"Why this newsletter? At the start of 1990, a new Socialist Economies Unit (CESCE) was established in the Country Economics Department of the Policy, Research, and External Affairs Complex (PRE). The objectives of the new unit are to catalyze and carry out analytical work and strengthen ties among researchers and also between research and Bank operations in these countries. This newsletter is one [of the means for the new unit] to fulfill its dissemination mandate. Its audience is primarily the staff of the Bank Group involved in work on socialist countries, although it is hoped that the information will be of use to a wider audience as well." With those words Socialist Economies in Transition was launched in April 1990. The first editor was Matyas Vince, from Hungary.

Times have changed in the decade since the World Bank’s newsletter began publication. CECSE changed its name several times, but it survived until June 30, 1996, under the consistent leadership of Alan Gelb. The Transition Economics Division became part of the Macroeconomics and Growth Division, led by David Dollar. Alan Gelb was appointed Chief Economist in the Africa Regional Office; David Dollar is now Manager of the Development Research Group. Both contributed much time and effort to creating and keeping alive the newsletter, steering it to safe waters even amidst the turbulent waves of successive reorganizations.

It would take many pages to list all the friends who supported us in our goals of becoming a faithful chronicler of the command economies’ historic transformation, providing a forum for often controversial views and ideas, reporting research work, and building a network of interested institutions and individuals. We traveled a long way to build a circulation of 15,000 for the English- language edition (the newsletter is also published in Russian and Chinese) and to reach tens of thousands of readers online.

As transition remains, alas, an unfinished business, our goal is to keep going in the years to come. To recall some memorable milestones of the past decade, we put together a selection of articles and cartoons from 10 years’ harvest. We start our series with the tumultuous first years: 1990 and 1991.

The future of the CMEA (Council for Mutual Economic Assistance) has a prominent place among the unresolved issues of system reform in the socialist economies belonging to this international organization. The urgency of the matter derives from three considerations. First, CMEA trade relations loom so large in the total trade of all members that the organization’s role cannot be ignored without serious risks to the success of the reform programs. Second, the traditional CMEA regime has been rejected by reformers in the European "Small Six" (Poland, Hungary, Czechoslovakia, GDR, Romania, and Bulgaria) as well as by the USSR. And third, the January 1990 session of the CMEA Council in Sofia seems to have set into motion a process that will either lead to a change of the existing CMEA or to its demise.

Fragmentary reform might be worse than no reform at all; there is no sense delaying a comprehensive reform program until every detail is clarified; the most crucial reform steps must be taken in proper sequence, even without knowing the full sequence a priori and the outcome in detail; ("When we play chess we have to know the opening strategies. But it is impossible to forsee the situation on the chess board after the 25th move"). The trap of decentralization should be avoided; a major obstacle is the lack of transparency in the economy. In the first stage, state-owned enterprises will be transformed into joint-stock companies. In the second, their shares will be sold mainly to the public at auction. Dr. Klaus added that his intention is to privatize large segments of the Czech economy in a few months.

Social sector reforms in Central and Eastern Europe require painful adjustments of attitudes and institutions. Central planning and decisionmaking must be replaced by decentralized control. Rigid occupational definitions and narrowly based education and training have to be replaced by flexible systems that prepare people for new technology and rapidly changing labor markets. Improvements in health care delivery and practice are urgently needed. The World Bank intends to play an important part in this process.

Certain questions deserve continuing reflection. Should the process be fast or slow? Does the state need the revenues from privatization? Should enterprises be demonopolized before being privatized? Should enterprises be financially and technically restructured before being privatized, or can this be left to the new owners? How can ownership arrangements be instituted where the new owners take an interest in performance? These questions invite multidimensional answers. Divestiture models are not exclusive. It may be perfectly possible, in fact, to give workers and managers a stake in their firms, give away a proportion of enterprise equity to the general population (either directly or through institutions), and obtain revenue for the state through general sales. Even in the best scenario, it is unlikely that most state assets can be divested in less than a few years. The near complete unpreparedness of the legal, financial, and fiscal environments underpin this expectation.

For a number of systemic reasons, trying to make the social (state-owned) sector efficient, with few exceptions, would be a hopeless task. "Market socialism," therefore, is an impossible goal—not because social sector managers are corrupt or incompetent, but because the culture within which they operate has not prepared them—nor can it ever prepare them—to behave as entrepreneurs. Options for improving efficiency [include] unrestricted entry of new private firms and privatization of existing social sector firms. Kornai explicitly rejects the notion that society should distribute credits to "impersonal private ownership" or through the "intangible stock market." Instead, only hard loans to stakeholders willing to offer their personal property as collateral [should be provided].

The most urgent analytical and research priority is enterprise reform. The responsiveness of micro-units to the changing economic environment in reforming socialist economies is problematic; it is not clear that market structure, internal enterprise organization, technology, management, and attitudinal patterns are conducive to a strong supply response once prices are liberalized and financial constraints are applied.

A radical change in the environment (that is, reform) might diminish the productive efficiency of the state sector, while the private sector is not yet ready to take up the slack. In the short run, competition between the state and the private sectors has little chance of identifying the entities most suited to the environment that is the desired end-state of reform. The only possibility is to maintain a dual economy during transition. The state sector must be subject to the traditional bureaucratic controls. In some cases, recentralization might even be required during the early months or years of transition. At the same time, the private sector should be allowed to function freely without central help or hindrance.

Eastern European countries are facing the most momentous economic and social change of the last 50 years: privatization of state-owned enterprises. Failure of [earlier] reforms ultimately led to the realization that lack of ownership is the root cause of inefficiency in socialist economies. Privatization will provide a unique testing ground for economics: Can market institutions be created by design rather than through evolution and slow process, characterized by accumulation of knowledge and survival of more efficient forms of organization?

Estimated Bank Commitments and Proposed Commitments in Central and Eastern Europe, 1988–93 (September 1990), (millions of dollars)

Turn the Fish Soup into an Aquarium (Timothy Garton Ash, September 1990)

A Russian joke about the transition from communism makes the point better than any learned disquisition. We know that you can turn an aquarium into fish soup, the question is, can you turn the fish soup back into an aquarium? Western models play a major part, both in the design of the new political institutions of East Central Europe and in the formation of parties. Everywhere, teams of Western experts have been called in to give their advice.

Transition is, as Ralf Dahrendorf has written, unavoidably a valley of tears. Even the Germans, with far better starting conditions in 1948, got poorer before they got richer. There is, to be sure, a general consensus among Western governments and political elites that "we should help" the transition to democracy in East Central Europe. But how many politicians are prepared to even contemplate action on a scale comparable to that which West Germany, after a very sober examination, considers to be necessary for East Germany? Above all, how many politicians are prepared seriously to make the case for such help to their own electors? Ironically, the kind of Western European consumer democracy to which East Central Europeans so passionately aspire may be the kind least likely to help them.

The difficulties in the way of the economic invigoration that Gorbachev has been seeking are formidable. The Soviet consumer goods market has lately ceased functioning almost entirely. Queues and empty shelves are as pervasive as ever, and some particularly scarce products are rationed locally or distributed preferentially to workers by their employers. The ruble is aptly held to be not real money but a kind of lottery ticket, redeemable for goods only with luck and perseverance.

In concluding a discussion of the new reform program in the Supreme Soviet, Gorbachev avowed to radically revitalize finances, stabilize the monetary system, and strengthen the ruble. Liberalization of prices is now promised on a considerable scale. But retail prices of most essential goods will continue to be fixed by the government, apparently at the current levels. The government proposes to continue the extensive control over materials supply, at least through 1991.

Gorbachev’s new program has been criticized as being vague. With one republic after another asserting sovereignty, the very existence of the USSR as a viable political entity can no longer be taken for granted.

[Editor’s note: Eugenio Lari was in charge of Bank operations in the former socialist countries until 1991, when Russell Cheetam and Kemal Dervis took over as directors of the two new regional departments serving the CEE countries.]

The lending activities of the World Bank in Central and Eastern Europe (CEE) have increased dramatically in both quantitative and qualitative terms. Against five operations for $543 million (or 3 percent of total World Bank lending) in FY89, total World Bank commitments in FY90 were $1,839 million (or 12 percent of total World Bank lending) in 10 operations. With the expected return to active status of Romania and the new members (Bulgaria and Czechoslovakia), commitments in FY91 are projected at 15 loans for about $2.5 million.

An attack on "market socialism" is now coming from a number of East European economists, converts to free market ideology, who usually express regret at their own "naïve" illusions of earlier times about the "reformability" of Soviet-type "socialism." A leading exponent of these ideas is Janos Kornai. He expresses his views systematically and cogently in The Road to a Free Economy (1990). Its basic argument is that there is no third way, no viable alternative to Western capitalism in one of its several forms, once one rejects Soviet-type socialism.

Electricité de France, the Dutch railways, Norwegian coastal shipping, American airports, Swiss postal buses, Swedish telephones, even Budapest’s own municipal transport system could be contrasted with examples of wasteful or unsuccessful "public" activities, which exist also. And what of the role of the state as provider or financier of health, education, public parks, roads, and other infrastructure; old-age pensions; a better environment; and low-rent housing? Do such things lead us along the road to serfdom? Perhaps we would both settle for a kind of welfare-capitalism-with-a-human-face, not easy to distinguish from a socialism with a big role for private capital and individual entrepreneurs. Much may depend in the end on the stability of the international system that the East Europeans are now so keen to join.

It is hardly possible to analyze Yugoslavia’s economic problems without an understanding of its present political predicament—not even the Soviet imbroglio provides a suitable parallel. Yugoslavia’s peculiar intricate web of conflicting nationalities, religions, and values prevents its quarreling leaders from devising a blueprint for action. And since there are hardly any rules, there can be no coherent game. At the same time, some leaders of Yugoslavia’s six constituent republics seem to have a vested interest in keeping nationalist emotions at the boiling point. In fact, many Yugoslavs are warning that a civil war may be but a few steps away.

The IMF and the Challenge of Eastern Europe: Interview with IMF Director Massimo Russo (November 1990)

A. The oil price explosion and the collapse of the CMEA trade and payment patterns will have serious implications for the region, resulting most probably in a deterioration of their terms of trade, disruption of their exports and imports, and general uncertainties. Many Eastern European exporters geared to the Soviet market will find it difficult to shift to the Western markets or even to preserve their positions in their traditional outlets.

A. No, I do not think we need a revision of our policy. I believe the approach of stabilizing the economy and at the same time enhancing the role of the market forces is the right one, the most effective one. Of course, it is not easy to implement such a program. All countries involved in the transition process should work for a stable currency and sound balance of payments, but to achieve that, stabilization efforts should go hand in hand with market-oriented reforms.

If larger enterprises are given freedom from the disaster of ministerial (i.e., bureaucratic) control and they are thus accorded the right to set their own prices, procure their own materials, and make their own subcontracts, the location of actual ownership is not a matter of prime importance. I would urge that ownership be widely distributed, and I am attracted by the proposed action in Poland, which is strongly supported by my colleague Jeffrey Sachs, to distribute the shares widely to the citizenry, with a special advantage for employees of the particular enterprise. The equity of such an arrangement has an obvious appeal, as does also the resulting sense of participation.

On the eve of unification, East Germany’s public sector, including cooperative farms, accounted for about 95 percent of total employment and output. The state trustee agency Treuhandanstalt (Truehand) was set up in June 1990 to handle the management of this vast empire. Treuhand is de facto the largest and most diversified holding company in the world, with a portfolio of some 8,000 enterprises, many of them multienterprise units, and reportedly holds 40 percent of the total area of Eastern Germany. At its inception, Treuhand also assumed all public debt.

Treuhand’s mandate is to assume ownership of state enterprises and to carry out their privatization, reorganization, or liquidation. Proceeds from the sale of enterprises will be used to cover costs of other units’ liquidation. The expected flow of transfer payments within Germany from the western to the eastern part of the country is anticipated to be well in excess of $3,000 annually per capita for the next decade, in addition to large interregional capital flows.

Restructuring the productive sector is urgently needed to provide a positive supply response and sustain reform. One important question is who will be in charge of restructuring and under what system of incentives? Centralized restructuring that excludes privatization not only may prove too slow to implement but also may produce an undesired selection of enterprises. Therefore, a more rapid move toward privatization may be required to minimize the risks of wasting resources during the restructuring process and to enhance the prospects of a sustained supply response.

Although forcing inefficient enterprises into bankruptcy is an important step, in the absence of well-functioning labor and capital markets it could create a large pool of unemployed workers. The issue of privatization comes up again, as it is impossible to develop a true labor market without simultaneously developing a market for capital. Policymakers should also address the issue of housing ownership and financing, a notorious obstacle to labor mobility in socialist countries. Failure to provide prompt solutions could jeopardize the early results of their stabilization programs.

Disruption in the Soviet economy is much greater than in Eastern Europe or in China. There is a shift to barter, to dollarization, as well as much hoarding. The internal movement of goods is increasingly restricted—people simply do not want to take rubles for goods, points out John Holsen, head of the World Bank’s team that together with the IMF, the OECD, and the EBRD have issued a study on the Soviet economy and recommended a radical economic reform program.

For Soviet officials the most controversial proposal was to move rapidly with price liberalization. That recommendation stems directly from the breakdown of the ruble economy. The government should go ahead with quickly introducing market-clearing prices. Right now, what the Soviet Union needs is simply to make the ruble a medium of exchange once again. The monetary overhang could be absorbed partly by the price increases that are expedited this year; partly by selling state assets to the private sector (small enterprises, retail stores, trucks, service industries); and partly by restricting application of funds held by enterprises. If other appropriate measures are taken, radical monetary reform is not necessary.

The day after the interview, the Soviet government withdrew from circulation all 50- and 100-ruble notes. Citizens can exchange those bills for the equivalent of their average one-month salary, up to 1,000 rubles. To exchange more than the specified amount, citizens must apply to a special commission and must document the origin of their banknotes.

From the Economist’s article "Value Subtractors of Eastern Europe":

[Post-socialist] countries should move gradually to free trade. All-at-once liberalization could flatten a large part of the economy overnight. To give enterprises a chance to adjust and to avoid a crunch that would undermine support for further reform, governments might need to start with high tariffs, promising to eliminate them over, a given number of years …. When reluctant reformers (of Eastern Europe) are willing to take their chance, they might be wise to do the opposite of what Poland did. They should privatize as fast as possible and preferably all at once, but then go carefully on trade.

Response of Jeffrey Sachs in the Economist:

Free trade is especially vital in Eastern Europe. It is the single most effective way—perhaps the only way—to instill real competition in the industries of Eastern Europe, which are otherwise too concentrated , too politically powerful, and too small to generate domestically based competition. Free trade will allow Eastern Europe to import a rational price structure. It will provide the principal source of contacts between Eastern European and Western firms—contacts that are vital for improved product qualities and technologies. Free trade will cause some firms to shrink or fail—but protecting such firms is unjustified.

Heavily managed economies, falling output, and unrealistic expectations of progress handicap the new leaders in Central and Eastern Europe. Market-oriented policies can help to decentralize decisionmaking and depoliticize the economic sphere. Progress will be slow, but the recovery will not begin unless restrictions on private initiative are withdrawn. Gradualism opens the door to an unstructured free-for-all: consumers will go to the black market, firms will produce for the black market. Therefore, a quick transition to a market economy is the most effective strategy.

For policymakers in Eastern Europe, there are two ways to go: backward to repressive control or forward to the market. The worst scenario is that of a mixed economy: capitalism without profit and socialism without planning. The new leadership is anxious to avoid hardship by exercising discretionary controls and restrictions on trade, property, production, and employment. But these tools were discredited under communism; they should be thrown overboard immediately.

Transition from a command economy to a market economy… presents an extraordinary laboratory for economists, international bankers, repentant ex-Marxists, and assorted capitalist carpetbaggers plying their trades—and the lab rats are real people, desperately hoping for something better than they had under communism.

Communism has turned out to be a century-long detour from the nagging question that perplexed Marx and a great many non-Marxists as well: how to reconcile efficient production with a bearable society. Communism produced neither. The dilemma, however, persists, and the question now will be fought out on the terrain where it always belonged—among variations of a liberal, market society. The collapse of communism doesn’t end the debate about the appropriate boundaries between state, market, and civil society, any more than it ended History. The third way, however, is not reform communism but reform capitalism.

The explosion of demand in Eastern Europe for telecommunications services, after decades of neglect, will place unprecedented pressure on manufacturers, service providers, and government authorities. Eastern European telecommunications firms must reduce operating and investment costs and improve productivity (they employ up to 300 percent more people then do the world’s most efficient networks). They must overhaul their corporate structure, develop human resources, and raise productivity without heavy layoffs. In the medium term [they need to] transform telecommunications entities into independent joint-stock companies, set conditions for market entry by other providers (such as licensing and franchising), and establish prices and tariffs. For this, technical assistance from the West is critical.

Hardly six months have passed since the term "privatization" became official Soviet terminology. Privatization in the Soviet Union is perceived as the process of diversifying and decentralizing enterprise ownership and economic decisionmaking. To this end, the All-Union laws, drafted in early 1991, embrace three consecutive processes: elimination of direct administrative control over enterprises, transformation of state-owned enterprises into joint-stock companies (corporatization), and, transfer of ownership rights to private individuals, collectives, and other enterprises. The present All-Union government is the first one to attempt genuine large-scale ownership transformation in the Soviet Union. However, the central authorities allow only the economic and political elite to play an active role in the process.

It has become almost axiomatic to refer to environmental pollution in Eastern Europe as a stark symbol of the old communist system. In fact, the new democratic governments have made little effort to hide the dire consequences, such as vast stretches of dead rivers so polluted that the water is not fit for industrial uses; massive air pollution from coal-burning and metallurgy industries, which is causing high rates of chronic bronchitis; contamination of agricultural lands above metal deposits, resulting in high exposure levels to carcinogens; large areas of forests lost or irreversibly damaged; and rural areas and many cities experiencing water shortages. How to clean up? [Through] market-clearing prices. Highest priority should be given to increasing energy and other natural resource prices to reflect their true scarcity, selective large investment pragmatic laws and regulations, strict fees and fines, and decentralization.

The World Bank has recently completed a retrospective study on the transformation of the economies of Central and Eastern Europe (CEE). All the CEE countries have taken major steps toward system transformation in the past 18 months. Hungary, Poland, and Yugoslavia led the way, beginning in late 1989, and Bulgaria, Czechoslovakia, and Romania followed in late 1990 to early 1991. All have adopted strict stabilization measures, implemented major price reforms, devalued their currencies (with varying degrees of currency convertibility), significantly opened their economies to international trade, and revised their legal framework to allow most forms of private ownership while trying to create a level playing field for private entrepreneurs. The countries have made less progress with restructuring and privatization of large enterprises or with development of the institutional capacity to implement the new legal frameworks effectively.

Spontaneous privatization has been discredited by the perception of abuse and inequity resulting from the wave of such privatizations in 1989 and 1990. Public sales are hampered by the inherent difficulties of valuation, the shortage of domestic capital, concern abut equity, and the sheer number of firms. Mass transfer is inhibited by fiscal concerns (the loss of sales revenue) and by the fear that efficient corporate governance would be sacrificed through such widespread ownership.

Dissolution of the Council for Mutual Economic Assistance (COMECON) will take effect 90 days after the remaining nine members sign the termination agreement June 28. The Soviet Union, Poland, Czechoslovakia, Bulgaria, Hungary, Romania, Vietnam, Mongolia, and Cuba are still divided over a successor organization. The need to find an alternative method of financing trade among the former COMECON countries has become critical. East European finance ministers are considering a Hungarian proposal to establish a Central European payments union. This system would allow trade surpluses between countries to be cleared in hard currency. However, the free-market Czechoslovak finance minister, Vaclav Klaus, has dismissed the proposal as a "poor man’s club" that would hinder the development of more orthodox trade financing and slow the integration of East European economies with Western Europe. Nevertheless, the central banks of Poland, Czechoslovakia, and Hungary are supporting proposals from the Soviet Gosbank and the West European Ecu Banking Association to adopt the ecu banking payments system for intra-COMECON trade.

A. Representatives of the Bank and both the Soviet Union and the republics have had many informal meetings. Formalizing relations in one way or another is one thing, but how to provide technical assistance to the Soviet Union, which is not a full member of the World Bank? Of course, there is a solution: for example, members could establish a technical assistance fund, managed by the Bank. And if the light turns green? I have little doubt that unless there is a prompt and major allocation of Bank resources and staff for Soviet operations, the stress and pain—from bottlenecks and staff overtime —that accompanied the surge in the Bank’s CEE operations will be repeated. Nevertheless, I share President Conable’s view that the role of the World Bank as a multinational financial institution will not be fulfilled until the Soviet Union becomes a member. The Bank can play a major role there, but will it be enough to solve the huge problems of the Soviet economy? That is another question, which you fortunately did not ask.

Central and Eastern Europe’s share in Bank lending increased from a mere 3 percent only two years ago to 18 percent now—a rise from $500 million to $2.9 billion—and the rate of lending likely will stay at that level over the next two to three years

The fiction that has been spread by reform economists now in power in the East is that the key to the turnaround of East European enterprises is to change enterprise ownership. This is an extremely dangerous fiction. Just because an East European enterprise manages to garner a multitude of new private owners, little is likely to change—in fact, in the short to medium run, the structure of output will remain unchanged, the same production technology will be used, quality changes will be unlikely, and management style will stay the same. There is little reason to believe that a large number of inexperienced stockholders with no initial business experience would have a substantial positive impact on the running of a typical East European enterprise. A far simpler and more sensible method of privatization is to create various mutual funds in each country and transfer a portfolio of companies to these mutual funds.

If I were looking for a new Spain in eastern Europe, I would bet on Slovenia, Bohemia, and Moravia, Croatia, Voivodina, Hungary, and possibly some of the Baltic republics. I am somewhat less optimistic about Poland and least optimistic about the Balkan area other than its westernmost part—it simply is much easier for a country to recover to its "normal" rank, after having been temporarily depressed by the disaster called communism, than to rise from rags to riches as have the Republic of Korea and Taiwan (China). The sooner East European reformers regain this historical perspective, the more likely the prospect of their respective countries "rejoining" Europe.

Nearly every major Western consulting firm, investment bank, or accountancy now has its very own Eastern European research division, staffed by "regional specialists," usually American-born executives with Polish or Hungarian surnames. But the Westerner who is willing to make concessions to local conditions is very rare. A businessman of my acquaintance recently arrived in Warsaw for lunch, announcing that he had been in Zurich yesterday and would be in Dusseldorf tomorrow. He professed total ignorance of Polish company structure. Like many other denizens of Eastern Europe’s international hotels and fine restaurants, he may well be destined to emerge from his Polish adventures empty-handed, a victim of the assumption that business works more or less the same way everywhere.

The Soviet Union should renounce the old ways, give up on the dream of partial reform of Communism—we see how ephemeral it is—and move toward a market system and toward macroeconomic stabilization. The hard thing is to cut the knot; to unravel it is impossible. If you try to change prices without changing enterprises, you don’t get a supply response. If you try to change enterprises without changing prices, you get even greater distortions. So there is no alternative but to try to do all that at once. The World Bank can make an important contribution, sharing the experience it has gained in reform efforts all over the world and ultimately providing financing. But all the preaching in the world is not helpful unless policymakers in the USSR want to change. The problem is more a matter of finding the will than of finding the wallet.

On the big bang versus gradualism question, the problem is that one cannot do everything at once, and yet, at the same time, partial reform risks making things worse. The issue is more one of finding the appropriate overlap in reforms than it is an issue of sequencing. There is room for discussion on the appropriate speed for privatization, even perhaps on price reform, but there is one clear lesson of history: no hyperinflation has been eliminated gradually.

The Bank recognizes that while a shrinking public sector is desirable in these countries, it has to be combined with new roles. Social safety nets for the unemployed are required as well as an intangible infrastructure to support the market economy. This involves codes governing commercial transactions, property rights, and the enforcement of those rules. To help the public sector meet these new demands faster and better, the Bank can play an important role. The task is not an easy one, and one cannot be too optimistic about the ability of apparatchiks suddenly to convert to drafters of commercial laws. There is a need for new people in the government administration, and we should support those new people in their task of governing.

[Editor’s note: Russian economist Leonid Grigoriev was one of the coauthors of the radical Five Hundred Days economic plan. Between 1992 and 1997 he was a senior official at the World Bank.]

A. We anticipate no more than three or four major reform variants—one plan for the Baltics, another for Russia and Ukraine, and probably a different one encompassing the Central Asian republics. All the states will eventually create market economies, although at various speeds. In Russia, reform probably will proceed faster than in some other republics, where Gosplan-minded people are still in charge of the economy.

A. Geography has condemned us to live together. It is impossible to change overnight the common currency and the common legal system, nor is it possible to ignore our common history. Under those circumstances, political independence is no reason to stem the traditional trade flow. The Baltic states, for example, can hardly afford to give up their major fuel and energy sources and simultaneously lose the largest markets for their manufactured products.

Of course, if the republics implement widely different types of reforms, and at very different speeds, the coordination of economic policies, taxes, and customs regulations among other things will be hard, if not impossible. The ruble should remain the common currency for the time being, at least in this most crucial stage of reform, if only to preserve the normal flow of interrepublic trade. I believe that eventually there will be a three-tier currency system in the new states: rubles, dollars, and local currencies all will circulate.

A time of frightening crisis can also be a time of action and aid. Both in the short and long term, all the Soviet republics need as much technical assistance as they can absorb. The main aim should be to develop the skills for instituting and maintaining a market economy, since in the Soviet Union virtually all such skills are lacking in the fields of macroeconomics, auditing, and law. Concomitantly, a multitude of foreign consultants will be required. Whatever happens, the supply crisis in parts of the country is likely to grow so serious that humanitarian aid, food, and medicine, to begin with, will be necessary this winter.

The overwhelming need is for the Soviet Union—or its republics—to go ahead and introduce radical systemic changes as quickly as possible. Each republic will require its own currency. Preferably, each new currency should be pegged to an outside standard, such as the ecu, because there is no reason why the failure of one currency should be allowed to drag the others down. The republics that are successful in their stabilization will find their currencies indirectly pegged to one another. Since the ruble does not inspire confidence among the non-Russian republics, it seems particularly badly suited for the role of international standard. The West will have to accept the introduction of 15 new currencies and realize that little can be achieved until each republic undertakes its own comprehensive reform and stabilization.

On the eve of transition, the agricultural sectors of Eastern Europe and the Soviet Union were characterized by large, inefficient farms, burdened with high production costs; subsidized food prices; excess demand for food at those prices; a high level of food consumption relative to other market economies at a comparable economic level; and pervasive monopolies in food processing and distribution.