Speakers at a CEPR lunchtime panel discussion on 1 July addressed issues raised by the Yavlinsky plan for the reform of the Soviet economy, whose relevance can only have increased in the wake of more recent events there. They focused on the merits and problems of the proposed `Grand Bargain': that Western governments provide aid to the Soviet Union in return for a firm commitment to an agreed package of economic reforms. The meeting took place as part of CEPR's research programme on `Economic Transformation in Eastern Europe', supported by grants from the Commission of the European Communities under its SPES programme and from the Ford Foundation. The views expressed by the speakers were their own, however, not those of the European Commission, the Ford Foundation nor of CEPR, which takes no institutional policy positions.

Willem Buiter (Yale University and CEPR) argued that proposals for large-scale Western aid in exchange for macroeconomic stabilization packages, the whole-hearted embrace of a market economy and political democratization are misguided. They betray ignorance of history, political naïvete and technocratic hubris. Such aid would constitute a reckless intervention in the decolonization of the Russian Empire; and until its constitutional transformation into its successor states is complete, Western assistance can only prop up the reactionary forces that are striving to maintain the unitary structure of the Soviet state.

Buiter maintained that if resource transfers from abroad are to make any sense, there must be clear agreement over the ownership and control of natural resources; the means of production, control and distribution; and responsibility for total current and future foreign debt. The Union and its constituent republics or its successor states must reach agreement on frameworks of revenue-raising powers and expenditure responsibilities, of monetary and fiscal control, and of property rights and contract law consistent with a dominant role for the market. Since all these changes are required whether the West gives any aid or not, there can be no `bargain'. The IMF and World Bank have failed to enforce meaningful conditionality on small developing countries, so they stand little chance of doing so for the Soviet Union; but if the Soviet government or private enterprises wish to borrow from Western banks on commercial terms or to seek foreign direct investment, they should be free to do so.

Buiter maintained that there could be no case for granting the Soviet Union scarce Western aid on grounds of fairness, equity or the relief of poverty, since there are more than 100 poorer countries in the Third World. Nevertheless, the West can help the Soviet Union, by supporting its rapid transition to full membership of the IMF, the World Bank and the GATT; by granting it most favoured nation status; by providing (relatively cheap) technical expertise in law, accountancy, banking and related skills necessary to its survival in a market environment; and by providing emergency short-term humanitarian relief when economic dislocation, political or armed conflict threaten physical survival.

In conclusion, Buiter cautioned that this technical expertise should not include prescriptions to substitute the nightmare of bureaucratic central planning with an equally unattractive libertarian never-never land. The Soviet Union should learn from the industrialized world's experience over some 200 years of developing a viable societal response to the unacceptable face of capitalism; and Western advisors should therefore emphasize the benefits from its transformation into a thoroughly mixed economy.

László Csaba (Kopint-Datorg, Budapest) noted how the increased radicalism of the proposed reforms of the Soviet economy from the 1989 Abalkin Commission to the Yavlinsky plan indicates an improved comprehension of the nature of a fully- fledged market economy and the socio-political preconditions required for its achievement. None of these proposals, however, has seriously addressed the practical management of the Soviet economy. Historical and international evidence indicates that no country can be stabilized from outside: the domestic authorities' ability and willingness to implement reform are critical to the achievement of market equilibrium and systemic change including privatization, liberalization and the transition to convertibility. Western aid beyond technical, consulting and humanitarian assistance would therefore be wasted until there is evidence of willingness and ability to enact a radical regime change.
Csaba maintained, moreover, that political and economic developments in the republics mean that there is no longer a single entity to be reformed on the basis of a single blueprint. Using (potential) EBRD funds to finance the bottomless barrel of Soviet projects would also deprive the Central European economies whose transitions to the market are already well under way of vital external resources, with no corresponding benefit to the citizens of the Soviet confederation. Moreover, this negative effect will not be offset even if the Soviet authorities spend part of any inflow of Western credits on Central and South- east European goods following traditional patterns of East European intra-trade. On the contrary, the reorientation of commercial relations is a main precondition of not only Central European but also Russian modernization.

Richard Portes (CEPR and Birkbeck College, London) argued that the case for a `Grand Bargain' rested on the West's major, legitimate interest in the Soviet Union's peaceful transformation into a democratic, market capitalist country. A massive aid programme would impose significant opportunity costs, however, by diverting assistance from both Eastern Europe and developing countries, and it might not prevent the Soviet Union's economic collapse. A slide into hyperinflation might even be necessary to break some of the barriers to economic transformation: stubborn beliefs in half-way measures, `anti- crisis' programmes and old-style `reforms'. The Soviet Union differs significantly from Eastern Europe: the Stalinist command economy was chosen, not imposed from outside; it has lasted two decades longer; the resistance of vested interests and the fear of radical change are correspondingly stronger, the memories of the market and private enterprise weaker. Moreover, without a constitutional settlement in which the Union has control of a common currency and sufficient fiscal authority to balance the budget, and a `common economic space', there will be no Soviet economy to aid.

Portes maintained that while Western conditions for aid should not differ in principle from those applied to Eastern Europe, the Soviet Union must go beyond programmes and promises with actions to demonstrate its commitment to reform. It must shift resources from military uses to economic transformation; take measures to make the reform process irreversible; and pass beyond legislation to implementation. Just as it shows little interest in the lessons from Eastern Europe for its own reforms, so the Soviet Union will resist ordinary IMF-style conditionality as it has been applied in Eastern Europe. While some argue that this type of `confrontational' conditionality is inappropriate for a Great Power, the scale of any Grand Bargain will require conditionality as rigorous as that for any other aid recipient.

Portes stressed that the West should not `abandon' the Soviet Union, but should grant it most favoured nation status, reduce export controls to a minimum, and promote cooperation in training and related areas. To justify substantial financial and technical assistance, however, the Soviet Union must demonstrate its willingness and ability to reform so that such aid will be useful; and once it reaches that point, large-scale aid may no longer seem necessary. The Soviet Union is a great country, with immense human and natural resources, for which a few key measures full foreign involvement in oil production, appropriate incentives for agriculture, and reform of the distribution network may improve the balance of payments to an extent that dwarfs any realistic levels of financial aid. Serious reforms will finally make the Soviet Union into the magnet for private foreign investment that it has occasionally seemed to be.

Portes concluded that economic reform in the Soviet Union differs from that in Eastern Europe: the task is more difficult and the rewards greater. But these differences do not justify a qualitatively different approach a Grand Bargain that the Soviet Union should not need either to motivate its reforms or to ensure their success.

Jeffrey Sachs (Harvard University) argued that the Soviet Union has now reached the end of the failed Communist experiment and confronts the prospect of growing chaos on the one side or a definitive turn to democracy and a market economy on the other. The West has an enormous stake in the outcome: chaos in a country with 30,000 nuclear warheads would threaten global security and darken the prospects of the new democracies of Eastern Europe. A peaceful transformation to a democracy and a market economy would immeasurably enhance Western security and may open up new prospects for mutual gains in trade, finance, scientific research, foreign policy cooperation and global environmental management.
The West may significantly influence the outcome in the Soviet Union, where large-scale conditional financial assistance from the West of the sort now flowing to Eastern Europe could greatly enhance the prospects of such a peaceful transition. Making such an offer of conditional aid to support and accompany radical reforms would demonstrate to Soviet leaders that a radical transformation is possible. Even if it were not immediately accepted, it would greatly strengthen the political prospects for reformers in the leadership, who could demonstrate that the hard-liners are costing the country critical Western support that would become available in the event of real reforms.

Sachs stressed that Western financial support must be offered only on a step-by-step conditional basis, linked closely to a mutually agreed sequence of political and economic reforms and contingent on a satisfactory resolution of Western and Soviet security interests. The economic conditionality would be applied the normal manner by the international financial institutions particularly the IMF, the World Bank and the EBRD. Such a programme would obviously require quick Soviet accession to full IMF and World Bank membership, as well as an easing of existing restrictions on EBRD lending to the Soviet Union.

Based on the current state of the Soviet economy, the scale of the required reforms and the experience of Eastern Europe, Sachs proposed Western aid of some $30 billion per year over five years, to be provided by the G24 and international financial institutions in roughly the following amounts: $5 billion per year from the IMF, $4 billion from the World Bank, $3 billion from the EBRD (including private sector co-financing), and $18 billion directly from Western governments, of which $3 billion per annum would come from the US, $10 billion from Europe, and $3 billion from Japan. This aid should be closely linked to a radical programme of market transformation and used to support the balance of payments, a convertibility fund for the rouble, investment in infrastructure, direct lending to new Soviet private enterprises and technical assistance.