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The Pizza Hut Marshall Plan


Davos, Switzerland -- THE FORMER Soviet Union is collapsing economically, and all the United States can manage is a small airlift of emergency food and medicine. This is an astonishing default of diplomacy and imagination, as well as a short-sighted view of America's own self-interest.

At the World Economic Forum here, the presidents of seven former Soviet republics held a joint discussion before an audience of the world's top business leaders. What they had to say revealed a dangerous policy vacuum. Although each pleaded for Western investment, none had a convincing scenario for how to attract it, nor a believable political recipe for necessary economic reforms.

The former Soviet republics face a common chicken-and-egg dilemma. The first part of the dilemma is currency stabilization. The Russian Republic continues to print rubles, but the ruble loses value daily. As inflation accelerates, real wages fall. With the fall in wages comes a fall in tax receipts; the government covers the gap by printing still more rubles -- which only further fuels inflation. Without reliable money, commerce stagnates.

Production and consumption are both in a tailspin. Nearly all factories still operate according to the principles of the old system. Prices and quantities are dictated by bureaucrats rather than by supply and demand. Broad-scale privatization is impossible, because nobody knows what factories are actually worth and there is not yet a system of laws governing private ownership. Even if you wanted to buy a Russian enterprise, it is far from clear who is authorized to sell it.

A few hardy foreign investors have taken the plunge, but they require very stout balance sheets and very distant horizons -- for there is no practical way of getting profits out until these jTC republics become genuinely capitalist.

Donald Kendall of Pepsi-Cola, one of the first Americans to invest in the Soviet Union in a big way, regaled the audience of business and political leaders here with his stories of how he converted ruble profits into real money. When Mr. Kendall began selling Pepsi to the Russians in 1974, he cut a deal to take out his profits in the form of cases of vodka, for which Pepsi became the American distributor. And when Pepsi's Pizza Hut subsidiary set up shop in Moscow, Mr. Kendall began taking payment in everything from mushrooms to outmoded oil tankers, which he sold in the West as scrap metal.

Pizza Hut endeared itself to Muscovites during the August 1991 coup, when Russian leaders led by Boris Yeltsin bravely blockaded themselves inside the parliament building. Starved for food, they did just what the plotters did in the Woody Allen film, "Bananas" -- they sent out for pizza.

But there are limits to the Russians' ability to sustain their economy by "ordering out," and limits to what can be bartered. There is only so much Russian vodka and scrap steel that the West wants. The inconvenience of barter is why money was invented in the first place. Until there is real structural reform, the productive capacity of the economy of the former Soviet Union will be stuck far below its potential.

Though free markets have a genius for entrepreneurial regeneration, they depend on prior rules. Given the fragmentation of political leadership in the former Soviet Union and the monetary and economic gridlock, the development of new rules for currency stabilization and marketing demands outside assistance.

It is not that the former Soviet Union needs massive infusions of Western financial aid -- though that would surely help. Rather, the prospect of a relatively modest amount of aid would force both the republics and the major Western nations to focus on just what sequence of events would unlock the economic potential of these benighted nations.

Most Western experts who have studied the problem argue that budget and currency reform needs to come first. This in turn would allow the ruble, or some successor currency, to regain trust both domestically and internationally. Then prices could have some real economic meaning, privatization could proceed and ordinary commerce could resume.

That was more or less the sequence followed in Poland, Hungary and Czechoslovakia, with financial help from the World Bank and the International Monetary Fund. Those countries were far easier cases -- they are smaller and more unified -- and they are far from out of the woods.

The contrast between U.S. behavior in the late 1940s in the reconstruction of Western Europe and its current vacuous policy toward the East is a disgrace. Then, economic reconstruction was a top policy priority. The United States committed both the prestige of the government, under Secretary of State George C. Marshall, as well as serious resources.

Arguably, it made sense to delay aid while Mikhail Gorbachev was in power, because the Communist Party still controlled the economy. But today, delay only invites chaos.

Privatization is fine, but one thing that can't be privatized is diplomacy. Today, free-lance advisers to the Russians, such as Harvard economist Jeffrey Sachs, are substituting as best they can for the U.S. government, but without either the resources or the clout to command attention.

So Pizza Hut is the makeshift Marshall Plan. It's not enough.

Robert Kuttner writes regularly on economic matters.

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