The Chinese and Russia Reforms - Essay Example

Economic Reforms in China and Russia Contents Contents 2 Introduction 3 Reforms in China 3 Economic Reform Outcome China 6 Reforms in Russia 7 Economic Reform Outcome Russia 8 Analysis 9 Conclusion 10 Reference List 12 Introduction The most prominent events in the contemporary international political economic system are the set of economic and political reforms that took place in the two communist giant nations, China and Russia. Both the countries undertook transformation from a planned to a market oriented economy after these reforms, following decades of central planning and communism. The reforms took place in these economies because their socialistic economies were lagging behind the free market economies of the western world. China and Russia are owns enormous endowments of natural resources and cheap labour. Thus, with the help of liberal policies, these economies significantly progressed and grown to match up the growth of the western developed nations. The reform in China had taken place in 1978 but in Russia it took place in 1991. This essay tries to enumerate the contrasting reforming strategies undertaken in Russia and China. The essay will also elaborate the economic outcomes of the reforms. The reforms of China and Russia were both considered to be Communist reforms but the outcomes of the reforms were different in the two countries. After the demise of communism, the reforms of Russia took place at a relatively faster rate. However, in China, the free market oriented reforms took place gradually over years (Eich, Gust and Soto, 2012, p.5-8). The communist government of China has tackled these reforms over years. Thus, it is highly rational to analyze the causes and outcomes of the different pace based reforms in the two countries (Hanson and Teague, 2013, p.3-4). Reforms in China Causes of reforms The centrally framed Five-Year plan model of China (1953-1957) was gradually abandoned in 1978, when the country transformed itself into a free market economy. The reforms were undertaken by the Chinese Communist Party for improving the competency of the Chinese economy in terms of a fourfold modernization path. The head of the Communist Party, Premier Zhou Enlai, had claimed that the reforms had aimed to improve the agricultural, industrial, service and technology sectors of the country (Eich, Gust and Soto, 2012, p.9). The first reform in China took place from 1966 to 1976, it was known as the Cultural Revolution. The reform was undertaken for improving the social status of the people of China. Ruthless political power and control imposed on the Chinese individuals were removed through this reform. The second phase of reform took place in 1970, when the officials of the central planning system complained about the inefficiency and weakness of the system (Joshua, Jurek and Stafford, 2009, p.8). In the third stage, the government of the country realized the importance of transforming its centrally planned economic system into a free market economy. This was analyzed by the government of the country after observing the remarkable growth rates of its neighbouring free market economies, South Korea, Singapore, Taiwan and Hing Kong. The economic progresses of these nations were much inferior to the growth rates of centrally planned nations like China and North Korea. At the final stage it was found the individuals of the country wanted the economy to reform. Thus, the end of Imperialism was inevitable in the country and laissez faire economic system was established in 1978. Reforms The agricultural output of China was produced under the process of Commune system. The farming process under this regime was undertaken through Collective farming method. The farmers used to produce agricultural output jointly through this method. Rewards were provided jointly to all the farmers on occasion of surplus produce. However, in 1978, the national policy of “household responsibility system” was introduced. The Chinese reforms were gradual in nature, thus the transformation of its state owned enterprises had taken place in a step by step approach. At first, the state owned companies were given autonomous powers to make decisions regarding their marketing, production and investment related affairs. In the second stage, financial independence was given to some state owned firms. However, eventually it was found that after getting adequate operational independence, bureaucratic practices and working inefficiencies were high in some of these firms state owned companies. At this stage, the government authorities of the country actively disinvested or privatized some of the poor performing pubic companies to domestic or foreign owners. In 1978, “Open Door Policy” was introduced by the government of the country. After the implementation of the policy, the closed economic framework of the nation was abolished and its market was opened for foreign trade and foreign investments. The Central Committee on Economic Reform had changed the price system of the country in 1984. The prices that were administratively determined in the market were uncontrolled after the price reform (Acharya and Richardson, 2009, p.12-14). The banking and financial sector of the country was also revived under the reforms. Bank of China, People’s Construction Bank of China was created after this reform. Economic Reform Outcome China The economic reforms of China had significantly helped to improve its social, political, economic and cultural status. The domestic productivity of the country had increased after the reforms. This is because the excessive controls imposed on the business firms within the economy were lowered. This gave added impetuous to the firms for increasing the scale of their operations and output. Thus, the individuals in the country did not face any scarcity of consumer goods and service availability in the Chinese market after the reform. Rather, the government of the country had started encouraging foreign direct investments with the domestic economy. This enhanced the level of competition among the domestic and foreign firms. With the help increased commercial competition the quality and variability of the goods and services available to the consumers in the Chinese market had increased. After implementation of the “household responsibility system” in 1978, the gross agricultural produce of China had significantly increased (Chow, 2004, p.129). The farmers produced separately and their output was more than what was produced under the Collective farming system. After implementation of the disinvestment and privatization policies, the extent of operational efficiencies of the state owned companies in China has increased and the loss making privatized companies were revived by their ne private owners. Thus, improved working of the public and sate owned companies in China, augmented the employment opportunities in China and increased it’s per person income level. After the implementation of the “Open Door Policy”, the extent of foreign trade in China had increased. The volume of exports and imports in the nation has enhanced to almost 7% of its national income (Chow, 2004). Many foreign companies had set up their business subsidiaries in the economy. All this had helped to increase the national and domestic product of China. The prices of the goods and services in the market were determined by the free forces of market demand and supply. The equilibrium prices were much less than the controlled price levels in China. This helped to increase the real income level of the country. Figure 1: Rise in Chinese Productivity (Source: Chow, 2004) The above graph shows that the number of state owned, collectively owned and private owned companies in China had significantly increased after the reforms from 1978 to 1996 (Chow, 2004). After the reforms in the banking and financial sector of the country, the extent of credit extended to the commoners and private sector companies in China had increased. All, these had helped to enhance the purchasing power and income level of the nation (Brian and Vane, 2002, p.7-8). Reforms in Russia Causes and Reforms in Russia The reforms in Russia and China were undertaken for similar causes. It is believed by the government authorities of Russia, that reforms made in the in its centrally planned economy would help in enhancing its economic productivity and welfare. However, unlike China, the reforms in Russia were based on the principles of “shock therapy”. Liberalization and decentralized polices were adopted in the fastest possible rate in Russia. In 1991, the whole world was astonished to witness the sudden disintegration of the Russian economy. The government of the country decided to enact the reform within 500 days. The policy was governed by the Prime Minister of the country, Yegor Gaidar. The state owned asset and companies were rapidly privatized in Russia. Total price liberalization policy was enacted in the country, under the regime of which the prices of most of the goods and services suddenly left to be determined by the free market forces of demand and supply. The “shock therapy” based free market policies adopted in Russia was not very effective. Thus, the impact of reform in Russia was just opposite to that of China. Economic Reform Outcome Russia In Russia, sudden removal of price controls and currency reforms were practiced after the implementation of the “shock therapy” based reforms. These reforms in the very short run helped in lowered the extensive hyperinflation in the country. The currency reforms in the country increased the aggregate money supply but also encouraged inflation in Russia. The government of the country decided to impose non expansionary policy in order to lower the level of inflation. Russia was experiencing severe fiscal debts at that point of time (Grealy, 2000, p.2). Thus, the non expansionary polices of the government aimed to achieve a balanced federal budget and lower the public spending over social schemes, military, education and other social services. However, it was found that after implementation of such rigid policies, the level of funds available for productive investments in Russia had significantly fallen. On the other hand, it was found that the tight monetary policies could not proficiently control the excessive inflation in Russia. As the working capital available to the public and private companies in the country had significantly declined, the scale of their production has lowered and this generated a diminishing impact on the employment opportunities and per person income thresholds (Grealy, 2000, p.4). Since, the amount of credit facilities provided to the commoners and private companies of the country had significantly fallen. Since, the financial base of the domestic companies in Russia was low, the quality of goods and services manufactured by these companies were inferior in nature. Thus, the light monetary and fiscal policies of Russian liberal government reduced its competencies in the international market. The social and economic infrastructural facilities of the country had significantly declined (Grealy, 2000, p.4-5). The levels of social welfare maximizing activities of Russia were much less after the reforms. The state of technological knowhow in the Russian economy was superior but due to lack of finances, investments for new innovation in the country were lowered. The healthcare spending of the government also decreased and its death rate in 2000 had increased by 13 % (Grealy, 2000, p.5). Analysis In reality the reforms in Chinese economy were based on the theory of “Gradualism”. Free market principles were adopted in the economy in a step by step manner. The level of state intervention in the country had declined gradually in China. This helped the economy become self sufficient in a gradual basis (William and Shepherd, 2003). Thus China’s economic reform was highly successful, because since its implementation, the domestic product of the nation has increased annually at a rate of 9.5%. However, “shock therapy” based immediate commercialization in Russia was not very successful. The level of control imposed on the small and medium sized firms of the country were suddenly lowered but they did not have much financial reserves to grow. Rather, the available money in the country was low and this lowered its productivity as well as international competency. Privation lead by “shock therapy” in Russia had increased the level of crime and corruption in the country. This is because, the level of control imposed by the government authorities on the legal affairs of the companies were low (Kumar, 2000, p.803). Conclusion The theories of economics states, that minimum government intervention generates the best outcome in an economy. Maximum private and household participation in the economic affairs of a nation helps to augment the net social welfare of the country (Giannaros, 2008, p.37). Thus, both centrally planned economies of China and Russia had to transform into a free market system, to gain higher competency in the international market. The Chinese reforms had taken place in 1978 long back before the reforms of Russia that took place in 1991. Though the underlying causes of the two reforms were similar, its outcomes were very much diverse. The economic changes in China had generated numerous positive outcomes but the reforms of Russia were not fruitful. From the context of the essay it would be correct to conclude that different outcomes in economic reforms were accrued by the economies of China and Russia due to different paces of the reforms. The reforms of China were successful because it was based on grounds of gradualism. The Russian reforms on the other hand were formulated according to sudden shock therapies and were less successful. In reality, the best outcomes in the current dynamic world can be accrued in a mixed economic system. The government and private authorities should together intervene in the matters of the economy. However, it should be noted that public participation should be entertained in places where the market fails to achieve equilibrium with the help of private control. Reference List Acharya, V and Richardson, M., 2009. Restoring financial stability: how to repair a failed system. New York City: John Wiley & Sons. Brian, S. and Vane, H. R., 2002. An encyclopaedia of macroeconomics. Massachusetts: Edward Elgar Publishing. Chow, G. C., 2004. Economic Reform and Growth in China. Annals of Economics and Finance, 5, pp. 127–152. Eich, F., Gust, C. and Soto, M., 2012. Reforming the public pension system in the Russian federation. IMF Working Paper, pp.3-24. Giannaros, D., 2008. Twenty years after the economic restructuring of eastern europe: an economic review. International Business & Economics Research Journal, 7 (11), pp. 35-48. Grealy, R., 2000. Evaluate the positive and negative effects of gaidar’s “shocktherapy” reforms. Allrussias, pp. 1-7. Hanson, P. and Teague, E., 2013. Liberal insiders and economic reform in Russia. London: Chatham House. Joshua, C., Jurek, J. and Stafford, E., 2009. The Economics of Structured Finance. Journal of Economic Perspectives, 23(1), p. 3-25. Kumar, N., 2000. Economic reforms and their macroeconomic impact. Economic and Political Weekly, 35 (10), pp. 803-818. William, S. and Shepherd, J., 2003. The economics of industrial organization: Fifth edition. Canada: Waveland Press. Read More