Personal View: How the west should help Russian reform

By JEFFREY D SACHS and CHARLES WYPLOSZ

The western aid effort for Russia has been a debacle. Over the past two years, much aid has been promised but very little has been delivered. Technical assistance and food aid aside, almost no programmes have taken off. Reformers have paid heavily at the polls for this failure.

As early as 1991, western governments sought to avoid budgetary responsibility for Russia's reforms by assigning the lead aid role to the International Monetary Fund - a cautious, narrowly focused bureaucracy ill-suited for a task needing breadth of vision and risk-taking.

Successful reforms depend on timing and tactics. In a crisis, reformers need to keep the initiative, and to make reforms palatable and irreversible. These principles have been exemplified by Anatoly Chubais, Russia's privatisation minister, whose programme has privatised 80,000 enterprises.

The same considerations should apply to monetary stabilisation. It is not enough for the IMF to preach low budget deficits and tight money. The trick is to help reformers implement such policies.

Foreign aid can be critical for stabilisation. Foreign resources help the government to pay the bills (such as for social programmes) in a non-inflationary way. Each dollar the government receives from abroad is a dollar's worth of domestic currency that need not be borrowed from the central bank. Foreign aid also fosters government unity, bolsters public confidence in the reforms and signals that the government has staying power.

The best chance for stabilisation came in 1992, at the start of Russia's reforms. Support for Yeltsin was high and reformers had the public's confidence. Yet the west pushed hard for continued debt servicing. Moreover, in January 1992, the IMF suggested Russia had little need of foreign financial assistance. The IMF reversed this notion two months later, but then did almost nothing to co-ordinate an emergency aid programme.

At no stage in 1992 did the Group of Seven industrial nations or the IMF actually consider in detail with the Russian leadership how foreign aid might bolster reform. There was no planning of support for social spending, small business development or industrial restructuring. The IMF itself lent only Dollars 1bn in 1992, under the surrealistic condition that the money be held in

reserve and not used for imports. The IMF also steered Russia away from introducing a separate currency, early stabilisation of the exchange rate and rapid development of a treasury bill market to help finance the budget deficit.

The chance for a breakthrough in stabilisation was lost in 1992. The government began to drift later in the year. Central bank leadership passed into new and reckless hands. New conservative ministers promoted a fresh burst of inflationary subsidies to industry and agriculture, and then acting-prime minister Yegor Gaidar was swept from office at the end of the year.

In 1993, the chances for a breakthrough were never as bright, but the G7's promises of aid remained vague and the IMF refused much up-front assistance. This guaranteed a continuation of the familiar pattern of gradual actions backed by niggardly financial support, resulting in backsliding.

After the dissolution of the hardline parliament in September, Boris Fyodorov, the finance minister, raised interest rates; ended subsidised credits, grain procurement subsidies and bread price controls; and put the central bank under the guidance of the government's credit commission, a committee to set macroeconomic targets. Despite these breakthroughs, and with elections weeks away, the IMF refused to disburse a planned Dollars 1.5bn loan which could have helped the government avoid politically damaging wage payment arrears.

The reformers lost badly at the election last month. They were undone by government inconsistencies and inaction - not by too much reform. The west had failed to help push through basic improvements in the economy and to help finance an adequate social safety net.

The west promised a Dollars 28bn package for 1993, of which about Dollars 5bn was actually delivered. Some Dollars 13bn was to come from the IMF, of which Dollars 1.5bn arrived; Dollars 3bn was to come from the World Bank, of which Dollars 600m arrived. Most of what actually came was in the form of export credits, which were of very limited use for the reforms.

When President Bill Clinton meets President Boris Yeltsin in Moscow on Thursday it may be too late for the reformers, who are under intense pressure to leave office. If the reformers and the reforms survive, Clinton must offer Yeltsin a fundamentally revised aid effort.

Given Russia's budgetary gap and urgent social needs, western governments should provide about 4 per cent of Russian GNP (Dollars 14bn) in quick-disbursing funds for socially oriented projects, including housing for the military, support for targeted social relief, and funds to close coal mines and compensate miners and their families. On the western side, the programmes should be monitored by G7 governments, rather than the IMF.

Another Dollars 8bn - from the World Bank, European Bank for Reconstruction and Development, and the export credit agencies - could support long-term industrial restructuring, with investment funds and programmes for promoting small businesses. The IMF would make available Dollars 6bn in loans, on which there would be the normal conditions, but it would not have the overall lead or be able to block disbursement of other funds.

The catch with our proposal, of course, is that it would require new appropriations from western parliaments. The west must choose. Paying less than one-tenth of 1 per cent of western GNP, or Dollars 14bn, is surely the most important investment in Russia's democratic future and, thus, in western security.

The authors are professors of economics at, respectively, Harvard University and Insead, the European business school, and are advisers to the Russian government .