Russia and China Economic Transitions - Essay Example

 Russia and China Economic Transitions There are generally three types of economies in the world; the controlled or planned economy, the free economy and the mixed economy. These economies to some extent have been tied to the level of democracy or the system of government of a particular country. Pure democracy is associated with the free market economy while monopoly is associated with dictatorship and its many shades. Most of the world’s economies that were previously planned economies have initiated a transition to become free or at least mixed economies. Russia and China are among the many countries that have travelled along this path. This paper examines how they plotted and executed their transition and how they employed privatization as an important tool of market transition. Planned versus Free and Mixed Economies A planned economy is that one where the government controls virtually all the major sectors of the economy. The government also makes all the decisions about the use of income and how it will be distributed in the economy. In planned economy, the production, distribution and, most importantly, the pricing and investment decisions are made arbitrarily by the government. It usually employs a fixed price system and a monopoly market structure because all the major economic players are owned and controlled by the government. The proponents of this economic model argue that the government is better placed to know, and hence take care of the particular needs of its people. The free economy occupies the other end of the spectrum; the direct opposite of the planned or controlled economy. Here the economy is based on the division of labor. The prices of goods and services are set by the interaction of the market forces of demand and supply. The intersection of the demand and supply curves provides the optimum price and quantity. The proponents of this model argue that it gives the consumers the liberty to choose what they want provided and in what quantity. The competitiveness of the market also ensures that the firms in the industry benefit by making reasonable profits that can be sustained by the market. The Mixed economy market is a blend of the planned and the free liberalized economies. It allows the prices to be set by the interaction of the forces of demand and supply but the government reserves the right to control some economic sectors that are too crucial for the country’s development. These sectors include the transport, energy and the health care sectors among others. These sectors provide services for the good of the people and profit maximization is not their first priority. For this reason, they cannot be left in the hands of the private sector. Most economies are mixed economies or are striving to employ this model. Privatization Privatization involves the selling of state owned corporations to individuals so that they can be run as public limited companies. The state owned assets therefore are transferred to the private sector. In order to transition from a planned economy to a free economy it is essential to privatize the previously owned state corporations. Many economists differ in their opinions as to whether privatization is necessary. The following are the potential benefits that accrue to an economy that has efficiently privatized its government corporations. First, there will be improved efficiency in the market. This is because private companies are profit-driven and will do their best to cut on operational costs. This is unlike state owned corporations that most of the times are not profit driven and are hence wasteful in utilizing their resources. The second potential benefit is that there is lack of political interference. The managers are therefore able to make economically viable decisions and not those that are influenced by public opinions and sycophancy. The other benefit is that privatization makes the corporation to work in the long run mode. Most state owned corporations are run for the short time by those on the helm; always having one eye on the coming elections, this should not be the case once they are privatized. The next benefit is that the shareholders are likely to put pressure on the management to perform at their absolute best and this should be beneficial to the people on the ground as they will get quality goods and services and the company will maximize their revenues; the economy’s GDP will increase. Lastly, the economy will benefit since the government will raise revenue through the sale of the corporation. This money can be invested elsewhere for the benefit of the people. Russia and China’s Economic Transitions Russia and China are among the few countries that have managed to have a successful shift of economic systems from the planned economy to the free or mixed economies. Both of these countries were embracing communism and socialism which was brought about by the planned economy system. The well being of the people was deteriorating because of the planned system. The major characteristics that were evident in China and Russia (formerly the Soviet Union) was that the state controlled all the property from the transport sector, communication to banking plus all the retails and wholesale enterprises. The major problem of this economic system was that it was extremely implemented. For example, the main focus for both countries was on military supremacy, nearly 50% of the countries GDP were invested in strengthening the military, and in the process neglecting the consumer good s industries. The governments also overcommitted their budgets, allocating more resources than were available. The allocation of inputs was done by arbitrary allocation by the few people in power. The governments also fixed the prices of the goods and services which most of the time were not reflective of the scarcity of the funds and resources. But the major undoing of Russia and China was that they aimed at self-sufficiency by avoiding to trade with the Western countries as much as possible. Their economies started declining and this meant it was time for transition. In order to do this, both countries started the transition through privatization of the state run corporations. Russia Privatization in Russia started in 1992 under Boris Yeltsin. At the time the government owned 80% of the major companies and 90% of the small companies. It was supposed to be implemented in phases; the first one is where the government would sell the corporations to the public then the second phase is where it was supposed to sell to the international investors. However, this did not go according to plan. The first major mistake the country did was that it employed a “rapid shock” therapy to the economy. This is where the changes are not gradually introduced but are rapid. The IMF and the World Bank issued loans to the government to start the transition; the western countries also offered their support. However, the whole crash of the transition came in the privatization exercise. Some people took advantage of the delicate and desperate situation to but the state owned corporation. These individuals were mostly those related to Yeltsin, this gave rise to an oligarchy. Yeltsin’s blood relatives and a few elites benefited while the majority of the Russian suffered because all the wealth was concentrated on a few individuals. Throughout the rest of the 1990s the prices of commodities went up more than 26 times, corruption increased and more than 80% of the Russians were living below the poverty levels which were topped by the complete crashing of the Russian’s economic system. However, when Vladmir Putin ascended to power in 1999, he set to continue the transition from the planned to the free economic system. He re-acquired the corporations from the few who had grabbed them by re-nationalizing them before selling them in the right manner to the private sector. He also deregulated the market so that the transition can take place. As a result, Russia’s economy started growing again with the GDP growing 6 times from 1999 to 2002. As of 2012, Russia had the tenth largest economy which is fairly liberalized. The average wages and per capita income has increased tenfold since 1999. Russia is also the world’s largest exporter of oil and natural gas with this sector contributing more than 65% of the country’s GDP and 50% of the budget. It is safe to say that the right implementation of privatization can be the spark needed for economic growth. China The Chinese have managed to engineer one of the most remarkable economy transitions in the world over the past two decades. Prior to this revolution, the Chinese economy was deeply rooted in communism and was rigidly being controlled by the government. However in the late 1970s and early 1980s the economy started undergoing its transition from being centrally planned to a market-led economy. This transition was gradual, as opposed to the instantaneous and rapid transition. The rationale behind this choice of transition is that the negative impacts of the transition will be mitigated by being spread over a range of time and, most importantly, social unrest could be avoided. The Chinese governments therefore fuelled the transition by liberalizing the economy so that the prices of commodities could be determined by market forces, trade barriers were also removed. However, China refused to wholly privatize its state owned enterprises instead offering just a percentage of them to be owned by the public through listing them in stock exchange markets. This move, though not ideal has led to the boom in the economy. As at the moment, the private owned companies own 96% of the country’s businesses; they employ 70% of the country’s total workforce and contribute, as of 2012, 52% of the country’s GDP. With such a critical role to play, the government has sought to put in place measures that will foster the growth of private listed companies so as to aid in the flourishing of the economy. As noted above, China were wary of shock therapy, they used a gradual model. The government owned corporations were privatized in the 1980s, but China, just like Russia, had its own problems in the privatization process. The corporations were bought by few and run as family business. The government then made provisions so that the corporations could be listed in the stock exchange and be run professionally. Since the provision started being implemented the China economy has sustained an average of 9% economic growth since 2000. Conclusion There are many lessons learnt from what transpired in Russia and China in their bid to transform their economies from planned to free or mixed economies. It is evident that the free and mixed economy systems are better than the planned economic systems in the long run. This is because they not only spark economic growth but also lead to a better welfare of the citizens. Fro the analysis of the transitions of the Russia’s and China’s economies it is also clear that privatization is a major undertaking for any economy that wishes to shift to a free or mixed from the planned. This is because it is virtually impossible to deregulate the market yet still hold the instruments that can make the market truly free. However, in order for the privatization to work it must be a part of a larger program of reforms and not implemented on its own. If the state corporations are privatized then run as personal properties, like in Russia, or like family businesses, like in China, then no true transition can take place. Therefore, the privatization must be accompanied by the relevant reforms to foster equity and equality. Also, deregulation is critical. If privatized but the market is not deregulated to encourage competitiveness of the sector then not much can be achieved in terms of transition. Lastly, adequate preparation and transparency are essential for the shift. All motives should be in sync with achieving sustainable economic growth and better welfare for the citizens. References Docksai, R., 2013. Five Economies that Work: Global Success Stories. Futurist, 47(2), 32-39. Greaves, B., 2007. Free Market Economics: A Reader. Chicago: Ludwig von Mises International. Harpercollege.edu. Transition Economies: Russia and China. Harpercollege.edu. [online]. Available at . [Accessed 27th January 2014]. Ikeda, S., 2002. Dynamics of the Mixed Economy: Toward a Theory of Interventionism. New York: Taylor and Francis. Robinson, N., 2012.The Political Economy of Russia. Oxford: Rowman and Littlefield Publishers. Russel, H., 2007. How China’s Transition to a Market Economy Propelled it Past Russia’s Reform in the 90’s. [ONLINE]. Available at . [Accessed 27th January 2014). Sanders, R., and Yang, C., 2007. China’s Post Reform Economy-Achieving Harmony, Sustaining Growth. New York: Taylor and Francis. Schutz, E., 2001.Markets and Power: The 21st Century of Command Economy. New York: M.E.Sharpe Publishers. Read More