Economic Systems in the USSR and in China since the 1980s - Essay Example

Comparative Economic Systems Explain the problems involved in the transition process from one economic system to another, and assess the record in the USSR and in China since the 1980s. Modern nation states function under a variety of economic systems. Historically, most societies were governed under a hierarchical feudal system where a supreme ruler, the sovereign, governed a pastoral society assisted by lords or barons owning all the property and land, with vassals, serfs and/or peasants remaining the vast bulk of the population. All economic activity including agriculture and trade was conducted as inherited roles within a family structure. Tradition determined what people did for a living and how the work was to be performed. In some parts of the world, such as in Africa, South America and Asia, such traditional economic systems are still in existence. With industrialization came the need for a skilled and diverse workforce where traditional work arrangements were no longer feasible. During the Cold War period the world was divided into two main camps with the West (USA, W. Europe) embracing a free market economic system and the East (USSR, China) embracing a command economic system. In a free market economic system a nation’s economic activities are the result of individual decisions by buyers and sellers reflected in the price of products and services in the marketplace. People have the freedom to develop their talents and abilities and take up work or enter professions according to individual choice. They can also produce and supply goods and services as private businesses freely within legal and contractual obligations. The free market economic system of the West adumbrating free enterprise has been (and continues to be) referred to as capitalism. Up until the end of the Cold War, capitalism was a term of opprobrium to the East where communism ( a term of opprobrium to the West) was the term used for a command economy where all economic activity of the nation was controlled centrally by the government (mediated by the Communist Party). No private individuals were allowed to own and operate the means of production of goods and services. Public ownership, except in very small scale, local economic activity, was the norm. As everyone knows, USA exemplifies the paradigmatic capitalist state while Soviet Russia and China used to exemplify communism. Things have changed for Russia and China since the 1980s (although the latter still holds onto the communist label) and what these changes are, how they have been adopted and the progress achieved are the concern of this paper. A third kind of economic system called socialism is adopted by some countries with most of the major industries, such as mining, power, communications, railroads banks and airlines in the hands of the state with various other businesses such as farms, factories, hotels, restaurants and stores allowed to be owned by individuals. Socialism aspires to the best of both worlds and sometimes it succeeds such as in the example of Sweden. Most capitalist countries (or free market economies) have adopted socialist policies at one time or other depending on what political party holds power at any given time. Between the extremes of free market economies and centralized command economic systems most modern states have adopted a mixed economic system with free enterprise co-existing with some government ownership. The difference between mixed economies and socialism is that mixed economies are pragmatic solutions to prevailing economic conditions rather than a doctrinaire adoption of the socialist credo. Even in the USA, the postal service, colleges and schools, are owned and operated by state and local government. For about 60 years the economy of the USSR functioned as a command economy relatively successfully, (second only to the USA) but failed in the end due to internal contradictions and the vagaries of a global economy. Early in the 20th century, it was felt necessary that drastic economic decisions and planning measures were needed to transform a feudal society into a modern state. In the late eighties the USSR broke up into its separate republics and communism was abandoned in 1991. Russia is now reasserting itself as a powerful industrialized economy. Indeed there are similarities with the People’s Republic of China, which was economically very backward (a third world country) before the Revolution. It still has a large peasant population and operates under the communist banner, but as we shall see below, it has transformed itself into a powerful modern state. When a centrally planned economy changes itself into a free market economy, the process is termed a transition economy. Transition economies undergo economic liberalization, letting market forces set prices and lowering trade barriers, macroeconomic stabilization, where immediate high inflation is brought under control, and restructuring and privatization, in order to create a financial sector and move from public to private ownership of resources (emphases in the original. http://en.wikipedia.org/wiki/ Transition_economy). Although the term transition appears to indicate a peaceful and non-threatening transfer of economic power to the community, and is quite the antithesis of a revolution, it is not so simple in practice. There are many barriers and obstacles to overcome and new institutions have to be created to enable and sustain the transition. What normally happens is clearly summarised in the passage below. Transition process is usually characterized by the changing and creating of institutions, particularly private enterprises; changes in the role of the state, thereby, the creation of fundamentally different governmental institutions; and the promotion of private-owned enterprises, markets and independent financial institutions (op cit). Obviously such changes cannot be brought about overnight. It is now necessary to illustrate the processes of transition by examining the changes undergone by the two major exemplars of transition, Russia and China. Post-communist Russia is still a large country with three-quarters of the territory of the former USSR and a population of 145 million. Although geographically, it is 1.8 times the size of U.S., the population is about half that of the U.S. with much of the land being unavailable for crop production. However, Russia is rich in natural resources including oil, natural gas, coal, timber and many strategic minerals. A system of central planning was adopted in 1928 and lasted until 1991. Private ownership of property had been abolished and entrepreneurship was totally unknown. In 1985 when Gorbachev was the head of the government, he instituted changes referred to as perestroika (restructuring) seen as the beginnings of transition but failed to deliver, mainly due to (with hindsight) a culture of dependency developed over the years and the lack of proper institutions to support the transfer of economic decision-making to free market forces. There was also widespread corruption and cronyism with most privatised establishments falling into the hands of oligarchs and even criminal elements like the nomenklatura (Russian mafia). After a period of stuttering growth, in 1989 growth turned negative and the Russian economy continued to perform badly until 1998 when it began to recover. Politically, 1991 was the critical year for Russia with the August coup getting rid of Gorbachev, and Yeltsin instituting a radical program of economic reforms. By December 1991 the Soviet regime had collapsed and the Communist Party was abolished. Yeltsin carried on in power until 1999 and was responsible for removing price controls - a feature of the old Soviet Union - ‘on 90% of consumer goods and 80% of intermediate goods. …These measures were to establish a realistic relationship between production and consumption that had been lacking in the central planning system’ (http://en.wikipedia.org/wiki/ Economy_of_Russia). Although under the Soviet regime agriculture was organized as collective and state farms, individuals were also allowed to farm on private plots which accounted for only 3% of arable land. Even so, these privately owned plots provided a third of milk and meat and two-thirds of potatoes and eggs consumed by the populace. A program of privatization was therefore instituted by the government. Every Russian citizen was given vouchers worth 10,000 rubles. Small-scale enterprises like shops, cafes etc were bought mostly by the workers in these establishments. It proved more difficult to privatize state owned enterprises (SOEs). However, vouchers could also be sold for cash, and traded at organized exchanges throughout Russia. A great deal of capital ended up in the hands of the few. Since 1997 state owned enterprises (SOEs) have been sold on a case by case basis. Shares and stocks were purchased by managers and workers of SOEs, in what was regarded as ‘insider dealing’, not a healthy way of ensuring economic efficiency. Nevertheless ’(B)y the end of 1993, more than 85% of Russian small enterprises and more than 82,000 Russian state enterprises, or about one-third of the total in existence, had been privatised’ (http://en.wikipedia.org/wiki/Economy_of_Russia). The Wikipedia authors concluded: Despite periodic delays, the inept administration of the program’s more recent phases, and allegations of favoritism and corrupt transactions in the enterprise and financial structures, in 1996 international experts judged Russia’s privatization effort a qualified success. The movement of capital assets from state to private hands has progressed without serious reversal of direction - despite periodic calls for re-establishing state control of certain assets. And the process has contributed to the creation of a new class of private entrepreneur (op cit). In Russia financial markets were ready for overhauling. Indeed it is asserted that there can be no real or effective financial markets in a planned system. Hitherto the role of banks had been limited to allocating credit, funded from the state budget to enterprises according to a centralized, preset plan. A two-tiered banking system was initiated in 1988 but did not achieve significant reform until 1995. Gosbank was split in two to make one central bank and about 2000 commercial banks. The central bank of Russia (CBR) was responsible for monetary policy and the regulation of commercial banks. The commercial banks remained undercapitalised and tied to local industries with their loans restricted and not allocated efficiently. The central bank (CBR) issued large amounts of money while the government made direct grants to industry resulting in hyperinflation. The CBR has improved its performance since1995 with inflation coming down, which was still high at 22% in 2001. In January 1992, the type of liberalization undertaken by Russia amounted to what was regarded as ‘shock therapy‘. Gradualism had given way to a program of change by freeing prices except for energy, medicines, consumer necessities and public utilities. Defence spending was cut back drastically. Subsidies to state owned enterprises (SOEs) were kept low. A new tax system had to be introduced to replace the overly complex and poorly administered system that followed the initial changes. Foreign trade required a currency that was convertible, no mean feat when inflation and capital flight was the order of the day. It was soon clear that the effects of ‘shock therapy’ were far from benign. The Gross Domestic Product (GDP) was reduced dramatically and the standard of living of the population fell accordingly. Unemployment and underemployment concealed for so long under the old system rose visibly. This trend continued leading to a financial crisis in 1998 helped along by lower prices in the global market for Russia’s export earners (oil and minerals). Despite the doom and gloom Russia has weathered the crisis and has built up central bank reserves which help the modernization process and can look forward to a healthy economic future. China, or the People’s Republic of China, to give its correct appellation, has been modernising its economy since 1978. However, China retains its political identification with the Communist ideology through its own declared version of ’Socialism with Chinese characteristics’. It is a type of mixed economy where the public sector is served by about 200 state-owned enterprises (SOEs) consuming nearly 70% of the labor and capital employed by Chinese industry. They are concentrated in heavy industries like iron, steel, machinery, armaments and energy resources. In the 1990s SOEs began to be transformed into corporations with a formal legal business structure and listed on the stock exchange. However, since 2005, it is reported that over 70% of China’s Gross Domestic Product (GDP) comes from the private sector. Another important change due to the reforms has been the remarkable reduction of the poverty rate from 53% of the population in 1981 to 8% by 2001 (Business Week 2005). National income doubled every 8 years and ‘by some accounts, over half the reduction in absolute poverty in the world between 1980 and 2000 occurred in China’ (Policy Brief, OECD 2005). In agriculture the old collectivist methods and the commune system had been supplanted by individual ownership and the development of small scale industries and services. During the 1980’s these reforms led to a doubling of rural per capita income and self-sufficiency in grain production. Rural industries accounted for 23% of agricultural output. Just as with Russia, reforms in the financial and banking sector helped with the modernization. Chinese banks are increasingly becoming autonomous commercial institutions. China was able to move away from the unproductive socialist policy of job security at any cost that had been mocked as the ideology of the ’iron rice bowl’. Foreign trade is extremely important in the transition from a centrally planned economy into a free market economy. China decentralized its foreign trading system and joined the Asia-Pacific Economic Cooperation (APEC) group in 1991. During 1993 China introduced Special Economic Zones (SEZs) to facilitate the influx of foreign investment. Although the economy slowed a little due to the Asian Financial Crisis of 1998-99, it did not affect China as adversely as it affected Russia. After 15 years of negotiations China was accepted by the World Trade Organization as a full member in 2001. By 2004 China had become the third largest trading nation behind U.S. and Germany. An OECD report (2005) states that the average economic growth in China over the last twenty years averaged 9.5%. It adds that such an increase in output ’represents one of the most sustained and rapid economic transformations seen in the world economy in the past 50 years’ (Policy Brief, OECD 2005). China’s economic reforms have allowed for the highest rates of gross savings in any economy. It is nearly half the GDP which means that the capital stock of the country increases rapidly. Increased investment has also boosted the annual growth of labor productivity, which was 8.5 % in 2003. This trend continues with the influx of labor from rural areas to the growing service and manufacturing sectors in urban areas. There are still many obstacles to the formation of a national labor market due to legal and other restrictions militating against the mobility of migrants. The Chinese government is taking measures to reduce income differentials between the rural and urban workforce. Although continuing urbanization will contribute to growth and reduce inequalities, there is the ever present danger of increased pollution. A harmful by-product of China’s rapid industrial development has been increased pollution. A 1998 World Health Organization report on air quality in 272 cities worldwide concluded that seven of the 10 most polluted cities were in China. According to the PRCs own evaluation, two-thirds of the 338 cities for which air quality data are available are considered polluted - two-thirds of them moderately or severely so. Respiratory and heart diseases related to air pollution are the leading causes of death in China. Almost all of the nation’s rivers are considered polluted to some degree, and half of the population lacks access to clean water. Ninety percent of urban water bodies are severely polluted (http://en.wikipedia.org/wiki/Economy_of_the_People’s_Republic_of_China). However, the Chinese government are taking steps to combat pollution. In 2003, it introduced new legislation ensuring increased penalties for the emission of air and water pollutants from industrial plants. China is well aware that current levels of pollution impose a welfare cost estimated at between 3% and 8% of the GDP. Whereas in Russia even before the transition there was a well educated and skilled cadre of people, China was not so fortunate. Even so, Russia experienced a ‘brain drain’ during the austere years, while China did not experience a similar flight. Recent trends are for young people to stay in full-time education longer and to acquire the skills necessary for an ever prospering nation. One of the problems facing China stems from its ageing population not being replaced rapidly enough by a new generation. This is mainly due to China’s existing restrictive family planning policies and could be corrected. On the basis of literature available, in comparison with Russia, China appears to have made the transition from a centralized planned economy to a vibrant free market economy with far less trauma than would be assumed. (2765 words) Works Cited 1. 2. 3. Business Week, 2005 4. Policy Brief, OECD, 2005 5. http://en.wikipedia.org/wiki/Economy_of_the_People’s_Republic_of_China Read More