Yeltsin's Russia: Free-marketeers seek a new cure for patient who didn't take the medicine: The remedies

Whoever is to blame for President Yeltsin's present plight, the foreign advisers who wanted him to go hell-for-leather for the free market will not be putting their hands up. Mr Yeltsin's error was not to go too fast, but to go too slowly, they insist. 'Excessively gradual' was the verdict last week from one adviser, Professor Richard Layard of the London School of Economics.

The Economist, bible of British and American free-marketeers, praises Mr Yeltsin for removing price controls and launching 'the biggest industrial sale in history'. If he is doomed, the current issue of the magazine suggests, the cause will be the changes he has not made. He has not allowed energy prices to float. He has missed the opportunity to close 'many of those loss-making factories'. He could have got away with 'the consequent steep rise in unemployment' a year ago, when he could have blamed it all on the follies of the old regime.

Russia has the most far-reaching privatisation programme of any former communist country. The foreign advisers approve of that. Mr Yeltsin's biggest error, they argue, is that he did not adopt the other half of the prescription for the ailing economy: a modicum of restraint over the central bank's desire to print roubles.

The result is hyperinflation: prices rising 20 to 30 per cent a month. One adviser, Professor Jeffrey Sachs, of Harvard University, said: 'Hyperinflation unleashes all of the hidden forces of economic law in the process of destruction. It means the complete corrosion of politics, reforms and of society. John Maynard Keynes was fond of quoting Lenin, that the quickest way to destabilise a society is to debauch the currency.'

Once controls were removed, runs the argument, the government agreed to hand out credits to finance higher pensions and social security payments to compensate for higher prices. The West persuaded Mr Yeltsin of the error of his ways - but too late. The central bank, still answerable to parliament, gave more money to cash-starved industrial enterprises, which was used to pay their wage bills even if they were failing to sell their products. And the central bank granted rouble credits to its counterparts in the other former Soviet republics to finance 'easy' sales of Russian goods.

Marek Dabrowski, a senior Polish economist advising the Yeltsin government, said that Russia should have gone for a Polish 'big bang' reform. In late 1989, Poland agreed with the IMF to curb money supply growth sharply, but at the same time remove all controls on prices, and make its currency fully convertible. The result was that prices soared. But demand collapsed and, as the shops filled up with goods, prices had to come down. Three years on, inflation is a minor problem, private companies have sprung up like mushrooms after summer rain and economic recovery is under way.

But the advisers agree also that Western economic aid for Russia has been inadequate. Too much of the money from the Group of Seven countries has been in the form of short-term loans at market rates. They should, the advisers say, have advanced long-term loans and made them conditional on implementation of specific reforms, such as restructuring industry, improving efficiency in oil and agricultural production and retraining the unemployed.

Can Russia rescue itself by finding some 'third way' between socialism and capitalism? Not according to Mr Dabrowski. 'There is no third way,' he says. 'You either have countries that are relatively successful, such as Hungary and Poland, or you have those in a macro-economic mess, such as Russia, Ukraine, Bulgaria and Romania.' Nor does he believe that 'a way back' to the stable, if unsatisfactory, old days of the command economy is feasible. 'I don't see any way back. Some political forces may try, but they won't be successful.'

So what happens next? Nearly half the former Soviet Union's pounds 47bn foreign debt falls due for repayment between 1993 and 1995 - and, so far, the G7 help has only added to this burden. The answer, say the advisers, is a moratorium on debt repayments. Professor Sachs points out that this has been the most successful route to recovery in Latin America.

There are some indications that the G7, whose senior officials are meeting in Hong Kong this weekend, will move in this direction. Officials say there are plans to use the substantial unused resources of the World Bank to advance help to ailing sectors of the Russian economy. Professor Sachs suggests that if hard currency was offered to the vast Russian enterprises, on condition that they restructured along lines suitable to a free-market economy, the government could rein in rouble credits and thus ease hyperinflationary pressures.

It is a race against time. 'It is so late in the day,' says Professor Sachs, 'but it is so important. It would be the biggest disaster if the G7 threw up its hands and said, 'It's too late.' '

The Economist is more severe: 'The 'Save Yeltsin' chorus already gathering in the West needs to understand there is little point in saving a Yeltsin who cannot save his own reforms. Whoever is in charge, the West cannot help a Russia that will not help itself.'

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