The “Ryzhkov Plan”

Economic Report of Premier Nikolai Ryzhkov to the Supreme Soviet. 24 May 1990.

 

Prime Minister Ryzhkov, faced with Shatalin’s radical proposal, appealed to Soviet lawmakers to reject a program that would bring a quick end to state management of the economy. Warning that an overnight end to state ownership of industry and agriculture and government central planning would plunge the Soviet Union into chaos, Ryzhkov called for a compromise that would ensure the gradual development of a market economy without jeopardizing the country’s stability. He would be stunned in September when Gorbachev, who had often wavered before calls to abandon the principles of socialism, sided with the reformers and rejected his plan.

Original Source: Moscow Television Service, 24 May 1990.

Esteemed comrades. Probably never in past decades has the USSR Government been obliged to put forward such a difficult and extraordinarily crucial report on measures which, in essence, really determine how the people are to live in the future. It is precisely this circumstance that obliges me to address not only you, members of the USSR Supreme Soviet, but also all the citizens of our country. I am convinced that the extremely difficult tasks and problems which the government has set out in its report on the country’s economic situation and the concept for a transition to a regulated market economy will catch the attention of every Soviet person. For, in essence, the transformations which we are to implement will predetermine the lifestyle and destiny not only of the present generation, but of future generations too.

The country has been consistently drawing closer to this decisive step-I shall put it bluntly–over the whole five years of perestroika. We have been advancing toward it through radical changes and profound, far from painless reinterpretation of all our views of socialism; through reevaluation of the essence of such concepts as democratization, ownership, the market enterprise; through a new understanding of the role and position of the individual in the system of economic management; and much else. We have come to decisions which very recently were uncharacteristic and uncustomary for our public opinion. Therefore, I assume it is understandable how complex, crucial, and intense the work carried out by the government over the past months has been. The final result is reflected in the report which is under discussion today. It has been prepared in fulfillment of the decisions of the Second Congress of People’s Deputies of the USSR which supported the program proposed by the government for the recovery of the country’s economy.

I shall recall that the congress pointed unambiguously to the need to accelerate the radical economic reform and the whole process for forming a market. The government was instructed to intensively study and take maximum account of the proposals and remarks made by the USSR people’s deputies. This work began immediately after the congress. Its main aim was to give the government program which the congress had approved a specific content that emerged from the whole complex of problems relating to the transition to market relations. This aim, precisely, occupies the central position in the program and this is understandable.

First, the market is a condition for a radical restructuring of the system of economic management which has come about; for the very fundamental changes in production relations and; in the final analysis, the formation of a qualitatively new cast for our entire economy. The moment has come when we must take a decisive step, since the old economic system has lost its viability and a new one must be created without delay.

Second, such a fundamental restructuring of economic life, and on such a scale, is without direct analogy either in our own or in foreign practice. The specific conditions do not permit the transfer of anyone else’s experience to our social system on a one-for-one basis, although on the whole, everything which is useful and acceptable of that experience accumulated abroad has to be used. But to ensure complete success we need largely nontraditional and at times completely new solutions.

Third, the complexity of the problems which we will inevitably come up against in the near future quite naturally provokes an enormous scattering of views on possible ways of overcoming them. All of this had to be taken into account in the course of preparing the concept. All central economic bodies were involved in its elaboration. The more important tenets were discussed at conferences with the leaders of enterprises of industry and agriculture; with workers in the system of material and technical provision, of financial bodies, banks; with economic scholars; and the heads of government of the union republics.

I would like to draw your attention to serious disproportions and imbalances. These, moreover, are increasing on a scale so far unknown to us. A kind of economic discrepancy is becoming more and more apparent. What is involved is that for the first time in many decades a fall in the absolute parameters of public-sector production and in its efficiency is underway, with a simultaneous and rapid growth of the population’s money income.

Compare the following figures. In only four months, the national income fell by 1.7 percent while money incomes increased by 13.4 percent. In a word, over the past two years the population’s income rose by R105 billion [rubles] or by 23 percent. This is almost equal to the absolute additional growth over the past seven years. Such an ostensible plus for the economy was turned into a minus by the acute increase of crisis phenomena.

Even the unusual growth of trade turnover and the increase in production of many kinds of goods does not help. The consumer market is empty as before. The economy’s imbalance is increasing. The disparity between money supply and commodity resources in cash and non-cash turnover is snowballing.

The country’s foreign exchange situation remains complicated. It has grown particularly acute in recent months. To a large extent this is connected with the fact that even after the confirmation of the plan for 1990, and in connection with the worsening of the population’s provision with food, the government was forced to make a decision on additional major purchases of grain and food products abroad to a value of about R3 billion-including 27 million tons of grain.

With the aim of improving the situation, the government is trying to find additional export resources and opportunities for reducing imports in order to restore the confidence of our partners abroad.

The USSR Council of Ministers considers it necessary to say frankly that if all of these trends continue to develop in the economy, then the subsequent reforms planned by the governmental program and the concept of switching to a regulated market economy which has been put forward for our attention will have to be effected in far more complex conditions. Many unpopular and extremely necessary decisions will be perceived to be even more painful.

The government of course does not shirk is responsibility for fulfilling the plan for the current year. Within the framework of our competence, we are taking the necessary steps, but it is exceptionally difficult to ensure their effectiveness in the situation which has now arisen.

I will remind you that in the report on the essence and the basic tenets of the program for improving the economy, the government particularly stressed the extraordinary need to consolidate all the forces of society toward fulfilling the measures proposed. In this we hoped for the energetic and constructive activity both of the center and in local areas.

If we now speak of how it is, you will agree that this has not happened. But, while there are no positive changes, a reduction in the level of control over the national economy is evident. To this should be added a fall in economic discipline, especially in filling orders and the fulfillment of contractual obligations.

The problem of enterprises scaling down plans has become very acute. If you sum up the production programs they have adopted, you can see for yourself that, throughout the country as a whole, the volume of gross national product will be approximately R 12 billion less than was approved by the USSR Supreme Soviet. The country is in practice living according to plans which have been scaled down by enterprises, but different targets had been outlined, you see. Things are at their most unsatisfactory with the plans for the output of consumer goods. Judge for yourselves: The production programs adopted by enterprises are R27 billion less than was provided for by the state plan, and enterprises of republican subordination have a more than 80 percent share of this.

Economics and politics are inseparable. The results of the development of the national economy over the past months are convincing corroboration of this. Political instability affects the economy very forcefully. The country is sustaining perceptible damage because of the conflicts between nationalities, strikes, demands to the center which are increasingly taking on the nature of ultimatums, and the intensification of centrifugal tendencies. Over the past four months, in comparison with the corresponding period last year, the output of industrial production has decreased by 18 percent in the Azerbaijan Soviet Socialist Republic [SSR]; by nine percent in the Armenian SSR; and by eight percent in the Georgian SSR. The shortfall in contractual obligations for supplies of output of the industrial enterprises alone of these republics is R868 [figure as heard], or 28 percent of the total volume of the shortfall in supplies in the country. In the Tajik SSR, industrial production has decreased by almost four percent. The output of production has also fallen in the Baltic republics. Over the period from January to April, losses of working time related to conflicts between nationalities and strikes amounted to 9.5 million man-days, whereas over the whole of last year 7 million man-days were lost for the same reason.

Neither are various kinds of internal barriers improving the economic situation. They are being artificially erected on the path of the interregional and inter-republican links which have come about. The imbalance is being felt more and more acutely not only in the consumer market but also in the production sphere. In conditions in which the amount of money in enterprises’ accounts is growing while there is virtually no increase in material resources, it cannot be otherwise. The weakening of the ruble has led to the development of trading in kind between enterprises. There has been a return to a primitive form of barter trade. And the leaderships of a number of republics and oblasts have begun to encourage these tendencies. Distorted forms of goods distribution have become widespread. In particular, trade and enterprises have contributed to a large extent to the emptying of shop shelves.

I cannot pass over another phenomenon from the sphere of the paradoxical. We are extending the rights of labor collectives and of local bodies. It appears that the greater the degree of autonomy, the greater will be the degree of independence. But, in fact, something which is the converse is happening. Demands and claims to the center by enterprises and regions are mounting like an avalanche. At times whole industries are thrusting on the government the urgent resolution of social issues, demands for resources, supplies and supplementary capital investments.

Moreover, as a rule this takes the form of an ultimatum with strike threats. One asks oneself whether the government is in a state to work in the slightest bit efficiently if ultimatum upon ultimatum is placed on its desk day in, day out. Any appeals by us to make a realistic evaluation of the country’s possibilities are perceived as being retrograde, a lack of desire to meet the people halfway in their vital needs and requirements. I can understand that strikes are an extreme means, but it would seem that some people have already forgotten how to see where they go too far. Even the law on strikes is being broken almost everywhere.

The government urgently requests the USSR Supreme Soviet to address all working people with an appeal to refrain from staging strikes, to find other forms of resolving the conflicts that occur, and to avoid extreme measures. But if, in fact, there is no other way, then to strictly observe the legislation that is in effect.

Comrades, we all know how many acute social problems there are in the country, but who will not understand the desire to resolve them as quickly as possible? And we would no doubt manage to do a great deal if our national economy were to work efficiently. But one cannot get away from reality with wishful thinking. It has been estimated that Rll7 billion will need to be expended from centralized sources on the implementation of the proposed social measures in the next five years. The Supreme Soviet has already evaluated what we do in fact have at our disposal: It has confirmed yesterday an expenditure of R13.4 billion for these purposes in the current year. In other words, in order to fulfill the program to a maximum degree, we shall need almost ten years. If one interprets a program like this critically, implemented at the expense of centralized sources, then one cannot help asking whether we are not starting to make the mistakes of the past again. As is known, the essence consisted in racing ahead, a lack of desire to come to grips with the actual possibilities of the economy. In a word, in no way can we get out of the habit of living on credit.

And finally, the last thing; the decline in labor, contractual and financial discipline, and disdain for the interests of partners are fairly substantial reasons for the increasing imbalance in the national economy. The economy is not capable of operating normally and developing in conditions of rally-type democracy. It has its own rules demanding precision, strictness, and always a very great sense of responsibility by the leaders. In this respect, we are asking the USSR Supreme Soviet to adopt the relevant law as soon as possible.

Summing up the results of what has been said, I would like to stress yet again that the USSR Government will take every possible measure to carry out the plan confirmed by the USSR Supreme Soviet to achieve stabilization of the economy. At the same time, it is quite obvious that this is not sufficient to eliminate the deep-seated reasons for the trouble in the national economy. In order to extricate it from the crisis, to impart dynamism to the country’s social and economic development, to achieve a real improvement in the life of Soviet people, a decisive transition to a regulated market economy is needed.

Comrades, the conclusion that it was necessary to switch to market relations as a fundamentally different model of economic management as opposed to the system of distribution by directive was reached in the country as long ago as 1987. This was stated quite clearly in the governmental program for improving the economy and in the decisions of the Second USSR Congress of Peoples Deputies.

You also well aware that this approach has its opponents, too. Arguments are continuing in society. I must say that the government has most carefully analyzed the possible options. But again and again, when we weigh all the pros and cons, we see that the retreat option that is, the return to the old methods–has no future.

Our choice has been made: It is necessary to move toward a market economy. What is in the center of attention now is this main question of how we are to do it, and do it in such a way as to overcome the transitional period as painlessly as possible and, on the basis of the new system of economic management, to ensure in as short a period as possible an upsurge in production and an increase in its efficiency.

The whole difficulty lies in the fact that in switching to market relations it is necessary as far as possible to avoid destruction of the framework of economic links, and to protect the population from the negative consequences which will inevitably arise and which we must foresee.

That is the task in general terms. It is an extremely complicated task which has no simple solution. But the times are such that there are no simple solutions in life today. It is necessary to foresee many things in order to ensure that the market mechanism works efficiently and begins to produce the results which we are counting on.

What conditions must be created for the transfer to the regulated market? The answers can be briefly given as follows: First, it is necessary to ensure real independence and economic responsibility for enterprises as free goods-producers. It is possible to achieve this only by relying on new property relations and the spirit of initiative and enterprise which is inherent in them against which, by the way, we struggled for a long time and, it must be said, successfully.

Second, it is essential to have a mechanism for price formation which reacts sensitively to the dynamics of supply and demand. At present we have a system which contradicts all objective economic laws, a system of centrally established prices constructed on paradoxes in which there are incentives for increasing costs and not for efficiency or satisfying the market.

Third, competition is as essential as air, as it would force reductions in costs and prices and would stimulate the satisfaction of consumer demand and force the producer to seek technical innovation. As a result of many years of orientation toward concentration, narrow subject specialization, we now have an extremely monopolized structure of production which simply excludes any competition.

Furthermore, the very foundation of the national economy-the structure of production-should be in accord with money-backed demand and react rapidly to the smallest change in it. To a large extent today we conduct production for its own sake. We extract and produce a vast amount of fuel, metal, and other types of raw and other materials in order subsequently to use them wastefully in processing industry, to lose them during transportation, to pile them up on dumps, to bum them up in flares while we do not have sufficient consumer goods and services.

As a result the national economy experiences a continual inflationary pressure because in such conditions it is impossible to make the population’s incomes balance with the supply of goods to them.

Another point: The market requires a reliable material and financial balance of the economy, a firm monetary system. But what we have is a major state budget deficit and a surplus of money supply over the goods resources set against it. I have already said repeatedly that with the market economy we will need an effective system of social support of the population, especially in the transition period when living conditions will change seriously and rapidly. Primarily, we refer to forms and methods of protection from the growth in prices, temporary unemployment, inflation. The government is giving these questions priority significance.

And finally, the regulated market economy needs a reliable legal back-up. The state power is only in a position to fulfill its regulatory functions effectively if it relies in its activity on the whole diversity of the necessary laws and other normative acts. And what is especially important is that all of them must be rigorously observed. Society needs an atmosphere of utmost respect for the law, all of which is obviously insufficient today and now.

Now that the basic prerequisites have been defined the question is how to ensure them in reality, in what stages and in what sequence to proceed. The government has studied various ways of forming the market. On this, too, there were the most heated discussions, clashes of different views, opinions, and positions. For instance, a number of economists propose to give full freedom to entrepreneurial activity right away and to immediately make all prices free. If one agrees with this one does not need to be especially perspicacious to realize that given our structure of production and the state of the monetary economy all prices would soar unpredictably. So, consequently, wages and other monetary incomes would inevitably have to be raised. In this way a spiral of hyperinflation sets in which not only fails to create incentives for production accumulation but, on the contrary, still further undermines them. Structural perestroika would come under threat. Great difficulties would fall on people who are completely unprepared for such a tum of events. Indeed the state would not be ready to help them either because it would not be able to halt the unraveling of the of the inflationary processes to such a degree. Naturally, we rejected this variant.

The retort is made to us that rampant inflation can be avoided. Yes, it can. And the task is performed by two principal means. The first consists of financial and economic measures directed at limiting the money supply or diverting it from the goods market.

The second path is the administrative one, based on the coercive support of stable prices or their regulation by the state. At the same time the presenting of orders, obligatory for the state, to enterprises over the whole volume of output are preserved, as well as its centralized distribution throughout the country. The application of each of these methods has its pros and cons. Financial-economic measures are attractive because they create the most favorable conditions for the formation of a market and an upsurge of the economy as soon as possible, but at the same time, and especially in the initial stage, they have to be very rigid. Only in this case is the desired effect possible. However, this makes their consequences for people all the more difficult. Judge for yourselves. The sharp restriction of the mass of money resources would seriously hamper the sale of output and would consequently result in the bankruptcy of a large number of enterprises, the freeing over a short period of time of a considerable number of workers for whom it would not be possible to find jobs immediately.

The greater part of construction projects would have to be stopped. It would have to be expected that as a result of the severance of many economic ties, production would decrease significantly and that would mean that the level of consumption of goods would fall. The social support of the population in this case, still, because of the very same rigid financial restrictions, could not be guaranteed at the due level. We have reckoned that this option, close to that which is today called shock therapy, is unacceptable for the country.

It is far easier to restrain open inflation by means of state price control, in other words by methods of administrative regulation of the production and distribution of some products. But, at the same time, it should be borne in mind that the wide-range application of administrative measures would not make it possible to achieve the material and financial balancing of the national economy and the elimination of deficit. Their main shortcoming is that they seriously restrict the sphere of commodity-money relations. As a result, the period needed for the market to emerge and the economy to come out of crisis would be considerably drawn out.

But, in connection with this, I would like, in particular, to draw your attention to yet another circumstance, to the time factor. Of course, we all want quick changes. However, the development of diverse forms of ownership and enterprise, the restructuring of production, the redistribution of labor resources among industries, and the adaptation of people to work and life in changing conditions have a natural pace and it would not be sensible to hurry them excessively. The losses in such a case would almost certainly exceed the results. And we are well aware of the cost of unjustified haste, for the peoples of our country have had to pay for it on many occasions. That is why, I believe, it is necessary realistically to evaluate the tasks facing us and the possible ways of tackling them.

Taking into consideration all of these points, the government regards the combination of financial-economic and administrative measures to be the optimal option for the transfer to a regulated market economy. The essence here is to consistently, step by step, reduce the scope of direct rigid state influence on the economy and to expand the sphere of market relations. Only in that way will it be possible to prevent inflation from getting out of control, to prevent a significant slump in production and a lowering of the people’s standard of living.

We must begin here with a decisive improvement in the material and financial balance, a restriction of the money supply, and a strengthening of the ruble. This is the main condition for further progress. From this emerges the need for major measures to reduce the budget deficit; an effective tax system; the raising of bank interest rates; and reform of price formation. In implementing all of this it is necessary and important to display firmness. Many people at present have still not yet assimilated severe economic truths; you see, some people think it almost a sign of valor to strive to acquire from the government more concessions and subsidies and, at the same time, to compel it to levy less taxes. However, there are no such things as miracles. The greater the social expenditure and concessions and the greater investments from the state budget, the greater will be the plan for taxes.

Of course we realize that enterprises which may suffer for reasons not dependent on themselves need to be helped initially and people’s social security must be at an adequate level, but these measures have a reverse side-in increasing the volumes of aid we are thereby putting back the possibility of rapidly achieving full material and financial equilibrium. So a golden mean must be sought.

Initially we should agree to maintain firm state prices for a number of main types of production-in less volume than previously-but state orders will have to be placed and supply of output will have to be regulated. Gradually, as the equilibrium improves and market relations develop, these restrictions will be decreased.

Such are the main points of the government’s proposed variant of transition to a regulated market. It is proposed to implement it in several stages: At the preparatory stage, which will last to the end of the current year, work will have to be completed on shaping the legal foundations of the market economy, the necessary legislative acts will have to be adopted and put into force. The reform of pricing has to be prepared, all the methodical and organizational questions connected with the introduction of the system of social support of the population must be solved.

In the following stage, the years 1991-92, a set of measures will have to be implemented marking a big step toward the market. Among these measures are reform of pricing, introduction of systems of social support, and taxation and credit reform. They are designed to create the main prerequisites for the development of market relations. Already at this stage, development of diverse forms of ownership, support of business enterprise, improvements in the structure of production along with the implementation of the appropriate financial policy should decisively improve the situation in the consumer market.

The stage of intensive development of market relations –1993 to1995 — will be characterized by a further reduction of administrative restrictions and by the intensification of competition, including that which will ensue from an active antimonopoly policy. As a result the market mechanism will begin to gather speed and promote a strengthening of economic incentives and the introduction of a new and more rational structure of economic links. And that means the creation of real and healthy soil for uplifting the economy and extracting it from a crisis.

It should be stated frankly that in the option that is being proposed the period of transition is not expected to be easy. I say this openly. Calculations show that a certain recession in production is inevitable, that there will be a considerable reduction in the volume of capital investment, particularly during the first two years. But we consider that the growth in the production of consumer goods and in the rate of housing construction must at the same time be preserved without fail. Material and financial balance can be achieved in 1992, and from 1993 onward the conditions will begin to come into being for an economic upsurge and an improvement in the well-being of the people.

Permit me now to dwell upon some key problems in the transition to a regulated market economy and to explain the government’s position on the main directions for resolving them.

Comrades! As has already been noted, the transition to a regulated market economy is impossible without the implementation of a very tough financial and credit policy. As the methods of exercising administrative influence are eased it is precisely the financial and credit levers that will become, in the hands of the state, a reliable instrument for regulating economic life, limiting the unfounded growth of the supply of money in circulation, and preventing a sharp flare-up of inflationary processes. Undoubtedly, today’s state of finance and monetary circulation and the fact that they are in disorder is one of the most serious brakes holding back the’ transition to the market. In bringing about an improvement here, the government, in 1990, through the measures that are being undertaken, is faced for the first time with reducing the gap between the state’s income and expenditure, which has increased constantly in the previous three five-year-plan periods.

But it is already clear that complete success will not be achieved by relying only on targets for economizing on expenditure and increasing income and without a deep reform of financial and credit relationships. In our view the laws that have been adopted and that are under consideration by the USSR Supreme Soviet, and also a number of new drafts that have been prepared by the government, will create reliable legal guarantees for the implementation of a finance and credit policy which meets requirements of a market type.

We link great hopes with the implementation of the draft of a future law on the taxation of enterprises.

It is fundamentally important here that we at last get away from the individual norms which were brought down to enterprise level in this Five-Year Plan. It is well known what this turned into. On the one hand, the economic mismanagement of those who worked badly was concealed, and on the other hand, incentives for those who knew how to work well were undermined.

With the introduction of a unitary tax rate on profit, everyone will be in an equal position. In its tum the state, applying tax benefits, will be able to stimulate enterprises to invest in production and social development in priority areas. Apart from this, the system of tax regulation will make it possible to encourage enterprises to invest resources primarily into accumulation and to link pay to its results.

Another important aspect. Today, when many dogmatic blinkers have been cast aside, consideration of the monopolistic phenomena in our economy no longer seems seditious to us. They do not permit the normal development of the economy today, but they will doubly hamper doing this tomorrow. Unless we take the appropriate measures and try to switch to the market, then, under the existing monopolistic structure, this will immediately being about price increases and inflation and will increase the already serious social tension in society.

The government insists that in the new system of taxation, a tax on excess profit should be provided for. In our view, at the initial stage, it is expedient to limit the upper level of profitability to 30 percent, and for agricultural enterprises to 40 percent.

I will dwell separately on the interrelationship of the USSR budget with the budgets of the union republics, and lastly, with the budgets of autonomous republics and local budgets. The new legislation introduces fundamental changes here. For example, the income base of republican and local budgets has been significantly strengthened. Calculated on a yearly basis, the receipt of funds into local budgets will increase by R25 billion, including by way of reducing income into the union budget by 20 billion, and by way of 5 billion from the republics.

*Apart from this, as of next year, payment for labor and natural resources to a value amounting to about 29 billion will be fully received in the budgets of union and autonomous republics and local budgets.

Such a redistribution of state income is not only in accord with the development of the independence of economic sovereignty of the union and autonomous republics and the expansion of local self-management, but also makes it possible to clearly delimit responsibility between the budgets of different levels.

Now, the financing of the subordinate industrial sectors of the republican and local economy and of practically all expenses toward maintaining and developing the social and cultural sphere, including health and education, and also other expenses connected with serving the population, should be effected at the expense of republican budgets.

Of course, with the increase in responsibility of republics and regions for the management of the economy, the role of the union budget should not boil down merely to financing the administrative and management functions of the state. Our federation of republics is united by the task of developing the whole national economic complex of the country as an integral whole.

Everything is tightly bound up around this. The rational utilization of natural and manpower resources, regional specialization in the development of basic industries and the fundamental sciences, defense interests, the formation of a common market on the basis of the new union treaty, will strengthen the economic ties of the republics, and will objectively lead to the consolidation of all our forces, possibilities and strivings. In order to achieve this goal alone, we already need a market and market relations.

Now, I will tell you briefly about the prospects for eliminating the budget deficit. As you may remember, the government program envisions reducing the budget deficit to 2.5-3 percent of the gross national product by 1993. This task remains one of the most important in the government’s activity, but we are not managing to completely achieve the desired result, especially at the present time when almost two-thirds of the budget comprise expenditure of a social nature. Naturally, we do not have the right to permit a reduction or delaying of the term for carrying out the social programs that have just been adopted. But in the future, hard as it is to admit, we shall have to reject the further speeding up of increases in expenditure which are not backed up by real sources of income. In forming the market, we are placing great hopes in the taxation system. But it can only play its part if it has at its disposal a powerful system of financial control. To be honest about it, up to the present day our mechanism did not particularly need a service like that. Now it is vitally necessary. The tax inspectorate is just being formed, and it is very important to complete this process as soon as possible.

It is even more important to radically restructure our credit system. Without this, as world practice teaches us, a market is unthinkable. The draft law on the State Bank [Gosbank] and on banking activity envisions the creation of a two-level banking system. The upper level is represented by the USSR Gosbank. It will regulate the mass of money in the total monetary circulation, both in accounts and in cash. The regulating mechanism is well known-it is the provision of a reserve of credit resources for other banks and the setting of a bank rate [uchetnaia protsentnaia stavka] for the credit resources provided for commercial banks. It is understandable that the conditions of this will be the basis for the setting of interest rates for the entire banking system, and the regulator for the size of credit investments.

In turn, the banks at the second level, in particular the specialized banks-the USSR Industrial Construction Bank, the USSR Agricultural Bank, and the USSR Housing and Social Bank-must gradually tum into a major share-based banking system, operating on a financially autonomous, commercial basis alongside industrial, cooperative, and other banks.

It is their task to provide enterprises with loans within the limits of the resources mobilized. In the conduct of their credit activity they are completely independent. At the moment of the transition to direct market relations, the immediate measure will be a revision of loan interest rates. Today, credits are essentially being granted free of charge. Interest rates on short-term loans are approximately 2.5 percent on the average throughout the country. Long-term loans are less than one percent. Can one help but be surprised at the excess of the money mass in the economic turnover and the depreciation of the ruble? From 1991 it is planned to establish new interest rates on loans. They are obligatory for all borrowers. And the rate of interest levied will depend exclusively on the length of time the loan is taken for.

Thus, for credit with a repayment period of one year or less, it is planned to charge interest at a rate of six percent; with a period of one to three years, eight percent; from three to five years, nine percent; over five years, 11 percent; and an annual rate of at least 15 percent is set for defaulting loans. In the future these rates may change in accordance with real demand and supply, the level of inflation, and other economic factors, that is, everything will be in accordance with market laws.

The commercial nature of credit relations in the new conditions makes it impossible to use our traditional preferential rate credits. The question of giving compensation for the preferential rates, if this turns out to be necessary, should be resolved by the organs of power which make the appropriate decisions.

The raising of interest rates charged for loans will be accompanied by a simultaneous raising of interest rates paid on deposit accounts belonging to enterprises and the population. This is necessary not only to create equivalent relations between the bank and its clients but also to reduce the money-backed demand on the markets in the means of production and in consumer goods, and also to ensure that savings are protected from inflation. In the initial period it is intended to establish annual interest rates of four to nine percent for such accounts depending on the length of time the funds are deposited for.

An organic component part of the market economy is the financial market including, first and foremost, markets in credits and securities. As far as the credits market is concerned, it should be set up as a result of the planned restructuring of the banking system. This will involve, primarily, the development of a network of commercial banks, and going over to setting the interest rates, for the funds which are attracted and the loans which are granted, on the basis of supply and demand. The picture here is more or less clear.

Not so clearly understood and more unusual for us is the securities market. However, we are already going over to forming the state debt by means of issuing bonds and treasury bills. The process of setting up joint stock companies is gaining strength. Their shares will also be freely bought and sold after some time. Enterprises, local organs of power, and union republics will be able to attract any funds which they need by means of issuing bonds and other securities without turning for funds either to the budget or to the banks.

Thus, the funds of such enterprises and the population will be withdrawn from the goods markets which will reduce money-backed demand and make it easier to achieve a balance in the markets. The creation of financial markets, therefore, is also something which we cannot postpone for long.

The establishment of financial autonomy for enterprises and of the new economic relations has already led to a considerable redistribution of sources of financing and investment. Only about 15 percent of capital investment at present is being implemented from the union budget and about the same amount from republican budgets. With the introduction of the tax system, enterprises will completely cease their contributions to ministers’ centralized funds. Consequently, we are getting rid of yet another source of investment which in practice often led to the squandering of funds.

At the same time, the demand for centralized investment is still very considerable.

A considerable proportion of investments is spent on providing resources for the economy. Judge for yourselves: Expenditure on the extraction of minerals is gradually rising, but it is hardly fair to pass on this increase to enterprises or territories, since they are working in the interest of the whole of the federation. Or take another example: The importance of major state ecological and economic-social programs, such as Chernobyl, the Aral and such, is generally recognized. In the near future it will be necessary, according to preliminary estimates, to put at least one-quarter of state capital investments into implementation of programs of this kind. This is also ten points above the present level of budget financing. We see the solution to the problem in the financing, starting from 1991, of non-budget all-union and republican investment funds into which 20 percent of amortization deductions from enterprises will be directed, with the exception only of those of them which relates to the agro-industrial complex. The USSR Council of Ministers requests support for this proposal.

Comrades, the reform of price formation is a most important condition for all the future economic transformations in the country. It is perfectly obvious that today’s prices reflect neither true production costs, nor the relationship between supply and demand, nor the level of world prices-in short, no economic categories. Such a thing can only exist in a rigidly centralized, distributive system of management, that is, in a state which takes into its own hands all production and all the resources produced, and redistributes them. In this case, prices do indeed play no determining role. On the basis of prices like this, it is not even possible to make a serious analysis of the conditions of the economy. It is truly a kingdom of distorting mirrors.

The experience of the work of enterprises which have gone over to financial autonomy and self-financing shows quite convincingly that it is precisely the existing system of prices and tariffs which most of all hampers the advance of economic transformations. The issue, as they say, is more than ripe. In the process of drafting the reform of price formation, different, often diametrically opposed points of view on how to conduct it have been examined. But one can say that the basic differences of approach focused on two options. The first presupposed the simultaneous transition from fixed state prices to free ones for the majority of products meant for production and technical purposes, goods and services. The second option takes as a premise the stage by stage introduction of market methods of price formation in combination with state control of the level and movement of prices.

Without doubt, both of these options have a right to exist. Under the first, which certain academics, economists, and commentators insist on, we would be able to stabilize the market within a short time since under it the most favorable conditions are created right away from switching to the majority of the elements of a market mechanism, and the balance between supply and demand is quickly achieved. At the same time, as had already been noted, as a result of such a step there could be an explosion of all prices and tariffs, an unbridled increase in inflation which would lead to a sharp deterioration in the living conditions not only for the poor but also for those who receive average wages. It is at present impossible to fully predict the duration of this process and its sociopolitical consequences.

Therefore, the Government of the USSR considers the second variant to be more acceptable. Its essence is that at the beginning of 1991 a simultaneous and comprehensive review of the entire prices system should be implemented in a centralized fashion. This will make it possible to remove to the maximum degree the distortions and imbalances which have accumulated here and to create realistic conditions for the introduction of financially autonomous activity for enterprises in all branches of the national’ economy, for the restructuring of the financial system, and the strengthening of monetary circulation. It will then be possible to embark on a gradual introduction of market price formation. In doing so, it is proposed to ensure a flexible combination of prices-both those established and regulated by the state and free prices formed under the influence of supply and demand. It would be a dangerous delusion to assume that a market economy could be totally free from the state’s participation in the processes of price formation.

It is also essential to stress especially that a simultaneous review of all existing prices carried out under state supervision will make it possible to sharply weaken the growth of inflation inherent in the establishment of the market. The main parameters for changes to wholesale prices in industry and sectors are defined in the submitted report. Here the average price increase will be about 46 percent. Moreover, prices in the fuel and raw materials sectors will be increased to the greatest degree. For example, in the fuel and energy complex the increase will reach 82 percent; in the metallurgy sector, 71 percent, and in the chemicals and timber sector, 64 percent. This will bring prices for the output of our extracting and processing sectors closer to world prices. It eliminates the artificial low prices for raw material resources, and will create an incentive for saving resources.

With the participation of Union republics, scientific organizations, and specialists in the agro-industrial complex a concept has been worked out for setting up new purchase prices. They fully take into account the increased costs for material resources used by agriculture, increased rates for use of bank credit, and other additional expenditure. The level of purchase prices ensures exchange on equal terms between agriculture and industry and is sufficient to stimulate production. Purchasing prices for main types of agricultural output, taking into account production costs taking shape and the need to align levels of profitability, are being increased by up to 55 percent. But the most difficult problems arose in the sphere of retail price reform. It is precisely here that the right knot of the economic interests both of the state and of every family and individual is tied.

The system of retail prices formed in the fifties and the start of the sixties has become obsolete in the extreme. Prices have become completely at variance with the changed economic conditions. They make it impossible to conduct a just social policy. In implementing social programs one constantly comes up against the fact that these prices have lost touch with real cost and labor cost. Thus, they hold back the development of the production of consumer goods. They deform demand, and cause shortages and profiteering. Low retail prices for consumer goods ultimately also determine the low level of pay in the country and undermine the incentive to work.

The prices for food are particularly deformed. They are two or three times lower than real cost. The production of food products is loss-making. Today, this is one of the main braking factors holding back the development of food resources.

If in the past thirty-five years the produced national income in the country increased 6.5 times, then state subsidies to prices rose by more than thirty-fold. Now, subsidies on food products alone make up about RlOO billion in the country. With the introduction of new purchase prices, without a review of retail prices, it would increase by almost another thirty percent and would make up one-fifth of all expenditure from the state budget.

We have gotten into a situation when almost all the more important food products are subsidized. For example, a kilo of beef costs the state R5.80 and the average retail price in the state retail sector comes to R1.81. And that is how things are for the majority of products.

In the future, it will be necessary to direct more and more resources to cover subsidies. A vicious circle has developed. The more food we produce, the more limited will be the possibilities of our economic growth. To speak honestly, we are already late with retail price reform. Further delay will only increase the country’s difficulties.

To construct the new system of prices for food products, unlike the existing one, which has been based on bread prices, the prices for meat have been taken as the basis. Such an approach is determined by a clearly expressed trend in consumption of food products, and is oriented primarily toward a protein and vegetable structure.

Calculations show that retail prices for food have to be increased on the average approximately two-fold, including an increase for meat products by 2.3 times, fish by 2.5 times, dairy products by 2.0 times, bread products by 3.0 times, sugar by 1.8 times, and vegetable oil by 1.7 times.

Meanwhile it must be stressed that in introducing the new conditions for the level of retail prices, we have not aspired to neglect subsidies for them. Thus subsidies for meat and dairy produce will amount to about R45 billion. In order to abandon them altogether, we would have to increase the price of beef, for example, to R9 a kilogram, compared with the planned R5.50. We consider that to be unacceptable.

A question may arise: Is it not possible, by lowering the expenditure on agricultural production, and hence the purchase prices, to preserve the retail prices operating today? Of course, this would be the best option. But we have to be realists. After all, we know that labor productivity in our agriculture is still low. Therefore production costs are high. Of course, a considerable proportion is the result of thriftlessness and wastefulness, big losses and other negative phenomena in agriculture itself. But one cannot fail to see that the high cost of many products is the result of poor work by other links in the national economic complex, as well. After all, it is not the workers in agriculture who design and manufacture expensive but often inefficient and low-quality, unjustifiably costly stock-breeding complexes, storage facilities and so on. But in the final analysis all of this determines the cost, the losses, and the high inherent price of production. For that reason, to expect a rapid rise in agricultural efficiency and the elimination of loss-making in the production of food means to ignore the actual state of affairs; this is wishful thinking.

Together with food products, it is also planned to increase retail prices for individual nonfood products. Prices for fabrics and items made from them will increase by 30-50 percent, for footwear by 35 percent, fur products by 20 percent, individual cultural, everyday and household goods by 30 percent, and building materials by 50 percent. It is envisioned to increase the rates for consumer and municipal services, apart from rents, by 70 percent, and for passenger transportation, aviation and railway transportation by 50 percent. [Considerable murmuring in hall]

Comrade deputies! You are aware that the government has adopted a decision to raise purchase prices for grain from the 1990 harvest. We have opted for this step in order to create extra incentives as quickly as possible for collective and state farms to step up production. The country is not in a condition to preserve any longer the scale of grain purchases from abroad which has come about. In connection with the introduction of new purchase prices, the state’s expenditure to this end will increase by R9 billion this year.

The revenue of the collective and state farms will increase accordingly, of which approximately R5 billion will be used for wages.

Having increased the procurement prices for grain we have not yet touched on prices for bread and flour products. But we must hold consultations here, for how much labor is invested and how much human sweat is poured before the bread reaches our tables? But recently our attitude to it has been simply barbaric. Let us be frank. Isn’t it because it is so cheap and available? Under these circumstances the government proposes to introduce sooner new retail prices for bread and flour products which are provided for by the reform. This could be done beginning this July. In doing so, the additional expenditure by the population will amount to R17.5 billion, for which it will be compensated in total. The most important result of this measure is that a saving of at least five million tons of bread grain will be ensured for the economy. But something else should be taken into account as well: Some of this is currently going to fodder for cattle. In this connection, measures must be adopted both in the center and in the republics to increase the sales of concentrated fodder to the population. The government requests the Supreme Soviet to support the proposal to introduce new retail prices for bread and flour products from 1 July with appropriate and complete compensation.

As I have already said, a simultaneous review of the entire price system is the first stage of reform of price formation. The government believes that in the future, in the transition to a regulated market, the prices system in the national economy will include three main types. These are: firm and fixed prices established by state organs which are obligatory for all suppliers; regulated prices for which price lists are accepted as a basis and the limits of deviation from them are established by the union and republican bodies. Within these limits the specific price will be determined by the suppliers and consumers independently. Other methods of flexible regulation of prices are possible. And, finally: free prices which are f01med under the influence of supply and demand.

Taking account of the economic situation and the state of the goods market, the use of a particular procedure of price formation for specific products will be established by the USSR Council of Ministers and the Union republic governments. It appears that in the near future the state should retain the establishment of wholesale prices for very important raw material, fuel and power resources, the output of monopoly enterprises, and procurement prices for agricultural output which is supplied as tax in kind.

To ensure the social protection of the population the state will also establish or regulate retail prices for very important consumer goods such as bread and flour products, meat and meat products, vegetable oil, milk and dairy products, sugar, fish, a number of light industrial goods in everyday demand, medicines, items for care of the sick, and certain other items. Prices for electricity and fuel transportation will remain in the area of state control. As market relations are established and the market is filled, the proportion of prices being controlled by the state will gradually be reduced and free price formation will expand.

With a flexible price system like this, the state can influence the processes of price formation on the goods market without allowing uncontrollable inflation. Estimates indicate that in 1991, the proportions of goods in retail turnover will amount to: at listed prices–55 percent; at regulated prices–30 percent; and at free prices–10-15 percent. I emphasize that all the mentioned transformations in the sphere of retail prices can only be carried out providing that the entire complex of measures for the social protection of people is introduced simultaneously. We are obliged to preserve the standard of living that has been attained to the maximum extent possible and especially to take trouble over those of the population who are inadequately provided for.

Comrades, in proposing that such a large-scale retail price reform should be carried out, the government thinks that it cannot be implemented without the simultaneous introduction of a system of comprehensive social protection for the population.

What is the essence of this system? First and foremost, it should provide the citizens with compensation for material losses which occur in connection with a simultaneous rise in retail prices.

What were the criteria that formed the basis of the choice of the variants proposed with respect to compensation measures? First, the bulk of the population should not experience considerable losses when the new prices are introduced. Second, the interests of the poorly provided for categories of the population-pensioners, students, large families-should be protected to the greatest extent. Finally, third, it is necessary to prevent the intensification of social tension, to attain the maximum possible social agreement regarding the content of the planned measures.

On the basis of these criteria we considered as incorrect and rejected the approach according to which it was proposed that different levels of compensation payments should be established, to make them dependent on the level and structure of consumption which has taken shape in one region or another of the country. The proposal that the difference in the sources of consumption, especially in foodstuffs, for the residents of the towns and the countryside, should be taken into account does not correspond to these criteria. We are in favor of residents in different regions of the country, in all towns and villages, being placed in an equal position when compensation matters are carried out.

In giving unconditional priority to equality, the government has worked out variants of the mechanism for making compensation payments. Two main methods have come to light. This is the introduction of compensation payments in an absolute sum in one case or the establishment of percentage increases on wages or other types of monetary incomes of the population in another.

Each of these variants has its pluses and its minuses. Therefore, it is necessary to discuss them extensively. The first method is the introduction of payments for all categories of the population in a lump sum. This will allow reliable social protection for the low income groups of the population. It will create some advantages for large families. But at the same time this method does not take into account the difference in the levels of consumption of different strata of the population, first and foremost those who are engaged in heavy physical labor or highly qualified work or who live in areas with harsh natural and climatic conditions. They objectively require higher outlays on food, purchases of clothing, and other goods. These are Siberia, the north, and the Far East. Society needs the mechanism of compensation payments to defend the interests of the able-bodied population, to protect the standard of quality and the labor productivity achieved.

In principle, it would not be difficult to distribute compensation sums among citizens in proportion to their pay and other forms of money income. However, in this case, the losses of those whose pay is not high and also of pensioners or citizens receiving benefits may not be fully compensated.

Without a doubt, the leveling-out approach to the distribution of compensation payments substantially deforms the entire system of distributive relations. At the same time, it is practically impossible to get completely away from this leveling aspect. After all, the main principle in carrying out compensation measures, and I think that people will agree, is to defend to the greatest degree the social interests of low-income groups. For this reason’ it will be necessary to find acceptable means of combining the interests of those on low-incomes and not to destroy the mechanism of providing incentives for the activity of the working population.

In order to smooth out the shortcomings of both approaches we are proposing a combined method which would make it possible on one hand to preserve the high degree of protection of socially weak groups of the population, and on the other to link compensation payments with the labor contribution of each person.

I will speak further about the scale of compensation, but before doing so, I propose to appraise the scale of the problem. The overall increase in retail prices for food, nonfood products and rates, and services is R198.8 billion. Of this sum, R135 billion, about 70 percent, will be directed toward compensation payments to the population.

We intend to leave the rising cost of jewelry, alcoholic drinks, tobacco, meat and fish delicacies, especially deluxe and fashionable light industry goods, individual forms of complex domestic equipment, the increase of rates for passenger transportation and for domestic and municipal services without compensation.

Proceeding from the sum which has been specifically determined, we regard it as expedient to link the size of payments to the working population with increases in pay by establishing a fixed percentage. This will make it possible to avoid the leveling-out. Calculations show that compensation could amount to 15 percent of pay.

For those whose earnings are low however, the lower level of guaranteed payment should be restricted to R40 a month. And for workers with high pay, it is necessary to establish an upper limit of compensation measures. At the same time, all payments linked to the simultaneous rise in prices are envisaged as not being subject to income or other taxes.

It would be possible to set compensation in a uniform amount for pensioners, students and pupils of colleges and specialized intermediate professional technical colleges. As far as dependents of working age are concerned, then it is proposed to pay them compensation at a rate of one-half the monthly compensation paid to people who are working.

Children are a special issue. Here a great number of options and their combinations were considered. We tried to link the size of compensation to the number of children in the family, with their relative ages, with the possibility of an additional sum through parent’s wages, and so on. What was necessary was a method which reliably guarantees the defense of the interest of children.

Many options and calculations showed that their real needs were taken into account to the maximum by making the appropriate compensation in a lump sum according to three age categories: up to five years; up to 12 years; and up to 18 years.

As a result of such a solution, those who benefit are low-income and large families whose expenditure on children’s goods is actually lower than the compensations paid. This is connected in the first instance with the forthcoming change in the existing procedure of utilizing subsidies. Now they are paid to industrial enterprises which produce children’s goods at socially low prices. Now however, it is proposed to pay these special purpose subsidies-in the new prices they are determined at R6 billion-to families with children.

Here, at least, there is a guarantee that money will be spent according to its purpose, since over 30 percent of goods intended for children used to be acquired at preferential prices by the adult population. Comrades, I will cite certain figures which will, evidently, be published in the form of a table, in order to give you an idea of the proposals, even though the people’s deputies have them. Nevertheless, I would like to speak about them.

It is proposed that, along with compensation for the range of goods for children, the following volumes of compensation per month will be introduced: R30 for children up to five years old; R35 for those between 6 and 12 years; and R39 for those between 13 and 17 years; R35 for students over the age of 17 at higher education establishments and training colleges; R35 for pensioners; and R20 for dependents, excluding children. As for workers in the material sphere of production, I have already spoken about this. Two options exist. They have been submitted for discussion here. One option is R45 for all regardless of wage, and the second option is 15 percent but no less than R40. If the Supreme Soviet backs the government’s proposal on the change in retail prices for bread and bread products from July this year, then the corresponding portion of compensation will be paid simultaneously from the moment the price increases are brought in.

The reform of price formation envisions a gradual transfer to regulated free prices which could cause their increase. In this case, measures of social protection are also essential, based on the introduction of indexing of the population’s’ current income. In contrast to compensation offering a one-time only establishment of the size of payments, indexing represents a special mechanism for adjusting the income of the population depending on the current rise in prices for consumer goods and services. Here, as with compensation payments, priority will also be given to the less well-off groups of the population.

It is our conviction that, in conjunction with compensation payments, the indexing of incomes will create reliable social guarantees for the entire population of the country for the period of the transition to a market economy. The minimum level of payments in connection with the indexing of incomes will be set by the government in conjunction with the All-Union Central Council of Trade Unions.

Now for the organizational side of the matter. It is envisioned that compensation will be paid once a month at the place where the main income is received. Payments to pensioners, children, and dependents should be made by the social security bodies according to place of residence. Students and pupils at higher, secondary, specialized, and vocational and technical education establishments, and post-graduates will receive compensation at the place where they are paid their grants. Enterprises and organizations functioning in conditions of full financial autonomy can provide their employees with additional support from wage funds and within the framework of collective contracts concluded between work collectives and the administration.

The last thing that I would like to stress is this: In accordance with the USSR law on the foundations of economic relations between the USSR and the Union and autonomous republics, only the minimum wage, pension, and other forms of social security are fixed at the all-Union level. In exactly the same way, the proposed sizes of compensation can be regarded as a minimum state guarantee. The Union and autonomous republics, and local soviets of people’s deputies have the right to increase the size of compensation payments, out of the resources of their own budgets [faint applause], taking into consideration the whole complex of specific features and conditions that have developed in those regions.

Taking into account the extreme sociopolitical and economic importance of tackling this matter, the USSR Government regards it as essential, as the program for the improvement of the economy envisioned, to submit a draft on the basic tenets of the reform of retail prices and measures for social protection of the population for nation-wide discussion. We must not take this step without the consent of the people. Every citizen of the country should express his attitude to it. [murmuring in the hall]

Comrades, the emergence … [murmuring continues] Comrades, the emergence of a fully fledged all-Union market brings to the forefront the demand for effective employment under which the individual’s attitude to work is radically changed, and his responsibility for its results increases.

It is important to put into action such incentives as would sharply raise for every person the value of his job, would give him the opportunity to realize his potential to the maximum and thereby ensure a continual improvement of his quality of life and satisfy his growing personal requirements and those of his family.

In the next few years an increasingly substantial effect on the labor market will be exerted by major structural changes for the better in the economy connected with its social reorientation, conversion of defense industries, reduction of production construction, and liquidation of plants that show little profit or a loss, and also the substantial growth, starting in the mid-nineties, in the population of working age.

Two alternative points of view of the concept of employment in these conditions can be singled out. The first deals with unemployment as a necessary requirement for high efficiency of the economy. It proposes completely abandoning the guarantee of the right to work, deliberately maintaining unemployment at a certain level, using it as a powerful means of pressure on the workers, forcing them to increase the intensity of their labor. Despite what I would call the formal logic of such a variant one cannot agree with this. High economic efficiency is not worth much when it is achieved by means of aggravating the social ills in society. The state is obliged to take, and shall take, every necessary measure to ensure the constitutional guarantee of the right to work.

Yes, we know that the initial period of the transition to a market economy may see the appearance of temporary unemployment of some of the able-bodied population. But it is not a question of superfluous people but a regrouping of forces. In this sense a difficult task that has to be solved will be connected with the redistribution of manpower both to other sectors of material production and to the nonproduction sphere in order to improve the cultural, consumer, shopping, and other services to the population and increase the shiftwork operation of equipment.

A priority task in these conditions is to correctly appreciate the scale and dynamic of the processes that will inevitably emerge during the formation of the labor market and to carry out a system of measures ensuring effective control of them. Carrying out this task requires vigorous action in the field of job placement making for quick reaction to the structural changes for the better in the national economy, reorientation of the whole system of training, distribution and redistribution of cadres. At the same time it is necessary to create at an all-state level, in all regions of the country, the legal, economic, and organizational foundations granting each able-bodied member of society a high degree of social protection from possible negative effects of the labor market. We support the proposal of the All-Union Central Council of Trade Unions on speeding-up the drafting and adoption of an employment bill.

Expansion of the spheres of application of people’s creative potential must become a powerful factor for increasing motives for labor activity in conditions of a market economy. Business enterprise will occupy a competent place among these spheres.

Entrepreneurialism in the USSR means initiatory economic activity within the framework of the existing legislation, based on the use of all forms of ownership. The opportunity will appear for people to greatly improve their living standards both by applying their own labor efforts and enterprise and also by improving the collective results of labor. The significance of this motive will rise in line with the development of many forms of ownership and economic structures.

Entrepreneurialism can come in the most varied forms. There is individual and family labor activity, cooperative, joint stock and lease-hold enterprises, and economic partnerships. And we must view citizens’ entrepreneurialism and their freedom of economic initiatives as a powerful lever making it possible to facilitate the solution of the problem of employment.

The experience of many countries has shown that entrepreneurialism, even small-scale entrepreneurialism, is capable of providing work for millions of workers. The government is fully aware that this is a completely new matter for our country. Therefore, the determining of the stages and the sequence of measures for the development of entrepreneurialism should proceed from the way the economic and social situation develops in society.

Sociological analysis shows that excesses committed in the cooperative movement and also the many examples of egotistical and group interests by collectives of enterprises aroused a negative reaction from the population. And we are obliged to draw the relevant conclusions from this. Because, the cooperative movement which is in essence so progressive and extremely necessary to us was to a large extent compromised because the financial and economic regulators of its activity had not been properly worked out.

To achieve the formal functioning of the market we also need to foresee many things in good time. For example, it is vitally necessary to make it possible for citizens to travel freely throughout the whole territory of the country. And for this it is necessary to create a housing market. In accordance with the decree by the president of the USSR, in the near future the government will work out the whole complex of questions connected with this. It is important to create the conditions for every citizen to be freely able, by his own choice, to acquire an apartment or a house, including by means of mortgage, period hire, or leasing.

Comrade deputies, we are all witnesses to the complicated and complex processes going on in the Soviet Federation. The democratization of our society has provided an outlet for the contradictions between the center and the localities which were suppressed by the previous administration’s command system of government and by harsh centralized planning. But today, when assessing the state of affairs in the federation, one cannot fail to see what has already been done to revive it. In recent years a considerable proportion of the center’s power has been transferred to the union republics and the rights of the local soviets have also been expanded.

The USSR Supreme Soviet has adopted a number of important laws establishing the beginning of a new constitutional delimitation of the rights and responsibilities of the USSR and of the Union republics. The changeover to a regulated market will create an economic mechanism able to implement to their full extent the rights given by the new legislative acts, to bring the Soviet Federation to a qualitatively higher level, and to step up the integration processes.

The basis for this development must be an all-Union market, which will significantly increase the efficiency of the work of the whole of the economic complex. The use of the possibilities of free activity on the widest all-Union market is advantageous for all republics. The specific character of regional particularities and of regional economies will find all-round application in this way. The aspiration to create little closed economic worlds within the national borders of the republics is the road to nowhere. Our future is in the formation of a single common market of the USSR for all.

I want to dwell on the basic principles of the restructuring of economic relations between the USSR and the republics which the government took as its starting point when elaborating this idea. First and foremost, we were guided by the notion that the renewal of the economic bases of the federation must be implemented in the interests of all of the Union republics and peoples of our country, not to divide them but to unite them, and thus to target it against economic separatism in any of its manifestations.

The second point of principle is that we intend to carry out the upcoming work on a new constitutional basis, the essence of which is to ensure the economic sovereignty and independence of all of the Union republics. Our cardinal task is to renew the Union treaty and to determine the content of the treaty relations of the Union republics with the USSR and among themselves.

Under any scheme of mutual economic relations, it is essential to provide for a replacement of the system of strict vertical management of the national economy, with a system of management based on the development of a mechanism of market relations and horizontal links between enterprises and economic organizations, regardless of their subordination or form of ownership. All economic subjects must be guaranteed the possibility of reaching the all-Union market without hindrance.

The legislative acts adopted by the USSR Supreme Soviet limit the competences of the Union republics and the USSR and their responsibility for the management of the country’s economic and social development. For individual republics the composition of the problems being tackled at the level of the Union republics may not by the same as each other, just as the degree of their participation in the fulfillment of the joint programs of the USSR may not be.

But if one is to talk in general terms, the Union bodies retain first of all the elaboration of prospects for the social and economic development of the country, the management of the implementation of the state programs at all-Union level, and, jointly with the republics, the formation of the state plan and budget, and the economic regulation of the activity of enterprises and organizations. The center also still has the task of drawing up the bases common to the entire USSR of the policy underlying price formation, financial and credit and money supply, wages and social guarantees to the population, foreign policy activity, and also the elaboration of principled approaches to the question of the distribution of productive forces with the participation of the Union republics.

All other questions of socioeconomic development will be tackled by the union republics autonomously or jointly with the union bodies of administration.

The third basic provision consists in the fact that a certain amount of state support is needed for individual republics for leveling out their different initial potentials and to take account of their specialization in the economy and the specific socioeconomic and national features that have taken shape. In the transition to self-financing of the territories, one must take into consideration that the initial conditions of the union republics are not identical. Thus, in 1989, the national income generated per person employed in the production sphere in the Russian Soviet Federated Socialist Republic, Belorussia, and the Baltic republics amounted to R6,500 to R7,500, while in the republics of Central Asia and Kazakhstan they were R3,500 to R5,000. These republics lag behind the development of the regions in per capita volume of consumption of goods and services and the provision of housing to an even greater degree-by more than 50 percent. Therefore, a mechanism will have to be developed for assistance to those republics and national formations which by force of objective reasons have found themselves in a less favorable situation. This mechanism should embrace a number of elements: The granting of economically favorable taxation to them, the financing of credit, the application of other market regulators in the transition stage, the granting of special conditions stipulated in formal agreements, of participation of individual republics in the implementation of all-union and regional programs, and finally, the creation of a special regional development fund, which could be formed on the basis of equal percentage deductions from the national income produced by the union republics and which could be used according to the joint decisions of the union and republican governments.

Comrades, allow me now to examine the process of transition to a regulated market economy from another viewpoint, namely the material balance of the national economy and its most important sectors. Perhaps the most difficult task of the transition period consists in opening up scope for market relations and freedom of economic activity, without permitting serious disruptions in production, and while achieving a material balance of the national economy and satisfying the requirements of the population for food and other consumer goods. For decades, we have tried to ensure the material balance of the national economy by means of allocating plan targets and centralized distribution of production. And we never succeeded in achieving the desired result in due measure. On the contrary, the deficit would increase year by year. The incentives to production would be weakened amid the moderate growth of consumer demands, consumers who had practically no incentive to moderate their requirements and economize on resources. The transition to the market is also necessary because it is capable of breaking these tendencies, of forcing people to manage economically and thriftily and to respond actively to consumer demand. Only in this way is it possible to arrive at balance in the economy. But it is difficult to do this immediately. There is the danger that, in the absence of a developed market infrastructure, the economic links that have taken shape will be destroyed, and new more rational ones will not be established immediately. Hence the need for the development of market relations, and while developing market relations, to act cautiously, with the state retaining certain functions in the organization of the market in the means of production, foodstuffs, and other goods in everyday demand.

What is at issue? The market presupposes the autonomous finding of seller and buyer, the sale of goods on conditions mutually acceptable to them. Our enterprises, however, are accustomed to someone being obliged to organize the marketing of output and the supply of material resources for them. Many may find themselves in a difficult situation just because they do not know clearly what to do when no one allocates stock and cost ceilings or writes out allocation schedules. At the first stage, there will be an intense process of forming the necessary intermediaries’ network, the organization of a commodity exchange, fairs, systems of commercial information, banks, insurance firms, without which the market cannot function normally.

The appropriate changes in this area should, of course, take place within the structure of the functions of the USSR State Committee for Material and Technical Supply, all republican, sectoral and local distribution bodies. In short, the basis for the new market infrastructure should be made up of the trade network which has already been created in the national economy and which includes about 8,000 enterprises. It will be necessary to master the fundamentals of commerce, marketing, and to educate and train the appropriate cadres. We have lost the greater part of our skill in this area of activity.

A negative and disdainful attitude toward commerce and those who engage in it has become entrenched. They are described as smart dealers, speculators, mafiosos who warm their hands on shortages. Unfortunately, at times there is an element of truth in these judgments. But one should bear in mind that the main culprit for this is the system of allocation by directive which, while suppressing entrepreneurialism, at the same time created by its own inflexibility favorable conditions for the shadow economy and the multitude of abuses.

The market means trading. And it is unthinkable without the skillful and civilized trader, dealer, without the middleman who organizes the movement of goods, replacing state officials who are engaged only in distributing resources which do not belong to them.

Trade should be regarded not as a passive sphere of ·exchange but primarily as the engine and regulator of production. Let us recall the well-known classical formula: Selling is supply on the part of production. Only someone who is ignorant of economics regards an intermediary as a speculator. And we need to overcome the usual stereotypes of thinking, to work actively on the reorganization and development of trade, to eliminate outdated structures that hinder the free movement of goods and services.

But while these processes are going through the stage of establishing themselves and the new structures gain in strength, we are obliged, while observing them attentively and supporting them in every way, to make sure that the output of essential goods is not halted, and that people do not run short of vital necessities. The government has defined its position on this question and has prepared a proposal to establish various types of markets for goods.

I shall speak first of all about the market in means of production and ensuring a balance of materials in the national economy. The situation here is extremely complicated. Enterprises have been given broad autonomy. They, themselves, draw up their output plans, frequently disregarding control figures and even state orders. Moreover, they frequently do not fulfill contract obligations, either. But, nevertheless, they demand that the state provide the material support for their own plans. It is a paradoxical situation: I shall draw up the plan, myself, in my own interests, but let the center give me everything I need to fulfill it.

In order to unravel this knot of contradictions, it is necessary to create conditions in which the enterprises will have the opportunity to independently draw up not only their own plans but also to be responsible for their material and technical support. And this means they must be given free access to material resources so that, on the basis of mutual cooperation, they resolve the questions of acquiring them.

From this stems the need to considerably reduce the centralized allocation of resources and to fundamentally change the approaches to drawing up state orders. Let me remind you that it has frequently been said in criticism of the method used at the moment that in essence, it is little different from targets set by directive. Indeed, for the most important range of output, the state orders the major part of output, up to 90 percent. This gives certain possibilities to use material resources to influence enterprises, to oblige them to produce essential articles.

But at the same time experience over the past two years has shown that it is difficult to achieve balance in materials in this way. And if the existing procedures are preserved, market conditions will not develop. It is no coincidence that on the eve of the 21st century, we have lived to see barter trade flourishing. Of course, it is possible to reduce as much as possible the number of types of resources and products which are allocated. It would be sufficient to totally maintain the centralized allocation of up to a dozen types of resources such as rolled ferrous and non-ferrous metals, cement, timber, some chemical materials, and fuel, but the autonomous activity of these enterprises would be shackled. Therefore, we refrained from steps in this direction, too.

Another option is when the manufacturer independently acquires everything he needs for his activity. Centralized allocation is totally absent. On the whole, this is a very promising path. But, unfortunately, this can be employed only at a certain stage of the development of the market; supply should always exceed demand for this. We are still far removed from that. That means that total renunciation of centralized distribution of resources in the initial stage of introducing market conditions would be premature.

The essence of the third option is that the state order is established for a limited range of the some of the most important products in a quantity necessary for certain aims, only for certain aims. With such an approach, it is important that a minimum of aims is chosen and the conditions of the state order are advantageous to the producer. This can be achieved if the appropriate policy of prices and tax advantages is carried out. At the same time, in the initial stage, it is necessary to preserve the obligatory nature of state orders and to provide for severe sanctions if they are not fulfilled. The government has recognized this option as the one which is in best accord with the aims and possibilities of the period of transition to the market.

It is planned, as of 1991, to restrict the composition of the state order to the following aims: defense needs, order for national education, public health and culture, the fulfillment of the country’s export obligations, the implementation of statewide scientific-technical programs, the formation of market allocations for the population, and the creation of state material and technical reserves. The particular need for stable work by the agro-industrial complex and light industry has been taken into account. These sectors, with regard to the most important types of resources, have been included as basic aims within the state order. Thus, there will be centralized distribution of only those volumes of products of the limited range of the state order which are essential for resolving the above-mentioned special purpose tasks.

Everything that is beyond the boundaries of this range of interests becomes freely marketable. Calculations show that, given such a variant, the share of the state order in the total output of means of production will be no more than 40 percent. Hence a real opportunity arises for giving a good impulse to the development of the market of means of production. It must be said that there were no unanimous advocates of such an approach. The opponents claimed that by taking this road, we will undermine the material balance. I assume that fears of that kind are based on an ingrained belief in the strength of centralized distribution.

However, all our experience shows that even at a time when everything, absolutely everything, was distributed in a centralized way, it was never possible to provide 100 percent of materials. We have always lived with a most acute shortage.

It goes without saying that the changeover from next year onward of virtually all sectors of the national economy to horizontal ties and to the direct interaction of enterprises on the market of means of production is far from simple. It is already necessary now to see to it that the economic ties that have arisen are preserved to the maximum extent possible. I repeat: The appropriate work must be started now.

The government believes that the entire existing system of providing supplies and equipment must, without delay, join in resolving this task and by its mediatory activity, help enterprises build bridges of new cooperation.

Comrades, a special role in the transition period will be played by the normalization of the situation in the investment sphere. It must be said that in the course of many years, it has been that participant in the national economy which has been destabilizing our finances, absorbing and freezing without due return a huge mass of resources. No matter what measures were being taken, it was just not possible to achieve any noticeable reduction in building time or any concentration of manpower and funds in key projects. I think that this has been caused by the fact that, up to now, we have been operating mainly within the framework of the old economic system whereas it is possible to get rid of the enumerated defects only by decisively abandoning it. Until recently, as is known, the predominant proportion of capital investments was distributed in a centralized way and this, as many years of experience have shown, in no way guaranteed the effectiveness of their use. In the course of the reform, the greater proportion of the funds for investment was handed over to the enterprises. It will suffice to say that for 1990, out of Rl74 billion channeled to these ends, the share of centralized capital investments is only some R84 billion. Next year, even fewer are planned. But what is the result? We calculated that the enterprises which have been placed in conditions of full financial autonomy and self-financing would spend investments in a more economical way. But it has turned out the other way around. The notorious incomplete building projects, which are already catastrophically numerous as it is, have increased still further.

Over the past four years the volume of incomplete construction has increased by R60 billion and has reached R181 billion; this is 94 percent of the annual amount of the country’s investments. Of course, in searching for reasons, the imbalance in the economy and the deficit in construction capacities and equipment are not discounted. But if you are trying to find out the roots of the problem, then it ought to be clear that we are coming up against the absence of an economic machinery which, on the basis of horizontal links and on market principles, would stimulate savings and ensure the most effective use of financial resources. I am convinced that if we do not create such a machinery, then the transition to market relations as a whole might come into question.

A solution must be sought in the very rapid formation of a market in this sphere. The preconditions here are evident. The important thing is that there is considerably less monopolization here than in industry. The construction industry is distinguished by its structural mobility and its greater receptivity to economic incentives. However, for as long as the client has the opportunity of investing free funds in open-ended construction projects, in those which are being started afresh, and in the implementation of ineffective projects, we shall not reduce the gap between the capacities of construction and the demand for implementing construction and assembly work. You see, it is a fact that the imbalance over the past years in connection with the decentralization of capital investments has even increased.

I think that we have to undertake the most radical measures and, first of all, restrict the demand for investment. The country does not currently have the possibility of putting resources into long-term construction projects and the construction of doubtful installations which do not promise a yield. Moreover, this was always senseless. Only the most effective projects which can be realized over a short period of time have the right to exist.

Who will select these projects and how? The client, of course. But from now on, he will scarcely allow himself to bury his money in the ground. In the appropriate section of the report, I spoke about major measures in the sphere of financial credit, such as cutting the budget deficit, taxation, and raising bank interest rates. So there won’t be such a thing any more as gratuitous money. The market for construction output which is taking shape will resist this.

I wish to say one thing about this. We have been proceeding toward the creation of such a market for a number of years already. During this time, the decentralization of construction administration has been carried out. The influence of centralized planning upon the fom1ation of volumes of contract work has been cut to the maximum extent. It appears that in the future, projects commissioned by the state at the all-Union level will include only a restricted number of the most important construction projects financed from the union budget. In precisely the same way the union republics will, within the limits of their competence, place orders on behalf of the state order for the development of production facilities relating to republican communal ownership, the social and cultural sphere, and nature conservation installations. Construction workers will pick up the remaining part of their building work in the market for contract work.

The government regards housing construction as a sector of activity for the investment complex which has a special social significance. The USSR Council of Ministers will continue to be guided by the program for resolving the housing problem. In conditions of a market economy, additional measures will be needed to support housing construction both on the part of the state and, in particular, on the part of each union republic, region, or oblast.

And there must be such support, including the development of the basis of the building industry and of building materials.

Comrades! There is no need to speak of how important the solution of the food problem is for us. I am profoundly convinced-and I think this position is shared by the majority of Soviet people-that the normalization of the food supply will eliminate the most pressing questions of a social, economic, and political nature. Here, too, we are right to count on market relations, to which the agro-industrial complex is more susceptible in actual fact that other industries. It is the market, in the broad sense, that must raise people’s commitment to highly productive labor, radically change their attitude to the land and the means of production, and revive the enterprise of the owners [khoziain], competition, and rivalry. The market will make it possible to untie many knots and eliminate the imbalances that have built up in agriculture. This is shown by the experience of our country and by foreign practice. Market relations have already started to form in the agro-industrial complex. The trade of agricultural enterprises on the collective farm markets and brand-name outlets is becoming ever larger in scale. The marketing of fruit, vegetables, and potatoes for contract prices is becoming more widespread. Consumers’ cooperatives are procuring food products worth more than RIO billion from the population and are marketing them at contract prices.

At the same time, we must take into account the fact that the agro-industrial complex is the most vulnerable to different sorts of distortions in the economy and to interrelations with all their partners. Any miscalculations here can lead to a fall in production, and be painfully reflected on all strata of society. Consequently, putting the economy of the agrarian sector on to market tracks demands particularly well thought out decisions.

The essence of modem agrarian policy is to give the peasants real chances to be independent masters, and to dispose of the output they produce and of their income, to create favorable economic prerequisites for the functioning of all forms of property and management in the countryside. We are, of course, not talking of the dissolution of collective and start farms, but of changes dictated by life itself in the production relations via the development of leasing, the formation of voluntary associations and cooperatives, where everyone who works is the joint owner of the social funds, and also that of independent peasant farms and their associations. The humiliating word “day laborer” will no longer be acceptable either to the collective farmer, nor to the worker in a state farm. The laws on land and property, which have laid the foundation for the renewal of the villages, will become most clear in conditions of a market economy. The prosperous rural producer of goods, the thrifty owner, with an active influence on the market that’s what we need today.

It is intended to implement a number of urgent measures in the agro-industrial complex in the changeover period. I will dwell on the most important of them. First and foremost they are measures aimed at the financial improvement of the rural economy. I have already mentioned the raising of procurement prices for the grain harvest of 1990, or a year earlier than planned in the reform, while preserving the existing wholesale prices for the industrial production of mixed fodder.

Through this alone, agricultural revenue will increase by R9 billion.

As has already been mentioned, proposals have been prepared on the increase in procurement prices on all other forms of agricultural produce. Furthermore, payments for field and farm produce will rise by R39 billion in comparison with this year and the profit of farms will rise by approximately 19 percent. Also, previously deferred debts on loans are being written off from those collective and state farms where leasing collectives, peasant farms, and cooperatives are organized. It is expected that over 1990, this writing off will comprise R25-30 billion. It is proposed that this sum should be added on to the country’s national internal debt.

At the same time, the government has taken account of the specific features and special social significance of the agro-industrial complex and it is included in the restricted list of key spheres that qualify for guaranteed provision of the most important kinds of centrally allocated material and technical resources. In the future, a policy of increasing the extent of free marketing of these resources will consistently be pursued. Everyone is aware of the serious flaws that have come about in the allocation system for material and technical supplies. A large quantity of unreliable and sometimes unwanted equipment is sent to the countryside. Rural enterprises are effectively deprived of any levers for influencing the means of production at the manufacturing state. Shameful to say, but there’s no escaping the fact: Over many years, we have not succeeded in achieving comprehensive mechanization in a single sector of agriculture. I’d like to draw your attention to another circumstance. In connection with the cut in the overall extent of investments countrywide, it is necessary at the republican level to ensure priority for subcontracted work performed by rural areas, and above all, as regards new construction projects connected with the social reorganization of the countryside. It is important, comrades, for us to orient the entire economy toward the needs of the actual producer, the peasant. In order for the laws on land, ownership, leasing, and leasing relations to function at full tilt, they must be backed up by a minutely worked out mechanism for implementing the land reform, and the emergence of new forms of economic management must be assisted with organizational measures, financing, and material and technical resources.

The government believes that in a market economy, substantial changes will also occur in the relationship between the producers of foodstuffs and the consumer. Substantial measures …changes are planned in the actual system for creating food resources. These are currently formed on the basis of state orders and targets for supplies to all-union and republican food stocks and also for local supplies. What should happen in the future? We can follow two routes. Either we can continue to give state orders for the supply of produce to the collective and state farms, or we can fully switch to the free purchase of produce.

Such a state order, as a directive instrument in agriculture, does not accord with the laws on land and cooperatives. At the same time, the changeover to free procurement and contract prices could lead to a spiraling not only of procurement but also of retail prices, and in the last resort, worsen the imbalance of the food market.

This alternative has been chosen: To guarantee the satisfaction of state and interregional demands for food and raw materials, it is envisaged that for a transitional period, state orders for the supply of food to the general stock will continue to be presented by the government of the USSR only to the union republics. As for the formation of republican funds, their volumes will be determined by the councils of ministers of the union republics. With the aim of guaranteed satisfaction of the state order for all-union demands, for republican needs, and local supply, the union republics will bring in a tax in kind. It is intended to have it established for collective and state farms and other rural producers of goods for the basic kinds of output: grain, cattle and poultry, milk, cotton, flax production, sugar beet, sunflower, and wool. The specific size of the tax is to be determined by the councils of ministers of the union republics.

The government has also considered possible changes connected with the restructuring of foreign economic links, especially in the area of imported purchases of food. The country is now spending more than Rl2 billion on imported food products, comrades. [bell rings; indistinct remark by Luk’ianov] Exports do not exceed one-tenth of this. With a changeover to a market economy, the question of the conditions of the import of food goods for republican needs must be solved as a matter of principle. The creation of a reliable food reserve will also be of great importance. At a union level, the size of such reserves is completely insufficient, and in the republics, especially in the oblasts and krais, they are practically nonexistent. Consequently, in order to ensure the supply of food goods to the consumer market, we need to create the essential reserves and food stocks for carrying over, including at the republic level.

Comrades, the effectiveness of the measures for moving over to a market-type economy will, in the last resort, be evaluated by the level of stabilization and the supply of goods to the consumer market, and also by changes in their quality. In the first place, this must concern the structure of trade turnover. We must significantly increase the proportion in trade of technically complex goods and durable items-furniture, timber and building materials, and other goods in high demand. I have already spoken of food goods.

The measure implemented recently on the structural perestroika of production for the benefit of the consumer sector, and the conversion of defense enterprises, have already started to give a return. The government report cited concrete figures.

I only remind you that in the past four months, the production of consumer goods in the machine-building complex rose by 18 percent and in the defense complex by 22 percent. This policy will be vigorously continued in the next five-year plan period, too. As a result, as early as 1992, we are expecting an increase in the production of color television sets, compared with 1989, by 2.2 million, an increase in videotape recorders by 600,000, an increase of sewing machines by almost 1 million and an increase of small two-wheeled tractor units by 380,000 or 3.7 times.

The coming into being of market relations will, of course, result in a growth in the proportion of the goods being marketed at prices which are being freely regulated. This is a very important condition which makes it possible to speed up the smoothing out of the unjustified differences between the consumption and the distribution of the mass of goods throughout the union and autonomous republics, krais, and oblasts.

In this connection, I would like to dwell on the problems of the transformation of trade. What is needed most of all here is a revival of business and commercial activity, the establishment of the study of demand conditions, and a strengthening of the influence of trade on the structure and the volume of the production of goods. To all appearances, the main role here is to be played by economically independent retail and wholesale trade enterprises, based on various f01ms of ownership. Opening up before them are broad opportunities for the creation of trade-and-industrial associations, amalgamations, joint-stock companies, and trade companies and firms whose activities will more and more extend beyond the framework of individual regions. Such a path will make it possible to abandon administrative government structures of the torg [trade organization], trest [trust], and upravlenie [directorate] types which monopolize market goods and which have no direct stake in the final results of the work of the trade enterprises. At the same time, the government believes that at the transition stage toward the market, it is important to maintain the state regulation of the flow of certain goods which ensure nationwide and inter-republic needs. Abandoning such a regulation can result in a weakening of the guarantees regarding supplies to all-union consumers, to interruptions in the supply of many kinds of output, especially in the regions which at present are importing the greater proportion of food and nonfood goods from other republics, krais, and republics.

The Council of Ministers believes that it is necessary to maintain the state orders to the republics and also to union enterprises for individual kinds of nonfood goods. On this basis, quotas will be established for consumers which ensure them guaranteed rights to receive output. As the market comes into being, such quotas will, of course, no longer be needed.

Now, as all of us know, the consumer market is experiencing immense difficulties. Its instability is intensifying more and more. As the transition toward regulated market relations progresses, a dynamic, and sufficiently effective system of protecting the market will become necessary. The government will constantly monitor the situation coming about here and promptly take the appropriate decisions.

Comrades, world experience has shown that the pace of economic development of a country vigorously taking part in world economic ties is considerably higher.

It goes without saying that our Soviet market also should not close itself off from the world market. But for this to happen, foreign economic relations also must undergo a radical transformation. The basis of these transformations will be decentralization and further liberalization in the conditions of foreign economic activity and the dismantling of the monopolistic structures which have built up in it, hand in hand with the provision of efficient economic regulation, supported by economic and legal levers.

Under the new conditions, enterprises will become the principal actors in this sphere. It is their inalienable right to independently choose spheres and forms of business operations and to make use of the hard currency earnings entering their accounts following payments to the republican and union budgets. It is also necessary to eliminate the present harsh limits of hard-currency self-recoupment. This will also be assisted by the establishment in the country of a hard-currency market.

We are proceeding from the premise that the functions of enterprises and ministries of the union republics and the Union of Soviet Socialist Republics in foreign economic activity, and the use of hard currency received, should be clearly allocated. Enterprises’ hard-currency funds should first and foremost be directed toward the modernization of production. A part of these means may accumulate in ministries’ sectoral funds for carrying out special programs for the development of progressive production facilities common to a given sector.

In their tum, the union republics’ hard-currency funds will begin to be drawn on for regional development, including supplying the consumer market. But the union hard-currency fund will be oriented toward the resolution of common state tasks, including the creation of a hard-currency market.

Given such a division of functions, the issue of the country’s foreign debt and sources of its repayment arises in a new light. We intend, under the new conditions, to switch the state regulation of foreign economic relations to the legal and economic levers that are generally recognized in the world. This means new customs, currency, and investment legislation, and appropriate provisions in the laws on currency and banks and anti-monopolistic, joint-stock and patent legislation.

For a certain period, it will also be necessary to preserve the state order for exports, as well as regulation and licensing. But their sphere will start to gradually contract, ceding to measures for the development of the export basis and provision of ruble convertibility [obratimost’].

The basic preparatory work for transferring the foreign economic complex to market operating conditions has to be finished by the beginning of 1991.

Serious changes will take place in economic mutual relations with CMEA member-countries. From 1 January, it is planned to go over to world prices with them and the settlement of accounts in freely convertible currency [murmuring in audience]. The inclusion of the country in world economic relations, together with the necessity to resolve many problems, will acutely pose the question of ruble convertibility. We must make the first move in this direction already this year. I mean changing the ruble exchange rate, bringing it into realistic correspondence with other currencies. In the future, it must react flexibly to the dynamics of domestic prices and world currency performance.

The situation that has come about in the national economy, the necessity of modernizing production and profound restructuring demand not only the mobilization of all our own resources, but also the use of new forms of attracting foreign capital to the country. It is necessary to activate its inflow under mutually acceptable conditions.

Comrades, the economic model, whose formation has begun in the country, has received the name of a regulated economy, a regulated market economy.

What is the deep essence of that definition, and what should be the place of state regulation in a market economy?

First, the state concentrates its attention on predicting the processes of expanded reproduction, and determining aims and priorities for drawing up a policy of social protection of the population. Second, the state, for the purpose of implementing its economic policy, takes upon itself the functions of regulating the financial and economic influences on production. Third, the state retains the regulators of direct influence on the economy. As you know, the Second USSR Congress of People’s Deputies has instructed the USSR Government to draw up, by December 1990, a 13th Five-Year Plan taking into account the specifics of its two periods: 1991–92, when market relations will still only be taking shape and rather detailed plans and quotas will be needed, and 1993-95, when the market will begin to function and the content and nature of the plan will change radically.

It is quite clear that at the initial stage of the formation of the market, the development of the economy will be characterized by increasing uncertainty and by the unpredictability of many processes. To elaborate a five-year plan for 1991-95 under these circumstances is practically impossible. We shall have to adjust it all the time. At the same time, to leave the country, especially at the first stage of transition to market relations, without planning and regulation, is also something we cannot do; and therefore, the USSR Council of Ministers has at the present time started work on preparing the plan for 1991, and is proposing that next year’s draft plan be submitted to the Supreme Soviet in October of this year. This, of course, will be a special document, organically embodying in the planning work the process of the transition of the economy to market relations. All the calculations here are fully rooted in the new system of prices, taxation, and credit relations. By having a plan and consistently replacing centralized methods of influencing production by individual market elements as these become ready, it is possible to ensure a smoother transition to the market. As for the five-year plan, it is proposed that it be drawn up at the same time as the plan for 1992.

I would also like to say a few words about the changes which, in the government’s opinion, the organizational structures of management must undergo. Many functions today exercised by ministries and departments will be consistently passed downwards to the level of enterprises, production, and other associations and concerns. A whole series of other obligations can be assumed by specialized, financially autonomous organizations, firms, and other structures which are characteristic of the market. Specific transformations must also be carried out, but only when the conditions for them are ripe. Indeed, strictly speaking, this process is already underway. At present there are 24 concerns, 17 inter-industry state amalgamations, 346 associations, and 40 consortia operating in the country, while around 600 similar amalgamations have been formed in the national economy altogether. Therefore, the task is not to eliminate particular management bodies, but to restructure economic relations by an appropriate redistribution of functions in the national economy. We shall have to take serious measures connected with the fundamental retraining of the managers of all types of enterprises. Most of all, it is, specifically, management cadres who today need knowledge of the mechanisms by which the domestic and foreign markets function and of economic methods of regulating production and labor relations.

These, comrades, are the principal provisions of the plan for the transition to a regulated market economy elaborated by the USSR Council of Ministers. I hope that the common desire and decision to move forward along the path of the cardinal renewal of our society and a constructive, responsible approach to the examination of the problems which I have put before you will help you to adopt profound, comprehensively examined decisions which are in keeping with the very essence of perestroika and its ideas and goals. Thank you.

Source: Translation from FBIS-SOV-90-102 (25 May 1990) (abridged).

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