SYNOPSIS:

Until now, the unraveling of the Soviet empire has had limited impact on the world economy because liberated countries like Hungary and Poland are too small and too poor to make much of a dent in international markets. The sudden collapse of communism in the Soviet Union changes all that. The capitalist world has gained a potentially huge new market -- and some global industries may have acquired new competition. Many people think of the Soviet Union as an economic midget because of the turmoil that has gripped its economy in recent years. But this perception is wrong. Although production is grossly inefficient and the standard of living has always been miserable, the Soviet Union was until recently the world's second largest economy.

Under Mikhail Gorbachev, the Soviet Union fell apart because political reforms undermined the command economy. Gorbachev was unwilling -- or unable -- to replace central planning with a true market economy. Today, the way is clear for radical reform. It will take many years before that reform produces a Western standard of living, but the Soviet republics will eventually regain economic ground lost during the Gorbachev era.

Boosting exports. In the past, the Soviet Union tried to be self-sufficient, either producing goods for itself or bartering with its satellites. The result was limited world trade. But now, in the wake of the recent countercoup, the Soviet Union will become a player in the global marketplace. The most dramatic changes will take place in foreign trade -- not in the domestic economy. Even if there is absolutely no economic growth in the Soviet Union over the next five years, the republics could well increase their annual exports to, and imports from, the West by $ 200 billion. Experience tells us that this increase in trade will come quickly. When Poland introduced its economic reforms in early 1990, for example, its exports to the West grew 20 percent in less than a year, and they have continued to expand rapidly.

Over the next decade, the Soviets could dramatically increase their exports of unsophisticated manufactured goods such as steel, bulk chemicals and plywood. With a huge military budget and an emphasis on heavy industry, the Soviet Union was for many years the world's largest steel producer. But chaos in the U.S.S.R. has destroyed this domestic market, leaving the republics with tremendous excess capacity. This will force them to sell their steel products abroad at very competitive prices -- the same strategy that enabled South Korea and Brazil to become successful exporters in this area.

As they move into the global marketplace, the Soviets must make sure that their goods meet minimum global quality standards. They will also have to come to grips with worldwide overcapacity and protectionism in many of the markets they wish to enter. The key question is whether the West will raise these barriers to keep the Soviets out. It may be that the ex-communists are about to test our belief in free markets.

Originally published, 9.9.91