'Shock Therapy'--With Emphasis On Shock

Boris Yeltsin called it "shock therapy." For millions of Russians and their neighbors in other republics of the former Soviet Union, it meant a distinctly unhappy New Year. In Moscow's state stores, the price of bread quadrupled. The free-market price of sausage went up more than sixfold, and pork sold for 465 rubles a pound-more than the average wage for a month's work. Yeltsin's overnight price reform had Russians worrying about runaway inflation. "We used to go shopping with one 10-ruble note," said a worker named Yuri. "Now we need a suitcase full of them."

Yeltsin insists that things will have to get worse before they can get better. "The economy is sick," the Russian president said in a New Year's message. His cure was a sudden shift from the centrally planned economy to free-market mechanisms. Higher prices were intended to lure more goods into the shops, in the hope that prices would stabilize when supply and demand come into balance. "It will be hard, but the period will not be long," Yeltsin promised. "We are talking of six to eight months." With a painful winter ahead, it was by no means certain that Yeltsin would have that much time before the Russian people-and the military-lose patience. And thorough economic reform will take far longer than Yeltsin hopes. Meanwhile, sharply higher prices could prove to be more shock than therapy.

Exactly two years ago, Poland began shock therapy of its own, freeing prices and slashing government subsidies for most essentials. The gain was worth the pain. Although Poland has had to endure prolonged recession and widespread unemployment, its economy has begun to turn around. Shortages of consumer goods have been eliminated. Inflation has dropped sharply, from a rate of 1,266 percent in 1989 to 70 percent in 1991. Russia faces even stiffer challenges. "In no way can [Russian] living standards improve within a year," says Leszek Balcerowiez, who has just stepped down as Polish finance minister and has visited Moscow to advise Yeltsin. "You need years for that."

Yeltsin's price reforms seem to go just far enough to inflict pain on consumers without guaranteeing any long-term gain. In theory, individual state stores set their own prices, but so far most of their prices appear to be set by bureaucrats rather than market forces. And although most prices have been decontrolled, ceilings have been set for key commodities ranging from milk and bread to fuel oil and vodka. The sharp price increases in Russia forced some of the other former Soviet republics to follow suit more quickly than they had planned.

Washington endorsed Yeltsin's program by urging that Russia and five other members of the new Commonwealth of Independent States be granted full membership in the International Monetary Fund and the World Bank, which would enable them to apply for loans to ease the transition to a market economy. But some economists complained that price reform was not accompanied by other changes. Russia has only begun to privatize land and other state property, and the republic still does not even have a budget. Radical Russian economist Gregory Yavlinsky warns that, without the proper preparation, price reform may produce nothing more than a staggering increase in the cost of living.

Reform will come much harder in Russia than it did in countries like Poland. The republic is vastly larger, with a volatile ethnic mix that does not exist in Poland. Russia's chronically inefficient distribution system is crumbling rapidly. One neighbor to the south, Armenia, has increased its agricultural production by privatizing farmland. But the added produce cannot get to market in Russia because of inadequate rail transport.

The most tangible impediment to economic reform is the military-industrial complex, which in the past devoured as much as 30 percent of the gross national product. Yeltsin is moving toward a smaller, all-volunteer army. That is essential for the economy, but it remains to be seen whether he can pull it off. Millions of soldiers and defense workers will have to be retrained, factories will need retooling and the generals and plant managers will have to surrender most of their power.

Perhaps equally important, the mind-set of the Russian people is quite different from that of Poles or Hungarians. The Soviet system taught them to believe in a kind of egalitarianism that is suspicious of individual advancement. Profit is increasingly honored in Eastern Europe, but in Russia the middlemen who make money by bringing suppliers and consumers together are regarded as criminals.

Countries like Poland have had far more experience with free enterprise. Communism was forced on the Poles nearly 30 years after it was imposed on Russia, and the Polish economy was more advanced to begin with. Even under Communist rule, 80 percent of Polish farmland remained in private hands, while a few private businesses were allowed to operate. "We, after all, did have the private sector," says Stanislaw Ciosek, Poland's ambassador in Moscow. "But here, by and large, these people have not had that kind of historic school at all. They were transferred straight from feudalism into Lenin's or Stalin's system of government."

Turning his people into capitalists, and doing it in a hurry, may be a task that is beyond even the talents of Boris Yeltsin. If he fails, the outcome could be frightening. "The situation in this country and its capital is very much like that of 74 years ago," writes the Moscow newspaper Nezavisimaya Gazeta. "People queue for bread, the empire is falling apart, the number of small sovereign republics is mushrooming and armed citizens in exotic uniforms are marching through the streets and squares of former district centers under the multicolored banners of new independent states. " All this is so reminiscent of the civil war that began in 1918 that many Russians fear the past is fated to repeat itself But whatever happens, a communist economy seems to have no place in anyone's future. Russia's only choice is to break sharply with the past-and hope for the best.