PRODUCTION SLUMP

A spurt of inflation and an uncontrolled spiralling of prices, or a production slump accompanied by massive unemployment constitute an "alternative" the government's actions having resulted in.

The USSR economy faced a steep decline in production in 1991 (the GNP fell 17% and industrial production by 8%). The main reasons for the crisis were structural imbalances in the economy, as well as the sharp curtailment of investments starting in 1990. But an important role was played by import cuts (nearly halved in 1991) and the severance of long-standing relations with the countries of Eastern Europe.

The recession appreciably increased in January-March: industrial production was only 87% of what it was during the same period in 1991 while average daily output fell 15%. This was due to some new factors. The most important one is the steep curtailment of supplies between the republics that disrupted cooperation, and financial policy aimed at limiting demand.

Typically, producers, most of which are monopolists, react in the same way to limited demand for their products: instead of cutting the costs and prices of their products they cut production.

There are two alternatives: to cut costs - often requiring big additional investments, something that cannot be expected today; or the reorganization of monopolies. The latter choice offers two variants:

1) attract additional investments in order "to break up technological monopolies" (such investments cannot be gotten), or

2) to let these monopolies die and to create on their basis something entirely different (it is not known, though, how those employed by the monopolies would react and what would they think about the government's policy).

Clearly in evidence are several "points of crisis". These are sectors that have always heavily depended on centralized investments (the fuel-energy complex, metallurgy, chemical industry, oil refining, construction). They are also greatly dependent on state purchases (the defence industry first and foremost). This also includes a wide range of industries dependent on imports of materials and build-up components. Some of these industries produce food and other consumer goods.

The financial policy of recent months geared to limiting final demand has worsened the slump in the consumer sector of the economy.

Meat production in the Russian Federation fell more than 25%, unskimmed dairy products 45%, and cereals 35% during the January-March period. The production of food generally fell 28%. The production of food during the whole of 1991 fell several times less.

In two months after the freeing of prices, there was a sharp decline in the production of consumer goods other than food: footwear fell by 21%, fabrics by 11%, TV sets by 28%, refrigerators by 15%. This narrows down consumer opportunities for the future as well.

The situation of crisis in the ferrous metallurgy consists in the two months' curtailment of rolled metal production by 23%, and steel pipes by 29%. The shortage of rolled metal affects engineering, thus manufacture of many types of products fell as much as 20-40% in one go.

Finally, oil production continues to fall (average production of oil declined 14% over the March figure in 1991).

These figures cast doubt on the assertions of the favourable influence of the slump on our economy through closures of inefficient and redundant productions. Declining production is most disruptive of the light and food industries and housing construction, sectors that even under normal circumstances were unable to meet even minimal consumer demand. At the same time, there have been no closures of basic industries whose hypertrophied expansion is obvious. The slump is getting out of control.

The fact that there have been no bankruptcies yet attests to the fact that THE LOWEST POINT OF THE ECONOMIC CRISIS IS STILL AHEAD. The slump will worsen as energy prices are raised and as it will become necessary to resuscitate some portion of the insolvent enterprises and continue the "open economy" policy. A sharp new downtrend in production is heralded by the increasingly frequent factor stoppages over the lack of raw materials and components, plans to lay off, over the next three months more than half a million industrial workers, forcing workers to take unpaid vacations.

At the same time, a number of stable tendencies are extremely impeding further economic growth.

• First, the general decline of investments that continued for three years has now become disastrously quick - having fallen 44% during the first quarter of 1992 against last year. Given the extreme wear and tear of equipment and the need for large investments simply to keep a number of industries running (fuel and energy, ferrous metallurgy, etc.) the present dearth of investments would lead to a further production slump.
• Second, a massive outflow of capital from Russia in recent months has been added to the shortage of internal investments and the continued lack of trust by foreign investors.
• Third, the present inflationary expectations and the general instability of the socio-economic situation make most entities care more about their current requirements than their long-term objectives.
• Fourth, the tendency towards disintegration and formation of regional markets hinders the accumulation of large financial resources for production upgrading.

The fallaciousness of today's structural policy (never proclaimed officially but obvious from the government's actions) is evident in that it relies almost exclusively on final domestic demand (taking account of the payment crisis!). It stresses the individual survival of competitive industries in the absence of market mechanisms to redistribute resources between them.

Inflation in our economy is generated by a very distorted economic structure rather than by the superficial manifestations the government is mainly concentrated on. Thus the processes launched by the Russian government over recent six months will be the reason for a drop in final demand and consumption and a sharp decline in supply. The most painful will be the deepening of the investment crisis, the destruction of the growth potential and an increasingly uneven decline of production in economic sectors (energy, investment, consumer industries and farming). An ultimate economic trap, stagflation may quickly prompt attempts to get out of the situation through non-economic means, which would not cure the situation and may be dangerous politically.