The internal transformation under way in the Soviet Union is potentially the most promising historical development since the end of the Second World War. The war brought about the demise of Nazism; the current changes could mean the end of Stalinism in the Soviet Union. Mr Gorbachev has launched an all-out effort to break with the Stalinist past. There is no reason to doubt his intentions; but one cannot avoid having grave doubts about his chances of success.

Stalin has been dead some 35 years; but so great has been the devastation wrought by his reign of terror that the country has not been able to rid itself of the structures that he has left behind. Khrushchev tried but failed. Gorbachev has already gone much further than Khrushchev ever did in introducing free speech, or glasnost; but in order to attain the kind of popular support which is necessary for a more democratic regime, he must also succeed with his plans for economic reform, or perestroika—and that is where his difficulties lie.

In the absence of economic progress, the hopes raised by glasnost will yield to disappointment and eventually disorder. Disorder will invite repression and the window opened by Gorbachev’s initiative will be shut tight.

The Soviet Union is at a great disadvantage when compared with other communist regimes which are attempting to introduce market-oriented reforms. Both China and Hungary have been successful in agriculture and this has provided a solid base for further reforms. China has the overseas Chinese community to draw on and in Hungary the spirit of enterprise has never been totally extinguished. In addition, both countries have received considerable support from the World Bank and other foreign sources. Even so, the reform process has run into difficulties, especially in Hungary.

In the Soviet Union, the infrastructure necessary for economic reform is simply non- existent. Job security on the one hand and the lack of anything attractive to buy with rubles on the other have removed all incentives for efficient production. The only rewards available are the perks of office, and they have nothing to do with efficiency. There is a truly astonishing lack of understanding of the market mechanism at all levels of society. Newly permitted co-operative enterprises encounter almost insuperable obstacles and widespread hostility. In my opinion, perestroika cannot succeed without the infusion of managerial and entrepreneurial skills from abroad.

The Soviet Union has recognized the need for joint ventures but is unwilling to spend hard currency on consumer goods. Without proper access to the domestic market, joint ventures cannot reach the critical mass which would be needed for them to make an impact on the Soviet economy.

The perceived wisdom, both in the East and the West, is that foreign borrowing is best used for investment purposes. This doctrine is perilous for a planned economy because a state mechanism cannot invest efficiently. The amounts wasted can be very large, as the experience of Eastern Europe in the 1970s has shown.

It would be much better for the Soviet Union to allocate a large amount of hard currency for consumer goods. This would help reestablish the value of money and build immediate popular support for perestroika. Given the proper incentives, joint ventures could be relied on to make the right investment decisions. They would create an enclave of efficiency, which would have a much-needed demonstration effect on the rest of the economy.

Presumably, there would be a two-tier currency system consisting of a convertible and a non-convertible ruble. The difficulty lies in designing the proper transmission mechanism between the two currencies. It is imperative to avoid inflation in non-convertible rubles because it is through the enhanced purchasing power of his money that the ordinary citizen would benefit from perestroika.

This could be accomplished by allowing domestic distributors of consumer goods to bid for convertible rubles on a competitive basis. The resale of these goods for non-convertible rubles would reduce the supply of money and enhance its purchasing power.

Even so, it may be necessary to remove the overhang of unspent rubles by exchanging them for convertible rubles. The availability of desirable consumer goods at reasonable prices would render the exchange tolerable and the enhanced purchasing power of the ruble would allow the authorities to introduce much-needed price reforms in the rest of the economy.

The periodic auctions would establish an exchange rate between convertible and non- convertible rubles. Goods produced by joint ventures would enjoy a competitive advantage over imports due to their lower hard currency content. This would be reinforced by a scale of tariffs which would be stiffest for finished goods and most lenient for capital goods. Another option is to make a preferential allocation of currency for the products of foreign companies which agree to set up joint ventures. Foreign participation in distribution and other services, where the need for efficiency is even greater than in manufacturing, would be also encouraged. Profits could be converted at the exchange rates established by the periodic auctions.

To ensure critical mass, several billion dollars’ worth of rubles would have to be auctioned off ever year. The auctions could tail off gradually as both exports and import substitution pick up. Even so, the foreign exchange requirements would exceed both the willingness and the ability of the Soviet Union to borrow.

It is at this point that imaginative leadership from abroad could play a decisive role. An international banking syndicate could be formed to finance the auctions as well as the credit requirements of the joint ventures. Half the capital would be subscribed by the Soviet Union (pledging some of its gold reserves) and half by the developed countries, including Japan and even Korea.

Large-scale foreign credit would have to be conditional on a large-scale reduction in conventional armaments. Since both issues are complex and time is short, the two sets of negotiations would be best carried on concurrently.