China and Soviet Union Economic Reforms Compared - Case Study Example

China and Soviet Union/Russia Economic Reforms Compared Name Course Tutor Unit Code Date Introduction Most part of the 20th century was characterised by extreme and violent revolutions all over the globe. However, the last quarter of the century marked the turning point. Revolutions established governments during this time had a momentous impact and did not involve much violence. China and the Soviet Union/Russia stand out as the two key economies that exemplify much of the revolution and that draw sharp contrast between the reform policies undertaken by each economy. Both economies have a common origin having laid emphasis on the Stalinist/Soviet Model that encouraged heavy industrialisation, centralised authority and planning (under the Communist Parties), along with cultural and political depression. Apart from their historical political and economic similarities, China and Russia cover diverse geographical space; they are among the biggest countries on earth (Lynch, 2012). Today, China has risen and turned into a global economic power whereas Russia is still struggling compared to the earlier times when China saw Russia as the elder brother. This contrast has drawn much attention from economists as well as researchers. The debate has been centred on the economic reforms that describe the economic revolution in these two economies. China and Russia characterise remarkable examples of how policies depend upon the economic situation. This paper presents a comparison of the economic reforms undertaken by these economies. The best way to compare China and Russia is to analyse the key structures of the reform process that determined and pushed the patterns of growth manifest by these two economies. Their reform process has been quite different in terms of gradualism, paces and form of policy sets and led to a fad used to compare these reforms, called ‘Gradualism versus Big Bang’ (Richard & Richard, 2011). China’s Economic Reform In the 1950’s China adopted the Soviet growth model given the military triumph of the USSR in the 1941 – 1945 war. However, soon after the model started to flop as it could not counter consumer wants further than the basic needs leading to a sharp economic failure. The Chinese economy continued to suffer until the death the Mao Zedong. He was succeeded by Deng Xiaoping who started the process of seriously reforming the falling Chinese economy (Richard & Richard, 2011). Gradual Reform 1978 – to-date Reforms in China kicked off towards the end of 1978 following government decentralisation of economic decision-making. Before 1978 regional as well as local levels were allowed to control and share revenue. However, by 1978 communism had totally failed and there were enough reasons for the government to seriously embark on the reform process. At this point in time there was a general feeling that reforms were needed in China. The transition of China from central planning to a market economy has been gradual and is not yet over. Analysts refer the strategy used by China as a “dual-track approach”: this is where a market orientation is allowed to grow along with a centrally planned economy (Huang, 2012). China embarked on a series of reforms as discussed below; Agricultural Reform Agricultural reforms were the first to be undertaken. Attention to the agricultural sector was key at this time given that it had stagnated from the time when the Communist Party ascended to power and there were periodic food shortages. The key policy that was developed at this time was referred to as the “household responsibility system.” This system was designed such that communal faming was abolished by giving individual households responsibility for particular plots of land. This was an experimental system where communal land was subdivided and given individual families who were then given targets to meet. Massive farming improvement was observed as individual families not only fulfilled a part of their pledge to the government but also exceeded their quota. They families could dispose of the surplus in whatever way they wanted, but they had no right to dispose of the land itself since they were given contracts over the land (Li, 2012). Owing to the observed results, this practice in due course spread. This system was noticed and with time the leaders began to see that agricultural output was going up. Given the pragmatic mood and interest in doing what worked, the authorities might have opted to take no notice of it, but the Communist Party started to formally recommend the household responsibility system in early 1982. By 1984, virtually each and every one rural household had taken on this new system. During this period there was a dramatic increase in agriculture-led growth. Demand for other items such as utensils, building materials, along with other simple manufacturing materials went up as a result of the increased spending. Township and village enterprises (TVEs) were established to cater for the rising demand (Richard & Richard, 2011). This created employment opportunities for local labour. Opening up Policy During the reign of Mao, the Chinese economy was closed. There was no foreign investment and trade involved selling quite a few raw materials in return for indispensable items. However, the new leadership headed by Deng decided to expand foreign trade and welcome foreign investment. Deng’s administration regarded foreign trade as a vital source of investment funds and fresh technology. Constraints on commercial flows were loosened up, foreign investment was allowed thereby legalising and supporting joint ventures with foreign firms. During this time state monopoly in foreign trade was cut down. This phase was in general aimed at forming market institutions and transforming the economy from a command economy driven by the government to a price-driven market economy. As of 1984, price reforms were realised using the dual-track pricing system. Under this system, rural enterprises were permitted to vend over-quota product at market price. This approach spread across other industrial sectors and in the labour market. The goods distributed at market prices went up until the early-1990s when nearly all products were included. Additional effort was made so that TVEs were given adequate autonomy plus suitably potent incentives to facilitate their response to market forces (Richard & Richard, 2011). The creation of Special Economic Zones (SEZs) symbolised trade reforms in China at this time. The SEZs stirred dynamic exchanges among foreign firms with better technology and key Chinese economic linkages (Lai, 2006). As of 1980, the government set up SEZs in Zhuai, Shenzhen and Shanou in Guangdong province, Xiamen in Fujan province and in the whole province of Hainan. An additional 14 coastal cities were opened to foreign investment in 1984. As time progressed, the government established a broad multilevel arrangement of opening-up and incorporating coastal areas with river, border, and inland zones. Because of their geographic location, two provinces, Guangdong and Fujian, were the key leaders and beneficiaries of this process. For instance, the central government permitted to keep all foreign exchange earnings after submitting 30 percent of any rises in exports to the central government. However, the experienced business growth led to increased inflation. The government had to use crude credit controls to deal with this situation in 1987 – 1988 (Naughton, 2007). The Chinese economy came under severe pressure in 1989. Liberalisation of the labour market made it difficult for the local graduates to get jobs. This led to massive demonstrations with opposition to corruption and demand for a more transparent judicial system and greater democracy. However, having noted that economic prosperity was the best way to defeat opposition, the leadership embarked on another series of economic reforms in 1992 (Naughton, 2007). 1994 Onwards From 1994, the Chinese government embarked on a reform policy that was referred to as “replacing the system”. This system was steered with quite clear objectives. Even though state ownership constituted a major factor of the Chinese economy, private property rights came to be, for the first time, regarded a complementary factor of the economy. In September 1997 during the Fifteenth Party Congress, a key leap forward on ownership rights was made by stirring private ownership to a complementary factor of the Chinese economy (Qian, 2003). State Owner Enterprises (SOEs) were privatised. As from 1995 there had been a massive rationalisation of state workers, a process initiated through local governments as experimentations in several provinces, such as Shandong, Guangdong, and Sichuan. The process was carried on to the new millennium and by the first years of the millennium, over two thirds of China’s Gross Domestic Product (GDP) was in the private sector. Moreover, the reform of ownership rights got along with the ending of the dual-track approach, reforms of financial, fiscal and banking system, as well as downscaling government bureaucracy. In 1997, the Communist Party indicated that state ownership would be lowered from the “principal component of the economy” to a “pillar of the economy.” On the contrary, private ownership was raised from a “supplementary component of the economy,” to an “important component.” This left the flap open for privatisation of SOEs. The country had gone across bridge to a market economy. Supplementary reforms started to be executed afterwards and have been sustained to the present-day (Naughton, 2007). Russia’s Economic Reform The USSR’s Soviet growth model proved strong during the 1941 – 1945 war notwithstanding the destruction of the destruction on the communist society dream. However, soon after the model started to flop as it could not counter consumer wants further than the basic needs leading to a sharp economic failure. In the 1970s Russia experienced some form of economic recovery given the rising global oil prices. In the 1980s the prices fell down and so did the Russian economy. The economy continued to worsen and nothing much could be done under the rule of Leonid Brezhnev and the succeeding two elderly leaders, Yuri Andropov and Konstantin Cherenkov. A younger leader, Mikhail Gorbachev, who became the First Secretary of the Communist Party in 1985 brought about serious economic reforms to Russia after taking on leadership (Richard & Richard, 2011). Unsuccessful Piecemeal Reforms Central planning succeeded in mobilising resources, especially for agriculture, due to the availability of labour. In the 1970s global oil prices went up covering the deteriorating economy. The resources obtained were enough for basic needs, but this caused a problem since much or the resources were misallocated. Due to the misallocation of resources productivity went down and the Russian economy continued to go down (as indicated in table 1 below). Earlier on in the 1960s those in power knew that the economy was in problems. Economic reforms proposed then could not work and their effect was not being felt during the reign on Brezhnev. The reforms were abandoned in the 1970s and the serious economic challenges were covered by the rising oil prices. In the 1980s the global oil prices fell and the Russian economy continued to decline. Therefore, communism proved ineffective in the long-term (Richard & Richard, 2011). Table 1: Russian Economic Growth Period Economic Growth (Official Data % average annual growth in national income) 1928 – 1941 13.9 1950s 10.1 1960s 7.1 1970s 5.3 1980s 3.2 Source: Richard and Richard (2011). The main hindrance to the reformation process were those leading the government. The communism system usurped the proposed piecemeal economic reforms. There were systemic challenges such as failure to reward good performance, bureaucratic procedures, there was no incentive to explore new opportunities; causing inefficiency. Therefore the reforms proposed in 1965 – 1982 did not help much (Richard & Richard, 2011). Big Bang (Radical) Reforms 1991 - 1992 On June 12, 1991 Boris Yeltsin as Russian President with a popular majority. This day marked the first step towards intense change in the country. Yeltsin and a few other fellow reformers had tried to overthrow the government in August 1991. Even though this communist coup was abortive, it helped him obtain an authentic administrative authority. On October 28, President Yeltsin declared his intent to embark on a radical economic reform through a speech he delivered to the Russian Congress of People’s Deputies. A few days later a vast majority of the Congress embraced his speech as a parameter for the government’s economic policies. He shortly after selected a new brand of members in government. Virtually all old Soviet branch ministries were eliminated as Yeltsin appointed most outsider ministers including young liberal economists, led by Yegor Gaidar. President Yeltsin and his reform ministers professed their intent to shape a standard market economy in Russia as fast as possible. Moscow had endured decades of incremental change until people were tired. Apparently, the predicaments of early 1992 left Yeltsin with no alternative but to clasp radical reform. The first priority for the reformers was to control state finances and draw up a well-adjusted financial plan for the first quarter of 1992. They also prioritised the liberalisation of the economy by focusing on prices, entrepreneurship, domestic trade and foreign trade. Consequently, most prices and imports were liberalised as large price subsidisations were eliminated from the budget. The reformers privatised over 70 percent of state property using the big bang approach espoused by Yeltsin. Citizens were given vouchers with which to bid the sale of state property or procure other smaller enterprises operated by owners. However, the environment within which these radical reforms were taken was not right. De Melo et al (1997) indicated with regressions that “the worse the initial conditions for reform were, the more likely a country was to fail.” The reformers struggled within an environment that was full of challenges, particularly on liberalisation and macroeconomic stability. The liberalisation of commodity prices and exports in early 1992 proved difficult due to repeated delays and resistance by energy lobbyists. The reformers also had to combat the competitive money emission that had started in 1991. They were not able to have power over the Central Bank that was under the hands of the old semi-democratic Russian parliament (Soviet Union). The protection of the ruble zone rendered financial stabilisation almost impossible, even the International Monetary Fund (IMF) supported it against the wish of the reformers. The reformers also had to battle the old state agricultural monopolies regarding food import subsidies. The other key concern was the freedom of enterprise. Established traders could not accept competition, so they had to rally support from mayors of big cities (Åslund, 2007). In deed reformers led the Russian government from November 1991 up to June 1992. Despite their struggle to carry out radical reforms, they were methodically trampled by a big business community involving bankers and industrialists in conjunction with the old parliament. 1993 Onwards 1993 proved to be a successful year for the reformers in the government. Towards the end of the year the dysfunctional ruble zone was shattered. Each one of the ex-Soviet union national-states set up their own national currency. In September 1993, subsidised credits were eliminated through an unpretentious government pronouncement. By November 1993, Russian real interest rates turned positive. By the end of 1993, the exchange rate was totally fused, abolishing the remaining import subsidies. Similarly small enterprises were successfully privatised, paving way for across-the-board privatisation. Even though the economic charges were so high given the huge rent-seeking along with the required adjustment outlays, by the end of 1993 the reformers had made a great leap forward such that the reform process look like it could not be overturned. However, the liberalisation of the domestic commodity prices had little effect, seeing as the product lobbies kept local prices down through quantitative export controls. The World Bank and the IMF fought hard against the export controls and in July 1994, all export quotas except for those for oil were eliminated. Finally, in January 1995 the export quotas for oil were also abolished. Still the oil managers were able to keep the domestic oil prices preciously low by controlling the export volumes through the pipeline system. Nonetheless, by 1995 the export rents had been cut down to a low percent of the country’s GDP. The event of October 11, 1994, “Black Tuesday”, gradually destabilised the budget balance and the exchange rate of the ruble fell on impulse by 27 percent. Macroeconomic stabilisation was lastly restored in the spring of 1995. Russia put pen on paper on its first comprehensive stand-by agreement with the IMF, with over $6 billion in financing in one year. In 1996 there was no major reform as communists continued to resist and the government lacked a high-ranking reformer. There were improved reform efforts in the spring of 1997 and the summer of 1998, but the reformers in the government did not have the clout to impact the real economy. In general, Russia’s economic policies have appeared to be a serious failure. A lot of alternative reform agendas that would have a better effect on Russia have been fronted but the debate still rages on and the search for alternative policy action continues (Kaler, 2008). Comparison: Gradualism versus Big Bang The reform processes by China and Russia reveal two main faces as regards their policy options in terms of the growth strategies espoused. The first aspect is the alignment and the bits and pieces of the strategies. China chose to separate trade liberalisation reform from the privatisation reform. For illustration, China created SEZs in the early 1980s, whereas the commercialisation of the SOEs started in the 1990s. Moreover, China brought together context-specific policies in their strategies, as in the example of TVEs, a clear-cut illustration of the socialist market system. On the other hand, Russia took on trade liberalisation and privatisation reforms at the same time, disassembling its earlier centralized planning system in just few years. The differences in growth strategies do not only touch on the intent of the reforms but also the type and the quality of the institutions, which charted altered patterns of transition from the old political arrangement (Aslund, 2007). The second difference among the two growth strategies is the spell of reforms. China manifests a gradual policy reform process. It adopted a dual-attack approach where the state played a key role in the economy as the government introduced a number of measures to expand the involvement of the private sector in economic matters. In its place, Russia stretched to a high level of liberalisation and privatisation as soon as it embarked on its reform process through a big bang approach employed by the reformers led by President Yeltsin. This led to an upbeat economic growth in the initial years, a situation not encountered by China in the course of its economic growth (Lynch, 2012). Conclusion In a nutshell, Russia’s prerequisites for reform in 1991 were different to a great extent from those of China at any time. The key issue were the unsuccessful piecemeal reforms in the Soviet Union, unlike China. As a result, the Soviet Union grieved several collapses leaving no room for a gradual reform process. Worse still, the piecemeal reforms had been reversed over and over again leading to a generally held assumption that the Soviet centralised planning system was so fossilised such that just an indiscriminate reform process was possible, even as gradual reform proved conceivable in China. Perhaps, the Soviet power was so dissolute that there was almost not any dominant policy-making command left in the Soviet Union, but China had some. There was also a major structural difference in the economies; as agriculture was still dominant in China. On the whole, the disparity stuck between China and Russia is so pronounced that there is little motivation to don that parallel policies would be ideal or even conceivable. China’s transition away from communism is by and large painstaking successful, whereas Russia’s is in the main measured as a miscarriage (Lynch, 2012). References Aslund, A. 2007, Russia’s Capitalist Revolution, Washington, D.C.: Peterson Institute for International Economics. De Melo, Martha, C.D, Alan G. and Stoyan T. 1997, Circumstances and Choice: The Role of Initial Conditions and Policies in Transition Economies, Policy Research Working Paper, World Bank. Washington, D.C. Huang, Y. 2012, How Did China Take Off?, Journal of Economic Perspectives, 26(4): 147–70. Kaler, A. 2008, The Russian Economy: Past, Present, and Future. Shepherd University Honors Thesis, mimeo. Li, E.X. 2012, Why China’s Political Model Is Superior, New York Times, 16 February 2012. Lynch, A.C. 2012, Deng’s and Gorbachev’s Reform Strategies Compared, Russia in Global Affairs, 10 (2): 118–30. Naughton, B. 2007, The Chinese Economy: Transitions and Growth, Cambridge, Massachusetts: MIT Press. Qian, Y. 2003, How Reform Worked in China, in D.Rodrik, (ed.), In Search of Prosperity: Analytic Narrative of Economic Growth, Princeton, NJ, Princeton University Press. Richard, P. and Richard, P.W.T. 2011, Age of Equality: The Twentieth Century in Economic Perspective, Harvard University Press, Cambridge, MA, USA. Read More