Economic Reform Outcomes in China and Russia - Literature review Example

Economic Reform Outcomes in China and Russia In the later stages of the twentieth century there were a number of notable changes that were made in the way economies were handled. Some of the countries whose changes were clearly evident were China and Russia. The reforms that were made in both countries were very important in that they changed allot of things in the countries. The economic reforms were responsible for the changes in the way the economies of both countries functioned. This paper aims at discussing the extent to which economic reform outcomes in China and Russia are different due to the pace of reform. Of all the reforms that took place in the twentieth century, the ones that took place in China and Russia are known to have been the most dramatic. During the first half of the twentieth century, both countries had communist economic systems. However, it was during the latter half of the 29th century that both countries start formulating reforms that were aimed at changing the manner in which their economies functioned. However, a difference in the exact date in which the reforms commenced in both countries existed. In China, the economic reforms commenced in the late 1970s, while in Russia they commenced in the early 1990s. However, a notable difference exists at the pace in which the reforms were developed and enacted in the two countries (Lin & Tsai 2004, p. 34). In Russia, the market-oriented reforms were developed quickly, and enacted in the same pace, while in China the whole process of bringing the reforms were a little bit gradual. There are a number of factors that can be said to have contributed to the difference in pace at which the economic reforms took place in China and Russia. One of the things that are believed to have contributed to the difference in the pace of the economic reforms between China and Russia is the fact that China was reluctant to adopt foreign technology especially those from the west. At the beginning of the reforms, China, mainly depended of the technologies that were locally available. This made it hard for the country to benefit from the technological advancements that were experienced in Europe, especially during the early stages of the reforms. Russia on the other side was willing to adopt new technology from all over the world as long as the technology being adopted was beneficial to the Russian economy in one way or another (Lin, Cai & Li 2009, p. 325). They made sure that their economy was open to new ideas at the early stages of the reforms making it easier for the reforms to have brought the changes that were experienced in their economy in such a short period. The other source of difference in the pace in which the economic reforms took place in the two countries is believed to have been because of the difference in the political leadership of the two countries. The political leaders of the two countries settled for two completely different transition strategies. While China faced issues such as an increase in their population, Russia was struggling with the decrease in their population. The other thing is that at the beginning of the whole process, Russia had many resources at their disposal while China’s resources were limited. With the surplus resources, Russia was able to make the economic transition as fast as it was. On the other hand, China had to take care of two things at the same time (Roland 2002, p. 39). They had to work on the economic transitions while at the same time making sure that they accumulated resources. At the time this transition was beginning, China was just from having bad political times. The Cultural Revolution in the country had just ended and had left the country in a state of lack of cohesion. Apart from the lack of cohesion, it was also clearly evident that the revolution had tampered with the legitimacy of the Chinese Communist Party making governance very hard in China. Russia on the other hand had enjoyed a period of about 20 years of absolute political stability prior to these reforms. With political stability, Russia was able to take less time in making the economic reforms work in Russia. On the other hand, China had to deal with unsettled political issues during the early stages of the political reforms (Fischer & Sahay 2000, p. 67). Another notable difference in the way the two countries handled the reforms is the segueing of the reforms. In Russia the government opted for bringing in political reforms first, then the economic reforms followed. The argument for this choice of sequences was that bringing in the economic reform without there being political reforms that would deal with political issues such as corruption would be pointless. This is because the advancements brought about by the economic reforms would definitely be drawn back by the political loophole (Marsh 2005, p. 54). China on the other hand went to the vice-versa. They opted for the economic reforms to come first, then they were followed by the political reforms. At that time when Russia opted for bringing in political reforms first, then preceding them with economic reforms China opted for a completely different way of carrying out the reforms. The main reason as to why Russia decided to do this way because this was the only way to make sure that the desired outcomes of the reforms were seen the soonest as possible. China on the other hand was more preservative and instead of changing their political system instantly, opted for the gradual change. With the gradual reforms in the politics of the country, it would be hard for them to expect the economic reforms to take up a faster pace. This meant that the people of China had to wait longer for them to see the fruits of the economic reforms that were gradually taking place in the country finally (Nelson & Kuzes 1995, p. 72). The Chinese government puts in place trade and investment policies that encouraged foreign direct investment and exports. One of such was the development of the Special Economic Zones (SEZs). Special Economic Zones (SEZs) refers to the geographical area that the government of China has created with a favorable environment for the production of exports. It is in most cases referred to as the special economic zone that is in the mainland China. This area is accorded special economic policies that make this area more attractive to foreign direct investors. When the government of China finally realized that the policies that were successful in improving the economic attractiveness of this region, they decided to extend these policies to be used throughout the country. This is a perfect example of a scenario where the Chinese government opted for gradual reforms. Unlike Russia where such reforms were enacted instantly, in China they choose to first test it up with a particular region before letting it apply nationwide (Weigl 2008, p. 87). During the period in question, it can be noticed that the Chinese government has shown more concern towards certain industries. These concerns were based on either performance or potential. For instance, in the early 1990s the government of China put in place trade policies that promoted the export of light industrial products, electronics, and textile. There were incentives that were introduced labour extensive industries that had a really positive impact to these industries (Zhang 2006, p. 44). They put more emphasis on industries that were based on comparative advantages that existed at the expense of those that were not based on the comparative advantages that existed. The exchange rate policy has also been an important factor in promotion of exportation and inflow of foreign direct investors in China. The exchange rate that was real was devalued on a repetition basis, thus bringing down the prices of tangible products in comparison to the world prices. This played a very important in increasing the cost effectiveness of exports from China as from the 1990s onwards. This proved to be an attracting factor to foreign direct investors who were considering investing in China. However, it can be noticed that it took China longer to come up with such a reform as compared to Russia where such reforms had taken place long before they had taken place in China (Perkins 2002, p. 415). At the early stages of these reforms, it can be noted that there was a very high rate of privatization of government owned enterprises in Russia. This was aimed at maximizing the amount of the amount of profits that are earned from these enterprises. This was after the realization of public companies led to more productivity of the companies. The trend was different in China. As much as some of the public companies were privatized a good number of them still remained under the management of the government. The privatization was more gradual in China because the Chinese government was a little bit cautious with the process of privatization of public companies. This must have influenced the difference in the pace at which the economic reforms took place in China and in Russia (Liu, Rao & Fei 1998, p. 118). The reform strategies that were used in China were further divided into several stages that were believed to be interdependent. The implementation of a certain stage would highly depend on the success of the stage that came before it. This must have taken longer since some stages would definitely be halted by unavoidable circumstances. On the other hand, Russia’s strategy was goal driven with every reform independently having a goal that it was meant to fulfil (Woo 1997, p. 72). When Oskar Lange introduced the idea of market socialism in the year 1930’s, which ideally means that the state has control of the factors of production, but followed the normal supply and demand structure, the Chinese economy literary changed for the positive. Although agricultural reforms and urban reforms were introduced, this gradually expanded the market element, the control of the factors of production remains key to the success of china’s economy (Tan 2005, p. 692). Understanding these elements is the only way one can understand the growth of china’s economy. Exchange rates are also an important factor, which attracts investments. China’s currency is stronger compared to many countries and for this reason many countries would want to invest in china since that means that they will get a higher return on their investments compared to other countries. With the ever growing and steady economy, it means that china’s currency has been strong and steady for a long time (Leng 2009, p. 101). This boosts confidence and encourages business to continue investing in the country. During the period in question, it can be noticed that the Chinese government has shown more concern towards certain industries. These concerns were based on either performance or potential. For instance, in the early 1990s the government of China put in place trade policies that promoted the export of light industrial products, electronics, and textile. There were incentives that were introduced labour extensive industries that had positive impact to these industries. They put more emphasis on industries that were based on comparative advantages that existed at the expense of those that were not based on the comparative advantages that existed. To make sure that they encouraged exportation of Chinese product, the Chinese government made sure that a majority of exports from China were taken care by sates owned foreign trade corporations. In fact, about 90% of exports from China belonged to state corporations. The government would sometimes apply mandatory exports targets on firms as they provide a number of incentives. The implicit risk of punishment encouraged many business organizations to export their products. The other difference might be in the way that the two countries handled the banking system. The Chinese government refrained from over meddling with the banking system in the country. They treated the sector with utmost independence, thus leaving it to be free. This though not instantly, but gradually helped in keeping the lending system unchanged. Russia on the other side did exactly the opposite. They made sure that they completely controlled the banking system. This led to the emergence of private and independent banking institutions most of which had close ties with some of the business organizations in the country. It is clearly evident that the difference in the pace at which the economic reforms took place in Russia and China can be attributed to a number of factors. However, the main reason of the difference was the fact that China opted for the gradual process while Russia decided to go for instant results. As shown in this paper, there are political, social, and economic reasons as to why the two countries opted for the reform strategies that they used. Looking at these factors someone can clearly see that even if China would have wanted to carry out the economic reforms as fast as Russia did, the factors outlined above would not have made it easy for them to do so. However, looking at the economic state of the China and Russia today, someone can notice that China seems to have benefited more than Russia through these reforms. This is because of the rate at which its economy has been growing. Bibliography Fischer, S & Sahay, R 2000, “The transition economies after ten years (No. w7664)”, National bureau of economic research. Leng, J 2009, Corporate governance and financial reform in China's transition economy, Hong Kong University Press, Hong Kong. Lin, JY & Tsai, Y 2004, “Reform and development in China: A new institutional economics perspective” Lin, JY, Cai, F & Li, Z 2009, “13 The lessons of China’s transition to a market economy”, Governing Rapid Growth in China: Equity and Institutions, 325. Liu, Y, Rao, K & Fei, J 1998, “Economic transition and health transition: comparing China and Russia”, Health policy, 44(2), 103-122. Marsh, C 2005, Unparalleled reforms: China's rise, Russia's fall, and the interdependence of transition, Rowman & Littlefield, Lanham, MD [u.a.]. Nelson, LD & Kuzes, IY 1995, Radical reform in Yeltsin's Russia: political, economic, and social dimensions, Sharpe, Armonk, N.Y [u.a.]. Perkins, DH 2002, “The challenge China's economy poses for Chinese economists.”, China Economic Review, 13(4), 412-418. Roland, G 2002 “The political economy of transition”, The Journal of Economic Perspectives, 16(1), 29-50. Tan, J 2005, “Venturing in turbulent water: a historical perspective of economic reform and entrepreneurial transformation”, Journal of Business Venturing, 20(5), 689-704. Weigl, T 2008, Strategy, Structure and Performance in a Transition Economy an Institutional Perspective on Configurations in Russia, Betriebswirtschaftlicher Verlag Dr. Th. Gabler / GWV Fachverlage, Wiesbaden. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=752143. Woo, WT 1997, Economies in transition: comparing Asia and Eastern Europe, MIT Press, Cambridge, Mass. [u.a.] Read More