(FORTUNE Magazine) – IS MIKHAIL GORBACHEV finally ready to get radical about transforming the ailing Soviet economy? One early sign that he might be was his decision in December to appoint Nikolai Petrakov, 53, a free-marketer and vocal critic of Gorbachev's earlier reform efforts, as his personal economic adviser. The former deputy director of Moscow's prestigious Central Economic-Mathematical Institute, Petrakov operates out of a spartan, high-ceilinged office one floor below Gorbachev's at the Communist Party's Central Committee headquarters. He confers with the President almost daily. In his first interview with an * American publication, Petrakov spoke in Russian with reporter Paul Hofheinz about his views and the package of market-oriented reforms Gorbachev aims to unveil in the next few weeks.

''Work is going ahead on a new economic program at full speed. Soon President Gorbachev will make a more detailed statement. But in his first address to the Presidential Council ((his newly created cabinet)) in late March, he talked emphatically about the need to develop a market, reform the banking system, and demonopolize the economy. This was the first time, I think, that Gorbachev has spoken so unambiguously in favor of going for a full-blooded market. It was a very important moment. It shows that we have finally cast aside the ideological barriers and hang-ups we had about socialism and the market being incompatible. Still, there are many ways to create a market economy. One is the Polish version, the radical version -- shock therapy. Quite a lot of supporters of this approach have appeared in the Soviet Union recently. But I think the Polish version won't work here. First, it would be impossible to carry through such a reform because of political considerations. In Poland, Prime Minister Mazowiecki has received an electoral mandate; the people themselves chose this option, so they have no one else to blame. We are in a different situation. There is strong criticism of the government. The Poles also find it easier to put up with higher prices than with empty shelves. But after decades of living in a nonmarket situation, our population has developed a different psychology. Several sociological surveys have shown that they prefer lines and ration cards to rising prices. One sign of this non-market psychology is the widespread hostility to the cooperative movement ((Marxspeak for private companies)). Finally, our economy is highly monopolized, more so than Poland or other Eastern European countries. For years we assumed that big factories would always produce more and better goods. We created single immense industrial enterprises where we could have had three or four competing ones. So we need more competition. One of the best routes to break up our organizational monsters would be to convert state property into publicly held stock companies. At the same time we should create a securities market and a stock exchange. With a genuine capital market, investment would be distributed according to market principles rather than in a centralized fashion. As we demonopolize, we must solve another problem: The volume of money circulating in the Soviet economy substantially exceeds the goods available. According to our best estimates, there are roughly 165 billion rubles of such forced savings. If we go straight over to free prices without increasing the supply of goods, then this money will merely fuel higher prices. And it will be an explosive rise. How do we put the brakes on this potential inflation? One way is to absorb that money by selling things that are currently distributed in a nonmarket fashion. Apartments, for example. At present, only 15% of apartments are sold. At least 85% of them ought to be put up for sale. We also need a market for second homes -- country houses and small gardens. And people should be allowed to invest money in production -- by buying shares and setting up small-scale businesses. Those who worry about allowing private property somewhat exaggerate a single individual's capacity to organize production. A person earning an average wage has to work five years without eating or drinking just to buy himself an automobile -- and a poor- quality one at that. How is he going to be able to buy a factory? It's more likely that people will organize themselves into associations and set up small businesses -- launderettes, hairdressers, and so forth. The state should extend credit to such private enterprises. Taken together, these measures could soak up 120 billion to 130 billion rubles' worth of deferred demand. Once that's done, we could make the transition to free prices. For certain goods -- oil, coal, gas, electricity, a few consumer goods -- prices should remain controlled but be increased immediately to bring them closer to world prices. All other prices should be freed entirely. For years our planning bureaucracy has mainly been concerned with telling each enterprise what should be produced, how it should be produced, and where it should be sent. But by assuming responsibilities that could be better handled by the market, the state never addressed large-scale problems that genuinely needed its attention. As a result, our infrastructure -- roads, railways, communications networks -- is in a bad way. The environment too. Social programs have been badly neglected. CLEARLY this approach is bankrupt. What's needed is to rethink entirely the goals of economic management at a macro level. The Soviet state's role shouldn't be so different from what governments in France and Japan do now. It should deal only with general national problems that cannot be solved at the level of individual firms: the creation of an infrastructure, protection of the environment, maybe certain gigantic scientific and technical projects, such as the space program, and social welfare concerns, like pension legislation. Where the state does decide to develop certain industries more quickly, it should limit itself to offering preferential credits. This soft form of control -- using incentives rather than commands -- is the right way. Too many of our economic decision-makers think that we must completely satisfy our own demands for basic products. This is absolutely wrong. In areas where we can produce, we must invest and establish a powerful export sector. In areas where we have a poor raw materials base or where we have already fallen behind, we must import and not attempt to catch up with the West. Entering the world market requires attaining a contemporary level of technology. Right now we sell unprocessed timber to Finland in exchange for paper. But with our forestry resources, if we had modern technology we could flood the world with cheap paper. Here the role that foreign capital and businesses can play is very important. If a Western business wants to set up operations here, with 100% foreign ownership, that should be allowed. But the key to attracting such investment is to give businessmen the chance to take out profits in convertible rubles. I agree with those who say full convertibility can only come in three to five years -- after the economy is restructured and prices are freed. But we won't create a competitive export sector unless we take steps right now to introduce partial convertibility. The most effective thing would be to create a parallel currency -- restricted to joint ventures and the small group of Soviet enterprises already producing competitive goods. This convertible ruble, or chervonets, would be backed by gold or dollars. It would have a free-floating, market- determined exchange rate against the other ruble, the soft ruble, and be maintained at a fixed exchange rate against foreign currencies. To win credibility, it should under no circumstances be devalued. Westerners earning profits in soft rubles could then exchange them for chervonets and repatriate them. In coming months, the Soviet government must face up to the necessity of large-scale purchases of consumer goods from the West. Stimulating efficient work, enterprise, and private initiative requires the possibility of being able to buy something, even if the prices are high. Right now our people don't want to work because there are no goods. And there won't be any goods until they start to work. We must change the structure of our imports. Currently we buy American grain to feed to Soviet cows -- and we still get poor meat! Perhaps it would be better to buy meat directly. We should also buy less equipment and more ready- made consumer goods. For instance, we are now trying to modernize our footwear industry with help from the Italians. But in five years, when that new equipment has worn out, we'll still be making shoes that are worse than any made elsewhere in Europe. Maybe it would be better just to buy Italian shoes. President Gorbachev has given people the opportunity to say whatever they think, to read Solzhenitsyn or Pasternak. But that freedom interests relatively few people. Everybody goes to the shops. To win long-term support, we must give them improvement -- not just for their hearts and souls but for their stomachs too. Will perestroika succeed? I hope so, but the dangers are great. It's not clear where things are heading. Among the many variables is the stance of the West. I think the West has an interest in seeing the Soviet Union develop as a democracy, in seeing this process stabilize. It provides a genuine opportunity -- maybe the last -- for creating a united, civilized world devoid of ideological schisms and united economically into a single global market. Unfortunately, Westerners have so far acted largely as if they were watching in a stadium to see which team would win. You must understand that you are in the game, on the same field. What precisely could you do? We would welcome an initiative like the Marshall Plan. But even if it were just a question of preferential credits and the removal of trade restrictions, that would provide an important external jolt as we enter this critical period.''