Reference no: EM131278679

You have been asked to head up a special presidential commission on the Russian economy. Your first assignment is to assess the economic consequences of the following six policies and suggest alternative policies that may have more favorable consequences.

a. Under the current Russian system, any profits realized by a state enterprise are turned over to the state to be used as the state sees fit. At the same time, shortfalls of money do not constrain enterprises from consuming resources. Instead, the state bank automatically advances needy enterprises credit, at a zero interest rate, to buy the inputs they need to fulfill the state plan and to make any necessary investments.

b. The Russian fiscal deficit has risen to an estimated 13.1% of GDP. This deficit has been financed almost exclusively by printing rubles. At the same time, prices are controlled for most goods and services.

c. Russian enterprises are allocated foreign exchange to buy goods and services necessary to accomplish the state plan. Any foreign exchange earned must be turned over to the state bank.

d. In an effort to introduce a more market-oriented system, the government has allowed some Russian enterprises to set their own prices on goods and services. However, other features of the system have not been changed: Each enterprise is still held accountable for meeting a certain profit target; only one state enterprise can produce each type of good or service; and individuals are not permitted to compete against state enterprises.

e. Given the disastrous state of Russian agriculture, the Russian government has permitted some private plots on which anything grown can be sold at unregulated prices in open-air markets. Because of the success of these markets, the government has recently expanded this program, giving Russian farmers access to much more acreage. At the same time, a number of Western nations are organizing massive food shipments to Russia to cope with the current food shortages.

f. The United States and other Western nations are considering instituting a Marshall Plan for Eastern Europe that would involve massive loans to Russia and other Eastern European nations in order to prop up the reform governments.