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Financial Post, Weekly edition, Fri 23 Aug 91, page 10. Editorial.


Aid to Soviets: A help or hurt

The coup is over, and Mikhail Gorbachev is back at the helm. The world is relieved, but for the Soviet people the sense of relief will be short-lived. Their economy is no less a mess than it was a week ago.

In the premature nostalgia over Gorbachev's return, there were many commentators who thought the coup could have been prevented had Western countries been more generous with aid; they think we should be more generous now.

We disagree. The Group of Seven industrialized countries were right, at the last economic summit, to make offers of substantial aid conditional on further economic and political reform.

This remains the right approach. With the hardliners defeated, Gorbachev can afford to go further, faster with economic reform. Boris Yeltsin should use his increased influence to ensure he does. Gorbachev might even have gained enough popularity to win the election to follow the union treaty that can now be completed. Being elected on a clear market reform platform would help the cause immeasurably.

It isn't just that there is little spare cash to go around. Nor is this ideological narrow-mindedness. Democracy and the market economy are most compatible with human dignity. There will be no successful recovery in the Soviet Union without them. The Soviet people must identify with the process of reform, and this they will do if they choose it, embodied by a leader and a platform, themselves.

The Soviet economy will only recover when it is left to individuals responding to price and profit incentives. For this to happen, private property has to be reinstated, prices have to be freed up, and the government has to control its spending in order to preserve the value of the currency.

Giving massive aid before this happens would be a waste of money. That would reduce potential international demand for Soviet production. It might be counterproductive in another way. Official - government-to-government - aid would tend to reinforce the old economic model under which the government, as opposed to the market, allocates resources.

If aid comes in the form of consumer goods or food or is used to buy these from abroad, this will hurt nascent Soviet producers of those goods. That's precisely the opposite of what needs to happen, and that's why it is easy to be critical about Canada's offer of food aid. It provides a market for Canadian farmers, and seems quite humanitarian. But it works against market forces in food production in the Soviet Union.

For this same reason, once reform has gone far enough, the aid that is available should be tied to the kinds of functions deemed appropriate to government involvement in traditional market economies. Aid should not be for activities that compete with the private sector but should fund public goods and infrastructure, e.g., transportation, communications, education and technical assistance, that support the market economy.

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Revised: June 3, 1995

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