Difference in Leadership Policies and Choices between Russia and China - Case Study Example

Running Head: COMPARATIVE ANALYSIS OF SOE REORMS Name: Course Code: Institution: Date of Submission: Introduction Russia and China are two economically powerful countries that underwent market transitions through various economic reforms almost at the same time. In the later periods of the twentieth century, many developing countries marked a serious period of transition from government directed economies to market economies. The debt crisis that emerged in the early 1980s for instance was the major catalyst for the economic transition in the Latin America region for instance though the region already had some implemented market activities that set the stage for implementing market-oriented reforms (Christoper 2009, p.2-5). Of the many countries that underwent through the transition, the Russian and Chinese reforms were the most dramatic of all. This is because the two countries had influence of the Communist revolution that took place widely through a good part of the first half of the 20th century. This revolution attempted to create some sort of socialist “paradise for workers” between the two nations (Anmin, 2009, p.2). Consequently, Russia and China transformed their economies from the initial centrally-planned economies to a market-directed economy that greatly changed the dimensions of state owned enterprises and management in the two countries (Anmin, 2009, p.4). The commencement of reforms in China republic took place in late 1970s while Russia took some time before initiating reforms in the early 1990s. However, the pace of the reforms and the surrounding circumstance in the two countries greatly differed. In Russia for instance, the economic reforms came in place immediately after the demise of communism while the Chinese market-oriented reforms took place in a gradual manner that went on through a long period while at the same time being moderated by the country’s Communist government (Maxin, 2006, p.12). Background to Question Research The most crucial research question in this paper is a comparative analysis of Russian and Chinese reforms in the state owned enterprises. Various researches indicate that there are several sharp differences and a few points of similarity not only in the State owned enterprise reforms but also the general economic systems and transitions of the two countries (Peter, 2008, p.8). The most outspoken debate about the difference in the outcome of transition and reforms between the two countries revolves around the initial conditions and the sharp difference in leadership policies and choices between Russia and China (Christopher, 2005, p12). Another difference emanated from Russians overlooking Chinese reform measures until much later when they realized that the Chinese reforms were effective and efficient. Nonetheless, the two countries shared some common backgrounds after being subjected to military defeats in the late 19th century and early 20th century. After the bloodied wars, Russia and China saw themselves shunning the global capitalist system and turn towards communist system. During this communist rule, the Russian and Chinese state owned and centrally-planned economies depicted several features of similarities and went against the then established Western model of democratic capitalism (Christopher, 2005, p.5). Later in the 1990s, Russia and China disagreed on various aspects of the model and seemed to take different dimensions with Russia embracing Western integration that valued market democracy as China followed a path that favored preservation of its authoritarian leadership style with very limited engagement and participation in foreign trade and investment (Andrew, 2003, p.10). After taking different paths, the two countries found themselves in different situations. In the case of Russia, there were various political liberalizations brought about by Mikhail Gorbachev, which later led to collapse of the country’s system and an eventual break-up of the Soviet Union (Shiping, 2006, p. 16). On the other hand, China seemed more progressive as it embarked on managing transition that embraced a well-planned and a step-by-step introduction of some values and features of capitalism. While these were going on, the Chinese government under the Chinese Communist Party (CCP) maintained a monopoly power to oversee the successful transition process. Eventually, the Chinese political system went on to remain firm and intact to introduce capitalism (Andrew, 2003, p.12). It is for these few reasons that China’s transition to move away from socialism is claimed to be a success compared to Russia’s transition usually perceived to be a failure. Research about the two countries indicates that China doubled its GDP almost every decade with the ability to lift over 400 million citizens out of absolute poverty. It is also evident that key development indicators like the advanced technology, use of internet, phone lines, increased life expectancy, and high-tech exports play an important role in indicating the wide gap between Russia and China success of transition and reform strategies in the state owned enterprises (Christopher, 2005, p.6). Approach to the Reforms There exist various differences and similarities in the reforms of state owned enterprises between China and Russia. However, research indicates that Russia is unable to free itself from economic troubles as far as China has achieved despite the former being on track after decades of democratizations while China has been on a consistent process of steady development under serious liberalization process and the lack of democratization (Peter, 2008, p.9). From the onset, this marks that serious difference that is widely expected to have enabled Russia develop even better than China. The contrast therefore has sparked a volume of research and the question of effectiveness of SOE reforms between the two countries. This paper argues out the point that indeed the reason behind the Russia’s fall is not directly related to the effectiveness of its reforms but rather its special initial state and condition before its reform and thereafter, the improper reform strategy adopted by its authorities (Paul & Kate, 2009, p.2). On the contrary, China’s success can be attributed to its favorable initial stages and the ability to adopt wiser and successful strategies for reform. However, since the two countries reformed from socialism state, they commonly share some problems that include poor constitutional infrastructure. According to Paul and Kate (2009, p.1), the difference in reforms of the countries can be argued to be politically-based. The Chinese political leadership for instance embraced gradualism and carefully guided the process of reform. The Russian political leaders on the other hand failed terribly after failing to recognize and emulate Chinese reform model and moved at a fast pace to allow the monopoly of their ruling party to fall apart. Similarly, throughout the reform process, the Chinese authorities embraced the bottom-up system of introducing reform. This initiative emanated majorly from the rural dwellers of china (George & Zhang, 2003, p.9). This was easily adopted as the Chinese people felt ownership of the process entirely as it was their original wish. This resulted in Chinese government leasing land to peasant farmers and thus the improved productivity. On the contrary, the Russian authorities did not emulate these reforms on SOE until much later when they realized the success of China (Anmin, 2009, p.3). However, the authorities imposed such strategies in a top-bottom initiative that saw the reforms implemented in urban areas where most individuals worked for the state. Framework State owned an enterprise is one important area that would clearly bring out the events of the transition period between Russia and China. Applying these differences in theory of Public Management indicates a further disparity between the two countries. It is evident that the characteristic of Russia’s New Public Management recipe is unappealing as compared to China’s case of ambitious priorities of stimulating favorable economic environment to allow growth and the country’s ability to address critical issues related to unemployment and social inequity. In effect, according to Frederickson and Smith (2003, p.215), new public management entails a range of principles that include accountability, policy improvement, government productivity, decentralization, privatization, service orientation, and marketization. This is in conflict with the Russian case where heightened public corruption, unethical acts, poor concern of addressing fairness, and government laxity in tackling social issues like unemployment. As discussed above, the Chinese had progressed in the post-Mao regime and even after the formation of the People’s Republic of China. However, Chinese scholars consider Zhu Rongji as the founding father of “NPM-like” reforms in the PRC’s central government (Luo, 2005, p.732). The original idea of Zhu was to convince China’s central government to change state-owned enterprises into privately-owned firms with the intention that they could help re-employ displaced workers (Hughes, 2002, p.189). This idea implies the most renounced “urban governance”. This is actually where the difference between Chinese NPM policies and those of Russia. The local Chinese government exercises little formal power in a unitary system while the Russian government owns its autonomy by direct interface with citizens and investors (Bao, 2005, p.15-16). Privatization and Contracting Out In Russia’s NPM recipe, the privatization is poorly spelled out and accounts for the serious ethical issues like corruption—in essence, privatization in Russia exemplifies Frederickson’s idea of “point of transaction,” that involves the central government and contractor. This indicates an imagery of “buyer-seller” relationship that is typical of a long history of government contracting for national projects like infrastructure and military weaponry (Frederickson, 2005). In the Chinese experience, the local government values the idea of subcontracting as a strategy to improving the performance of its state owned enterprises. Subcontracting as applied in China implies that there is an explicit distribution of profits earned by contractor due to local government, reinvestment accounts, and managers as bonuses. Subcontracting practices are viewed as precursors to modern privatization. The Chinese government values the idea as a platform for interaction between state owned enterprise managers entrepreneurs to facilitate and enhance shared commitment and efforts that result in sustainable risk-taking that see most government managers become more assertive in embracing innovation learned from private entrepreneurs (Tsui et al, 2002, p.369). In the Russian NPM experience, privatization involves allocation of contracts and major public responsibilities with large and independent firms that enjoy some rights in a manner that sees the contract setting the conditions for engagement and transaction between the government and the autonomous private company. Although this type of arrangement could be possible in China, it will just exist as a continuum meddling between traditional state ownership and full-scale privatization (Walder, 2006, p.322-326). In between full privatization and state ownership depicts continuous and successive stages of “creeping privatization” where government managers allocate income and resource and control sale of firms in phases. Walder (2006, p.312) shows China’s GDP through its “creeping privatization” as outpacing economies of Russia and general central Europe area. Results As discussed above, the differences and similarities in reforms in the two countries of Russia and China are the reasons behind the disparity in economic performance and developments between the two countries. First, the finding of this research shows a contrast the achievement of the reforms. The contrast of achievement of transition and reform agenda is indeed obvious and outspoken. This is evident with China's doubling GDP in 1989 for instance from $300 billion to $700 billion while Russian halved its GDP from $700 to $400 billion the same year (George & Zhang, 2003, p.13). This contrast and the great difference in developments of the two countries have indeed stroked a substantial discussion in the academic and economic arenas. Generally, the explanation for this great disparity as explained by scholars falls between two main perspectives of reform strategy and the initial conditions of each country at the time. The two perspectives though not related empirically or theoretically, can help identify the core reasons why Russian reforms are discussed to be less effective when compared to those of China (Peter, 2008, p.9). The perspective of Initial condition The perspective of initial condition as a reason for the disparity in the successfulness of reforms of the two countries seeks to explain the prevailing economic structure, the extent of central planning in the economy, coverage of social welfare system, and the international economic condition at the time of transition (Keller, 2008, p.). Russia’s initial condition of economic structure was stable before the transition period. Russia was industrialized whereas China highly depended on agriculture as the main economic activity. This idea of relative backwardness was useful in providing China with a twofold advantage that facilitated its transition period. First, according to Peter (2004, p67), less industrialization provided Chinese with the opportunity of sufficient space to mimic industrialization which would help in fostering potential for productivity in China’s rural areas when on the other hand this potential in Russia was long exploited in the era of the former Soviet Union. Another advantage is that since agriculture was highly advanced in China than Russia, productivity was much higher in the former country (George & Zhang 2003, p8). This great achievement of de-collectivizing agriculture in China played a great role in facilitating successful reform achievement. Another aspect of the initial condition is the extent of central planning. Although the economies of the two countries appeared to be “planned economies” at the time of transition, the degree of planning varied between the two countries (Anmin, 2009, p.2). The level of “planning” in Russia for instance was a bit higher before entering the transition. Furthermore, decentralization of power was on a higher level in China than in Russia (Maxin, 2006, p.15). This is because of Mao’s advocacy for administrative decentralization that highly facilitated and encouraged small-scale economies amongst the people of China and encouraged self-supported local economies. On the other hand, Russia embraced very centrally and thus provided the country with the basics of unified economic planning (Aslund, 2007, p.32). This implied that China had favorable advantages to facilitate proper planning and room for emulating industrialization. The Reform strategy Perspective This is the mainstream reason explaining the effectiveness of China’s reforms as opposed to the ineffective Russian reforms. The main component of the reform strategies is the speed involved in implementing the reforms. According to reliable literature, the Russians opted to follow a path of “radical reform strategy”, otherwise known by most scholars as “shock therapy” while China chose to follow the path of “incremental reform strategy” (Peter, 2008, p.17). Indeed, Russia’s reform strategy was very radical as demonstrated by the collapse of the Communist party state system that took place almost in a single day. This rapid strategy facilitated price liberalization and stabilization of over 250,000 state owned enterprises then later on privatization of over 130,000 of the same enterprises. This strategy was quite opposite to the China’s strategy that was highly opposed to democratization. China opted not to privatize its state owned enterprises but rather promise expansion and development through the idea of completely decontrolling agriculture and the admitting foreign capital with strict territorial constraints. Furthermore, China ensured the economic expansion through the harnessing of private incentives that help growth of local authority, and the use of retailing (Keller 2008, p.7). Additionally, poor implementation of strategies in Russia is another reason for the difference in economic development between Russia and China. Most critics of the Russian reform strategy blame the country for adopting a “shock therapy” approach, which was an idea of the Western society, implanted on a certain group of young and inexperienced radical reformers to oversee the implementation process (Rogot 2002, p.8). Despite the use of young and inexperienced young reformers, Russia did not immediately feel the effect of the strategy until after over six months of implementation the country realized the impacts of price liberalization and the cutting down of government budget as proposed by the reform strategy. Conclusion The Russian and Chinese reforms in state owned enterprises have some similarities and differences as well. However, the difference in their effectiveness brings out the difference in reform achievement and the gap in economic success between the two countries. Although the two countries shared some common backgrounds, the Chinese Republic benefited from issues such economic structure at the time of transition and choice of good leaders that did not embrace democratization and privatization was of great importance in achieving the benefits of reform and transition. Furthermore, it is evident from the research that the Chinese reform strategy was much more effective that the Russian “radical strategy” approach. Therefore, in conclusion, China’s reform strategy was far much effective in the realization of a prosperous country than the Russian reform strategy that does not indicate any much success in the country’s economic development. 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