China’s market reforms began under the administration of Deng Xiaoping in 1978, whereas market reforms in Russia started in 1985 under the Gorbachev’s administration (Barry N, 1995 pp. 17-380) (Moore T, 2002 pp 78-105). During this period many economists and experts were optimistic that Russia would effectively achieve a change to the market financial system, while on the other hand they were of the view that China would not achieve great success.
This was due to the fact that Russia was considered to have had the tools required for implementing successful reforms, as opposed to the state of affairs in china. As a result therefore, Chinese reforms success and Russia’s reform failure, was crucially due to each opting to a different approach to the market economy.
Comparison market reforms
Russia employed what economists would refer to as “shock therapy” which assumes the more radical change to the market economy, embedded on sudden liberalization and privatization (Philip H, 2003 pp. 25-200).
Russian government had no alternative other than select this due to the conditions, which were laid down to it by World Bank and IMF. Conversely China deviated from this approach and employed an approach of the weighed and pragmatic transition to a market economy, embedded on institutions, through which there is creation of competition and strong government (Barry N, 1995 pp. 17-380). In contrast to the expectations of many, market reforms in China flourished, while it did not occur in Russia.
Why so and yet by analyzing the starting positions of the two countries, it is evident that Russian positions were more favorable (Philip H, 2003 pp. 25-200). Take for instance Russia was largest producer by volumes of oil, gas, coal, wheat, foot-wear as well as having a vast domestic market and complete infrastructure.
Its class of educated population was seen to offer advantages as opposed to china. In china things were different as its population was of low per capita income, with a shallow home market, coupled with under developed industry as well as poor infrastructure. It is no wonder that two thirds of Chinas population was rural and besides not educated and even not literate (Barry N, 1995 pp. 17-380). Chinas work force was not well defined and there were few scientist, engineers and technicians.
Natural resources in china were very minimal and the middle class was very small. It also important to highlight that China possessed some advantages in comparison with Russia. The period of Socialism in china was short hence this led to China having a considerably smaller government sector. China had also the capacity to derive some benefits from the presence of the prospective entrepreneurs, who could appear in business programs. High rates of accumulation, aid from foreign Chinese people as well as significant cheapness of the work force, placed the country in a better position compared to Russia.
Nevertheless, a very crucial factor appeared to be the selection of another approach to the economic reforms as opposed to what the Russians employed.
Soon after ascending to power as the head of state in 1985, Mikhail Gorbachev commenced perestroika (Klein L & Pomer M, 2001 pp. 11-117). His idea was to create democratic market system through initiatives aimed at making Russia a socialist beacon for all mankind (Philip H, 2003 pp. 25-200).
These initiatives instead led to the collapse of the very system that he wanted to revitalize. His successor Boris Yeltsin under the advice of the West, tried to transform Russian socialism into laissez-faire capitalism. He aimed at eliminating oppressive government control; however is ambitions were thwarted as he finally failed to achieve his objectives. From this period Russia adopted the Gaidar program in its economic reforms.
Under this program government intervention in economic transition was not considered necessary (Klein L & Pomer M, 2001 pp. 11-117).
It overlooked the requirements for Russian enterprises to make the alterations to a market system (Philip H, 2003 pp. 25-200). Under the same program little attention was directed to the direct requirements of the people. Little was done as pertains to education, health, science, and culture. What followed were long delays in payment of salaries and nonpayment of government contracts (Klein L & Pomer M, 2001 pp. 11-117).
Under Gaidar the rationale was fundamentally based on three basic elements, stabilization, liberalization and privatization (“SLP Approach”). What were its effects? Macroeconomic stabilization, being the first element of the “SLP approach”, renegades on stabilizing the currency value, through chiefly cutting government spending. Nevertheless this did not stabilize the Russian economy; conversely it led to the combination of reduction and inflation.
Faced with long term inflation the economy was devastated and it was not possible to raise middle class, which is prerequisite of any normal political and social system.
On the question of price liberalization as the second element of the “SLP approach”, which encompasses ending price controls as well as lifting constraints on international trade and capital flows. As per this theory, when prices are created through a market method, they reflect the conditions of supply and demand. The situation in Russian is totally different as the prices there are established not by the market, but by monopolies, which were reinforced as a result of privatization, and by the Mafia, who have power over the most important sectors of the economy as well as corrupted officials.
On privatization of enterprises, as the third component of the “SLP approach”, designated the transferring of public assets to privet owners, which, according to concept, was meant to positively stimuli owners, managers as well as workers (Klein L & Pomer M, 2001 pp. 11-117). Russian privatization commenced in the middle of 1992 and is one of main entire reconstructions process of the large-scale economy (A Study of the Soviet Economy; vol. 1-International Monetary Fund. 1991).
The privatization of the state unitary enterprises saw old administrators becoming new owners. This led to the appearance of particular monopolies coupled with the appropriate monopolist behavior, which encompasses swindle during the establishment of prices.
It should be noted that the initiators of this mass privatization hoped that the Russian economy would soon bottom out and then turn upward, as the efficiency incentives let loose by privatization took hold. Well that didn’t happen.
Chinas success economically has been attributed to the fact that China began from not political, but economic reforms; transformations were conducted at the institutional basis; important forces were shoved toward the improvement of agriculture and rural areas; as well as its mode of emphasizing on the creation of free economic zones (Moore T, 2002 pp 78-105). Obstinately, Russia during the reorganization of its economy ignored or did not turn ample reflection to the above mentioned elements of reformation of the transitional economy.
To begin with china did not begin with political reforms as it preserved the existing authoritarian political regime so as to avoid confrontation. In contrast the Soviet Union in 1985-1991 and Russia, beginning from 1992, attempted to carry out political and economic reforms simultaneously. Chinas economic achievements were as a result of the efforts of Deng Xiaoping and his reformist disciples, Hu Yaobang and Zhao Ziyang, as well as a few of the elders.
These reformists moved beyond economic reforms to put into practice several limited political reforms. Dehg’s replaced Mao’s maxim of “politics in command” with that of “economics in command” which placed China on a course that neither he nor his contemporaries predicted (Barry N, 1995 pp. 17-380). Beijing’s responsibility as the country’s economic decision maker declined immediately the reforms took off. In part, this decline indicated a careful resolution by the reformers to substitute the central government’s direct participation in economic dealings with more indirect levers of macroeconomic control and with more local decision making. This move of the state relaxing economic grip, however, also set in position courses in the society, the political structure, and the cultural field that it could not manage.
Simultaneously, China’s opening to international trade was attended to by an arrival of Western manipulations in politics and culture as well as in the economy that challenged official values and official culture and spread beyond urban circles to manipulate rural areas through the use of radio, television, telephone, fax, film, and e-mail (Barry N, 1995 pp. 17-380). Such reforms served the purpose of opening China to the outside world as opposed to any other time in the twentieth century, as well as also decentralizing both political and economic power as China strived towards a market economy.
It is also important to understand that China’s reform actually involved more institutional renaissance and revolution than outright eradication. Reforming a socialist economy may weaken establishments that were once fundamental to the state-dominated mode of socialist production. On the other hand, the practicability of restructuring may need the creation of new institutions, such as a system of private property rights, tax regulations, and channels for dispute resolution.
In decommunization attempt in rural areas there was a major institutional departure from the Mao era as communes were transformed into township governments and production task force placed with the villages (Moore T, 2002 pp 78-105). However the decommunization process was also a tool used to strengthen the administrative aptitude of the state throughout institution-building at virtually every echelon of the polity. Of course, the first priority of the Deng leadership was to resuscitate whole decision-making bodies, agencies, sectors, and social groups that had declined at some point in the Cultural Revolution.
For instance The National People’s Congress had not even met for a period of eight years (1966-1974); by the same symbol, there was no PRC head of state (president) between 1966 and 1982. Hence, after Mao’s death, there was reinstating of college entrance examinations, military ranks were re-established, bonuses were reinstated for industrial employees, 12 million skilled urban youths returned to the after having been sent to the countryside and approximately 100,000 academicians/political prisoners were reformed and allowed to look for state employment.
Of great importance to Chinas success was the 1982 Constitution which also included a number of provisions that pointed out a renewed esteem for official institutions, such as the establishment of the president and vice-president positions, restraining the presidency and premiership to two successive terms, and placing the military under civilian control.
Another factor that led to Chinas reform success was its radical changes in the agricultural sector (Barry N, 1995 pp. 17-380). China subdivided its large farms into comparatively small, more effective units and introduced a system of family contract for the small firms. The central government started to offer price and ownership incentives to farmers, which enabled them to sell a portion of their crops in the free market.
The market for secondary crops and domestic products was liberalized almost immediately after the December 1978 party plenum. Due to enveloping market storage, it was capable to change relatively deer prices even for goods of doubtful quality. It is no wonder that at the turn of 1980s around 60 percent of agricultural commodities were bought and sold on competitive markets, as compared to only 8 percent in 1978. Haphazardly by 1990 this share had increased to about 80 percent. De-collectivization which was initially meant for the impoverished and mountainous areas, took about turn and extended speedily throughout rural China. At the end of 1982, 80 percent of rural areas had reverted to family farming.
Furthermore, starting in the late 1980s villagers in a number of areas, were allowed to choose their own village heads and village congregation in multi candidate elections. The candidates had to be vetted by the ministry of civil affairs. This further improved central power in the local areas.
China’s special economic zones as well as foreign joint ventures had also great impact in the country’s economic transformation, while reducing the party-state’s control (Moore T, 2002 pp 78-105). It is noted that Russia also tried to create free economic zones, but with no success. The zones, which were first set up in the early 1980s, were meant to draw overseas investments by offering special tax benefits and involving less red tape than in the rest of China.
Considerably Deng encouraged overseas Chinese communities to trade with china, these included communities in Hong Kong, Thailand, Malaysia, the Philippines, Singapore, and Taiwan (Barry N, 1995 pp. 17-380). These countries knowledge of business together with their capital and management know-how shaped Chinas coastal regions economically.
The zones competitiveness together with overseas joint venture as well as private and collective enterprises flexibility accentuated bankruptcy or stagnation of over 60 percent of China’s comparatively ineffective and superseded state industries.
By looking at the outcome of reforms in China and Russia one inevitably comes to conclude that competition is much more significant for the successful economic development than the form of property. China notably increased the area of competition without indulging itself in privatization of state ventures. On the other hand, in Russia the great part of the financial system was privatized without special objectives the stimulation of contest (A Study of the Soviet Economy; vol. 1-International Monetary Fund. 1991).
At the close of 1998, the Russian GDP had climbed up by only one half that of 1990, with the havoc plundering almost every area of production (Philip H, 2003 pp. 25-200). Russian industry was faced with the problem of managing domestic competition, thus rendering sharp reduction in investment and degeneration of scientific and technological potential.
Conversely, since inception of economic reforms in 1978, China has strived to become one of the world’s fastest-growing economics. Notably from 1979 to 2005 the country’s real GDP grew at an average annual rate of 9.7 percent. The first four months of 2006, China’s real GDP grew by 10.2%. Since economic reforms were commenced, the size of the economy in real terms has increased eleven-times, and real per capita GDP (a common measurement of living standards) has shot up eight-times.
Barry Naughton, (1995). Growing out of the Plan; Chinese economic reform 1978-1993. Cambridge University Press. Pp 17-380.
Philip Hanson, (2003) The Rise and Fall of the Soviet Economy: An Economic History of the USSR from 1945. Pearson Education. Publisher EH.NET pp 25-200.
Klein L. and Pomer M. (2001). The new Russia – transition gone away. California:Stanford University Press.pp 11-117.
A Study of the Soviet Economy; vol. 1-International Monetary Fund (1991).
Moore T.G. (2002). China in the World Market. Cambridge University press. Pp 78-105.