of reserve currency countries will lead to inflation in the currency board country. While a currency board will be an improvement over the existing system, it will demand the same type of " shock therapy" to the economy that the managed fiat system requires. If the politicians of the designated reserve currency counties do not exercise discipline in the formulation and implementation of monetary and fiscal policy, republics will end up with a currency no stronger than the currency or currencies used as reserves.

There is a variation of the currency board system under which the central bank issues currency redeemable for a foreign currency at a fixed price. This system resembles the Bretton Woods system, but presents the same problems that were mentioned earlier.

Option 3: Monetary System Based on Using Another Country's Money

Theoretically, in the first stage of a transition period, it would be possible for a newly independent republic to adopt another country's currency. Many small countries that have been part colonial empires have used such a system (Francophone Africa, former British Caribbean possession, etc.). Liberia, Panama, and lately Argentina adopted the U.S. dollar as their reserve national currency, although none of these countries was ever a U.S. colony. In this case the currency board concept is carried one step further. A currency board has the advantage of totally removing domestic political pressure to increase the money supply, while at the same time eliminating the need for a central bank. For very small economies such a system makes a good deal of sense, but former Soviet republics will have a very difficult time finding volunteers to play the role of reserve currency countries. Nor is this a policy without risk. The currency user becomes virtually totally dependent upon the country whose currency is chosen as a reserve, which creates opportunities for the donor country to exert political and economic pressure. Above and beyond this however, political considerations dictate that countries that have struggled for economic and political sovereignty issue their own currency. The only possible exception to this general rule might be the development of supranational currencies, such as the European ECU or the IMF's SDR, which, in theory, could evolve into major world currencies.

It is necessary to reiterate that none of these systems can be used effectively unless the newly independent republic develops a real market economy with a free system of pricing and private ownership of property. This having been said, the Baltic states are a good testing ground for the transitional use of a currency board system, particularly if they should decide to organize themselves into an economic union after independence from the Soviet Union. The free use of such a currency by both private citizens and businessmen would facilitate the transition process and mitigate economic hardship, as it would enable citizens to protect themselves during the transition period and could be a good stimulus of entrepreneurial activity on the world market. The use of such a system demands that the government allow individuals to make transactions in foreign currencies without hinderance. This unhindered circulation of foreign currencies could give rise to de facto convertibility. A legal private market could develop for free exchange, which would facilitate economic progress, particularly given the depletion of foreign reserves held by the government. The government need only legalize shadow market exchanges. The disadvantages are obvious, however: it denies the country autonomy over its own monetary affairs and subjects its economy to the whims of foreign central bankers.

Gold Standard

Money evolved for the purpose of reducing the costs associated with other forms of trade, such as barter. Specific commodities such as gold or silver were used as the medium of exchange. Later, paper notes were substituted for the actual commodities. Under the gold standard, notes were equal to a specified amount of gold, and all issuers of paper money were required to guarantee the convertibility of their notes into their face value in gold.

Monetary systems based on the gold standard had a number of advantages stemming from their connections with market forces. In an open economy, the supply of gold was not politically determined, but rather set by the cost of production in relationship to price. Given that the supply of gold was determined endogenously, the total amount of money created by government or private banks was strictly limited by the willingness and readiness of the population to hold it at the prevailing price. This prevented state bureaucracy from inflating the money supply. However, the gold standard had its own limitations. As is the case with any single commodity standard, it merely related changes in the relative price of the commodity to the general value of money rather than to the constant real value. Further, due to gold's relatively inelastic supply, rapid increases in the demand for money led to deflation, while periodic gold discoveries and technological improvements of the refining process tended to cause inflation.

Gradually countries moved from the gold standard to quantity monetary standards. The underlying premise of these systems is that the value of the money is determined by the quantity supplied and demanded. However, given die political pressures on monetary authorities to increase the supply of money in excess of increases in the supply of goods and services, these quantity, or flat, standards have tended to result in pervasive inflation.

Richard Rahn of the U.S. Chamber of Commerce suggests to avoid this by using a basket of representative commodities and services as the standard of value on which to anchor the monetary system. One of the principal attractions of basing convertibility on the value of such a basket is that it frees the international monetary system from the political problems associated with the global distribution of the gold reserves.

This advantage notwithstanding, there are substantial problems with the implementation of such a system. First of all, the commodity basket must be very large in order to accommodate normal lot sizes of wholesale trade. In addition, it must be composed of commodities that are readily storable and of identified uniform quality, just as under the gold standard where gold content was of a given purity. However, it has occurred to many economists that the commodities themselves need not be recognized as reserve assets. Instead, the currency could be redeemed by supplying a financial asset that gave the holder sufficient resources to buy a given amount of the basket commodities. Thus, the value of the currency would be preserved through its convertibility into a reserve asset that has a constant value in terms of the commodity basket.

Theoretically, it is possible for small republics to consider moving to a commodity basket-based standard. The principal advantage for such republics as the Baltics, Moldavia, Armenia and Georgia is that such a standard would provide a totally external anchor or definition for their currencies. In addition, it could quite easily be phased in parallel to the existing currency. For example, it could serve as a currency for the new and rapidly growing private sector, especially in the case of total privatization. This would allow the supply side of the economy to grow rapidly, while the existing state-owned and directed economy shrinks. It wold also create an opportunity for alternative suppliers of goods and services to become established while the state monopolies are being abolished and prices are being decontrolled. However, it cannot and should not be used as a permanent crutch to avoid decontrol of all prices and the elimination of state subsidies to enterprises.

Social Policy

During the transition process, there must be some provision for the possibility of redistribution of incomes away from the state budget to the poor. But this should not exclude the creation of private insurance companies, different insurance plans, and private emergency relief programs to address mass poverty (in 1990, according to the estimates of the USSR State Committee on Labor and Social Affairs, 100 million Soviets had an income below 160 rubles a month - $5 by the official exchange rate). Whatever government measures are enacted ought to be set to expire as state revenue runs dry, thus eliminating the possibility of another disastrous social experiment in wealth redistribution.

The denationalization of state assets, and the increasing freedom of private enterprise, will no doubt help to alleviate much of the adverse effects of the transition. Private enterprises, especially in the neglected areas of service and consumer goods production, can absorb much of the unemployment that will inevitably result from the restructuring of heavy industries. The private sector must serve as a social-welfare basis of a political regime. The reforms must be radical enough to generate incomes and incentives sufficient to support it. The most crucial factor here is time. The quicker the reform, the more decentralized the social policy, the less painful it will be.

Another problem of critical importance is that of unemployment insurance, which in the complete absence of any accumulated funds, must, at least for the transitional period, be covered through public provisions. Premature dismantling of the existing system of a social " safety net" could lead to the situation where the reforms would be considered unacceptable and a reversal could be anticipated. But all provisions should be measured, so as not to create disincentives for the participation of all people in the social division of labor that grows out of market economy.

The Pace of Reforms

Conventional wisdom counsels going slowly, " phasing-in" freedom, rather than taking the generally reviled path of radical and comprehensive social and economic change. Gradualism and piecemeal change, is always held up as the sober, practical, responsible, and compassionate path of reform, avoiding the sudden shocks, painful distortions, and unemployment brought by radical change. As it is obvious from the Soviet experience, however, gradual reform provides a convenient excuse to the vested interest of the party and state bureaucrats to change nothing at all. Combine these interests with the standard resistance to change which is endemic under socialism, and change will be reduced to mere rhetoric.

Soviet economist Igor S. Oleynik recently assessed the problem of economic reforms as follows: " The distinguishing feature of the adopted decisions was their indecisiveness. They stopped halfway and gave into the compromise between the predominant views of society, which favor more economic freedom, and the principles of the socialist system. This crucial mistake now threatens to derail the entire reform process." 12

Due to the urgent need to create an effective market it is important to enact reforms as soon as possible. Gradualism should be eschewed in favor of a radical and immediate overhaul. The implementation of required reform program should be done simultaneously and as fast as possible. Janos Kornai puts it bluntly when he says " . . . these measures must be taken in one stroke..." 13

The Role of Western Corporate Investment

It is evident that the only way to enhance the dynamic economic development of the Soviet Union is to attract foreign capital investment as well as to secure access to the modern know-how and methods of management. This should be done through direct investment by foreign private-sector institutions which can be attracted only through the creation of a favorable policy environment.

The basis of exchange should be the same as that everywhere else: the prospect of returns on investment flows from a mutuality of interests on the pan of domestic and foreign (national and international) institutions. Certain objective prerequisites for foreign capital investment in the Soviet Union already exist: a skilled labor force, an abundance of natural resources, and cheap land. Foreign investments are more likely to be made in response to opportunities in economies which are market-oriented and genuinely desire direct foreign investment. Tough competition among both developed and developing market economies for foreign capital has already prompted liberalization of tax and investment regimes, tax holidays, the sharing of risk capital by way of joint venture arrangements, etc.

One of the most critical issues in this area is how to encourage greater equity ownership by private enterprise. In most of the countries in transition there are insufficient domestic and foreign private sector investors. Most of the economy is still run by government organizations. In these conditions there should be opportunities created for private companies to purchase the equity at any time from the government corporations. This creates private-sector interest in the efficient management of these corporations.

Powerful incentives, a new accounting mechanism, and a sound monetary unit must be secured for foreign investors to provide the needed technology, management techniques, and training of the host country's labor force. Attracting equity financing will provide capital and the credit support necessary for commercial financing. Whether or not investors will be able to earn their expected returns will depend on the host country's regulatory policies on the limits to equity contributions, prices and wage controls, taxes, participation in decision-making, repatriation of earnings, and currency convertibility. Private foreign investment must highlight the value of external borrowing to enable investment policy to be carried through, as distinguished from using external borrowing in order to avoid structural adjustments.

Foreign investments require friendly policy environments. At a minimum, here are the signs to look for: extensive and radical transition plans: provisions for repatriation of earnings and servicing loans; complementary institutional infrastructures; mutually acceptable prices and terms of contract; and the prospects of mutually satisfactory financial and economic results.

Conclusions

A comprehensive program of transition to the market economy should include the introduction of private property through different means including employee shareholding plans; the creation of stock exchanges and provisions of free trade in shares; the denationalization of land; the elimination of state price controls; the creation of labor markets through the elimination of state price controls; the creation of labor markets through the elimination of restrictions on the freedom of labor to contract the immediate de-municipalization of housing; drastic cuts in military and other government spending; monetary reforms aimed at achieving the convertibility of currencies in international money markets; and the liberalization of foreign trade.

The centrally planned economic system was linked to the Communist Party's " leading role" in society, thus making all economic reforms impossible. As the non-communist governments of the formerly Soviet republics make the transition from centrally planned to market economies, they will experience strong political influences pulling them in opposite directions. The political coalitions holding these governments must be cohesive to survive the pressure.

In the period of post-communist transition, governments of the Soviet republics must have full political legitimacy. Only legitimate, freely elected governments can exercise the authority to take the necessarily painful measures needed to place the economies on the right track.

Certainly, suggested measures of transition will be rather painful, but nevertheless, they are unavoidable in the light of the present situation which is already unbearable. They represent the surest way to catapult the socialist economy of the Soviet Union into the modem age.

NOTES

1. Calculated from Narodnoye Khozyaislvo: SSSR v ]989 godu, p.279.
2. ibid ; calculated from the same source. 90
3. Narodnoye Khozyaistwo: SSSR v 1989 godu, p.51.
4. James Buchanan, " Rent Seeking and Profit Seeking," in Toward a Theory of the Rent-Seeking Society, eds. James Buchanan, Robert D. Tollison and Gordon Tullock (College Station, TX: Texas A&M University Press, 1980), pp.3-15.
5. V. Pavlov, " Labor Responsibility, Consolidation," Ekonomicheskaya gazeta, No.18 (1991), pp.4-6.
6. Moscow Kuryer. June 12, 1991, p.l.
7. Financial Times (London), April 27-28, 1991, p.7.
8. Moscow News. October 7-14, 1990, p.l3.
9. John Norton Moore, " The Rule of Law: An Overview." Paper presented for the Seminar on the Rule of Law, Moscow and Leningrad, March 19-23, 1990.
10. " The Soviet Union and the Rule of Law," Foreign Affairs (Spring 1990), pp.23-24.
11. Moscow News, April 7, 1991, pp.6-7.
12. Igor S. Oleynik, " Soviet Economic Reforms: Concept and Result," Institute of Economics, USSR Academy of Sciences (Moscow); April 1990, pp.7-8.
13. Janos Komai, The Road to a Free Economy. Shifting From a Socialist System: The Example of Hungary (New York: W.W. Norton, 1990), p.102.

Óuri N. Maltsev is a Fellow at the U.S. Institute of Peace and a professor of economics at Carthage College in Kenosha, Wisconsin.