The Commonwealth's Best Chance Is Competition

Competition among the member republics of the Commonwealth of Independent States offers a great opportunity for economic progress and political freedom. The most significant and lasting gain from the collapse of the Soviet Union could be competition among different policies and institutions that were not possible before. The competition would exert pressure on each republic to put its house in order as it tries to attract domestic and foreign investment and the allegiance of its citizens.

Just as consumers benefit when companies vie for their patronage with different goods and services, so too would the various ethnic groups in the CIS be better off if they could choose among different governments, each with its own policies and programs.

Competition among the republics' economic and political policies would be especially effective, of course, if the CIS allowed free movement of goods, capital, and people among member states. If that were possible, and if economic growth were lagging in parts of the CIS--possibly because of foolish policies--both people and capital would leave for better conditions in economically successful republics. Migration would also be unusually heavy out of states that oppressively restricted individual liberty: Thus, freedom to migrate would help protect minorities against the most outrageous forms of discrimination. For example, if Azerbaijan discriminated against its Armenian minority, some of them might well migrate to Armenia or another republic.

OPEN BORDERS? It was no accident that essentially all communist countries sharply limited the right to emigrate, especially for younger skilled workers. These governments were well aware of the power exercised by those who can vote with their feet. When it first became possible to leave the German Democratic Republic less than two years ago, a mad exodus by tens of thousands of young people precipitated the government's collapse.

Although the republics may agree, however, on free trade in goods and capital, free migration of people throughout the Commonwealth and coordination of many other policies is not likely in the near future. The republics fear domination by the Russians, and there is intense hostility among other ethnic groups. Such frictions were exacerbated by Stalinist policies of moving large populations forcibly in and out of different regions. But the example of growing cooperation among formerly unfriendly countries of Western Europe suggests that cooperation among the former Soviet republics may grow over time.

Some economists point to the European Community's agreement to have a common currency by the end of the century and lament that ethnic rivalries and fears will prevent the Commonwealth from replacing the old ruble with a new ruble. But I believe that a common money should be allowed to evolve and should not be imposed at the beginning. Supporters of a uniform currency usually assume that it will be well-managed, with a low rate of inflation and with easy convertibility into hard currencies. But what if it were badly controlled, like the Argentinean peso or the ruble in recent years? The fact is that poor management of money has been far more common than good management.

MINTING IT. It is better to let republics issue their own currencies, if they want to, and reap the benefits of competition among different currencies. Thus, if the Russian ruble were strong and the Ukrainian money were not, companies and households in Ukraine would naturally use Russian rubles in some of their transactions.

Flight from their money puts pressure on governments to behave more responsibly, while the advantages of having a currency widely used encourage more sensible monetary policies. A republic might even control the amount of its money by linking it to hard currencies, the way the Hong Kong dollar has been pegged to the U.S. dollar.

Obviously, competition among the republics in nuclear weapons would not be a good thing. It is essential that the new Commonwealth establish controls and safeguards over the thousands of nuclear warheads in its territory. The West would like to see many of these destroyed and could offer disarmament and other inducements to the republics with nuclear weapons.

It may seem unlikely that small republics, such as Moldova and Armenia, can compete effectively in the world economy if the CIS does not guarantee free trade among its members. But countries with relatively small populations, often dominated by a single ethnic group and with their own languages and currencies, have done well on average. Their per capita incomes have grown faster than average in recent decades. International trade and flows of capital give producers and consumers in small economies access to large markets and products from elsewhere.

The economic viability of small-fry nations helps explain why Yugoslavia and other countries with strong ethnic rivalries will also dissolve into loose confederacies or completely separate nations. They too will gain from competition among different states, as people choose with their wallets and their feet.

Before it's here, it's on the Bloomberg Terminal.