‘Don’t Bother Us With The Facts’: Allies Preempt IMF-Led Study On Soviet Economy

The Center for Security Policy today took note of the bizarre circumstances now unfolding as Western governments — many of whom have recently lavished billions in their taxpayers’ funds on Moscow center — begin to confront the findings of an IMF-led study on the Soviet economy they commissioned last July.

This comprehensive analysis of Soviet economic prospects and how the West might best support putative efforts toward systemic reform in the USSR has been jointly conducted by the International Monetary Fund, the World Bank, the Organization for Economic Cooperation and Development and the newly established European Bank for Reconstruction and Development (EBRD). The decision to commission such a study was a classic bureaucratic stalling tactic in the face of a full-court press by the West Germans and other European allies at the Houston Economic Summit. These allies were then demanding that some $20 billion in emergency financial assistance be immediately disbursed to the Kremlin.

Fortunately, at that time the United States, Great Britain and Japan were reluctant to squander taxpayer funds on a failed and unreformed Soviet economy. Indeed, President Bush went considerably farther than other Western leaders in proposing that there be three firm preconditions met before U.S. taxpayers were obliged to assume new credit exposure associated with aiding the Soviet Union. Those three preconditions were:

• a sharp reduction in the then-estimated 18% of annual Soviet GNP wasted on military expenditures (a percentage Soviet Foreign Minister Eduard Shevardnadze subsequently acknowledged was actually roughly 25%);

 

• curtailing or terminating the flow of billions of dollars in Soviet yearly aid to Cuba (and presumably to Moscow’s other bankrupt and dangerous clients around the world); and

 

• the actual implementation of comprehensive structural economic reforms which would offer some promise that large-scale assistance flows would actually contribute to the transition to a viable market economy in the Soviet Union.

In order to buy time for these changes to be undertaken by the USSR — and to provide an analytical basis on which to make informed lending decisions when and if they were made — the IMF and its partner organizations obtained a full six months to accomplish the mandate set forth by the Houston summiteers.

In the intervening period, however, Mikhail Gorbachev showed his true colors. At first, he publicly committed to — and then abandoned — the radical "500-day" Shatalin plan as a blueprint for fundamental economic reform. Virtually every Western expert in this field saw the changes called for by the Shatalin program as a "do-or-die" requirement for the Gorbachev regime’s stated intention of moving toward a market economy. Not surprisingly, in the wake of Gorbachev’s breathtaking retreat, conditions have rapidly deteriorated with ever more serious bottlenecks developing. This is particularly true of the transportation and distribution sectors as evidenced by the widely reported, albeit selective food shortages.

Ironically, a number of the prescriptions reportedly contained in the IMF-led study resemble elements of the now-shelved 500-day plan. These include, to name but a few:

• price liberalization accompanied by severe wage restraints;

 

• drastic cuts in state subsidies to Soviet industries;

 

• massive privatization of state-owned assets;

 

• a complete overhaul of the taxation and banking systems; and

 

• truly liberalized foreign trade.

Moreover, the Houston-mandated study is said to recommend the same sort of "cold turkey" transition to a market economy — akin to that being undertaken by Poland — as that central to Shatalin’s program for jump-starting the Soviet economic system within a 500-day period.

To the obvious discomfiture of the IMF and its counterparts, Gorbachev is moving in just the opposite direction — and doing so at flank speed. In particular, his regime is: recentralizing the political and economic decision-making of the country; relying increasingly on the old-style, central-planning mechanisms of the USSR; and demonstrating a new determination to stanch the bid for freedom and market-oriented reforms of the republics.

The Center believes the good news is that, despite a debilitating lack of Soviet data disclosure and transparency, the IMF-led study has shed new light on the unprecedented dimensions of the chaos within the Soviet economy. It appropriately concluded that large-scale financial and energy-related assistance to the central authorities of the USSR would be tantamount to knowingly squandering taxpayer funds in the absence of a coherent and mature reform program there.

The bad news is that, without waiting for completion of the IMF-study they requested, Western leaders have already committed some $20-25 billion in official credits and pledges to Moscow since the Houston Economic Summit. What is more, there is no evidence that — in the face of this sobering assessment — any change will be forthcoming in the attitude of the G-7 leaders (with the possible exceptions of the U.K. and Japan) who remain desperately determined to shore up the Gorbachev regime at virtually any cost.

Finally, the Center is grievously concerned that Western leaders — having already decided to disregard the objective analysis sought from the IMF and World Bank — will now attempt to pervert the integrity of these institutions in order to justify, or at minimum facilitate, continued, irresponsible financial flows to the central authorities in Moscow. In this vein, the European Community ministerial on 13-14 December agreed to press for immediate Soviet membership status in the IMF and World Bank, going well beyond the Bush Administration’s idea of granting Moscow a "special association" with these organizations — offering institutional expertise but no access to funds.

In addition, the EC ministers have made it clear that they are determined to dispense with the current borrowing restrictions placed on the Soviet Union within the EBRD. Such restrictions were the very basis of Administration and congressional willingness to consent to the creation of this institution with taxpayer resources for the original purpose of supporting solely the emerging democracies of Central and Eastern Europe. Given the Bush Administration’s abysmal track record of abandoning preconditions — especially those involved in East-West financial relations, the Center is confident that it will shortly acquiesce yet again to such pressure, barring congressional intervention.

The Center for Security Policy believes that assistance to the Soviet Union at this time should be limited to the kind of legal, technical and analytical advice reportedly endorsed by the IMF-led study. Even such intensive advisory services by these and other Western institutions, however, should be carefully targeted to the reformist republics and localities of the Soviet Union — not the increasingly repressive Kremlin.

Congress should hold hearings at the earliest possible moment on the conclusions and implications of the IMF-led study. In addition, it is essential that the Bush Administration be required to submit to the legislative branch its own interagency-vetted assessment of Soviet creditworthiness before any further commitment of American taxpayer guaranteed credits of any kind is authorized.

Moreover — if, as the Center expects — such a creditworthiness assessment supports the conclusion that prompt repayment of U.S. government guaranteed loans is no better than a fifty-fifty proposition, any such transactions as are authorized (for example, Commodity Credit Corporation three- or ten-year guarantees for grain purchases) be formally described as outright grants. Doing otherwise would represent a wholly disingenuous misrepresentation of the facts to the American public — which will, in all likelihood, ultimately have to pick up the tab.