Just one year ago, I organized an international task force, under the authority of Prime Minister Nikolai Ryzhkov, to study the possibility of establishing an “open sector” within the Soviet economy. The idea was to create the embryo of a market economy within the body of a centrally planned economy. The study continued until May 1989 with some 70 people participating at  one time or another, but it did not reach any firm conclusions. After a few months I personally concluded that the idea was impractical. The body of the mother was too diseased to allow an embryo to flourish.

The best way to understand the situation in the Soviet Union today is to think of a centrally planned economy with the center knocked out: The parts scurry around trying to survive as best they can but they are not really viable on their own. The only reason the paralysis at the center does not cause instant death is that underneath the form of a centrally planned economy there is a well-developed informal economy. But the informal economy also feeds off the centrally planned economy in many ways—so it can not keep people alive indefinitely if the disintegration continues.

There are at least three reasons why the center has become paralyzed One is that the leadership lacks even an elementary understanding of economics and the state apparatus beneath the leadership is both unwilling and unable to function in a democratic fashion. The second is that a grave conceptual error was committed when enterprises were given greater autonomy before they were reconstituted as autonomous entities. They continue to function as bureaucratic units but without the controls that are necessary to make a bureaucracy perform. As a result, prices are rising and output is falling. The third is that a number of republics are clamoring for greater independence and simply refuse to obey orders from the center.

These three factors mutually reinforce each other, and are in turn reinforced by the total lack of positive results from what perestroika there has been so far, to create paralysis in decision-making.

In this environment a market-oriented open sector is not feasible. For one thing, what would serve as money? The ruble does not fulfill the criterion of money because it is practically in unlimited supply; but if a special hard currency, a “valutny ruble” (to borrow Lenin’s name for the currency used during the New Economic Program of the 1920s), were introduced, all the existing and yet-to-be-created rubles would be converted into it, making the latent inflation manifest. That is what happened in Poland where the dollar was allowed to be freely traded, causing the current hyperinflation.

Before a market-oriented open sector can be established, far reaching changes must be made in the Soviet economy as a whole. These changes can be summed up in a single sentence: The ruble must be turned into a real currency.

But contained in this single sentence there is a multiplicity of requirements. The state budget must be brought into balance; the relationship between the Union and the republics must be regulated; state enterprises must be made to obey market discipline; and the so-called monetary overhang—some 250 billion to 300 billion of unspent rubles in the hands of the population— must be removed. Of these requirements, making state enterprises obey market discipline is

by far the most difficult. It has not been accomplished anywhere, today’s Hungary included. To accomplish it would require a thoroughgoing administrative price reform and then a tying of wage increases to increases in profits. Capital has to be paid for and there must be positive real interest rates. Bringing market forces to bear on enterprises is not enough; administrative measures must also be employed, especially in the case of loss-making enterprises.

There is a great deal to be done and the various measures must be properly coordinated. I confess I do not believe the Soviet Union is capable of doing it on its own, especially as there is no general agreement on what is to be done. There are those who would like to revive the old mechanism and those who reject the need for any central decision-making. Only a few people recognize that a democratic system of government also needs an effective executive branch, and even they disagree on the shape that it should take. That is because the very basis of the Soviet Union has been brought into question. The universal principle uniting the Soviet Union was the communist state (which was itself supposed to wither away). Now that the old dogma has lost its persuasive power and the machinery of oppression no longer operates, the various nationalities seek to reassert themselves. Since their claims overlap, conflict is inevitable. Without resolving this issue, democracy cannot take root.

The only democratic solution is some form of confederation in which the constituent republics enjoy a large degree of autonomy. The British Commonwealth serves as an obvious example because the independence of the units has grown over time, although the analogy is misleading: The Soviet Union is likely to retain a larger degree of cohesion than the Commonwealth because its territory is contiguous and its parts economically interdependent.

I believe Mikhail Gorbachev would favor such a solution, but his freedom to maneuver  is severely circumscribed by his lack of success in the economic sphere. He would need the promise of large scale assistance from the West to make it a practical option. If the ruble could be turned into a sound currency the various republics could be given a great deal of autonomy and perestroika could proceed at differing speeds in different places. The Baltic republics, in particular, could begin to function as part of the “open sector” and serve as a gateway between the outside world and the rest of the Soviet Union, The process of disintegration would be reversed, and the integration of the Soviet Union into the world economy would begin.

This is the moment for President Bush to offer a grand alliance with the Soviet Union. A mutual security and assistance pact between NATO and the Warsaw Pact would serve to orchestrate all-round disarmament and to redirect resources to the rebuilding of the economies of the Eastern bloc. A fraction of the savings on defense would be enough to reverse the economic disintegration of those Warsaw Pact countries that have adopted a democratic system of government.

To be specific, the annual budget deficit of the Soviet Union is estimated at more than 100 billion rubles; in addition, there is a so-called monetary overhang of, say, 250 billion to 300 billion rubles. But the black market rate of the ruble is already around 15 rubles to the dollar. (The official rate on commercial transactions is $1.60 to the ruble.) Thus, hard currency credits in the region of only $25 billion would be sufficient to stabilize the ruble and that figure is only a fraction of the potential savings on NATO. Assistance would be best channeled through an international monetary institution specially organized for the purpose, and linked to the World Bank and the International Monetary Fund.

Time is short. In the absence of a major new policy departure by President Bush, the internal pressures in the Soviet Union for greater autonomy, including separate currencies, are likely to escalate, especially in the Baltic States, forcing Mr. Gorbachev either to engage in a policy of repression or to quit. Either way, the moment will have passed.