Comparison Between Russia and China\'s Economic Reform in 1990\'s

¶ … Russia and China's economic reform in 1990's

Ever since the beginning of 1990s, the attention of the world has been concentrated on the persistently emerging relationship between the Russian Federation and the People's Republic of China. Much has been authored on the costs and benefits of such relationship and the prevailing analysis already tends to support China as one of the dominating states to come out in the coming decades in comparison to Russia. (Russia and China: Business Partners, Weary Neighbors) Hopefulness over the market restructuring of Russia wiped out with the crash of August 1998, when the ruble depreciated by 70% of its value and banks could not settle the debts and endorse currency contracts. In contradiction to the reform assurances by Yeltsin, the Russian economy of the 1990s more closely resembled a Soviet model than a market driven one. (The Logic of Economic Reform in Russia)

There was complete regulation of economic systems by the state in the era of Soviet Union. Since the central government regulated all the sectors of the economy it made the economic system unproductive and unsuccessful. This resulted in many distortions during the period. To illustrate, it banned the influence of international economic strategies with a view to avoiding the competition from outside that resulted in slow pace of economic and technological transitions. Inadequate technology resulted in wastage of resources. Moreover, the strategy of full-employment made the people become lazy for work and exerted profound impact on the productivity and it is evident from the short supply that the labor was used unproductively. The short supply resulted in depriving many people of the goods and services they desired. All these economic problems contributed towards degeneration of the Soviet Union in the year 1991. (Case study of Client)

The Russian federation could however visualize many market economic reforms. Firstly, the Russian Federation witnessed the liberalization of the international trade and price. This reformation wiped out the economic strategy of the Soviet Union with regard to banning the international economic systems to exert influence in respect of international trade. This permitted the economic competition and liberty of economic activity in Russia. Additionally, this reform permitted the foreign imports into the Russian market that withdraw the authority of the central government to own the local monopolies. The liberty of international trade assisted Russia in improving their technology since people could restructure and know the new technology to enhance the productivity and reduce the excessive utilization of the natural resources. It also withdrew the formal price control measures of the Soviet Union. Leaving the price subject to the free mechanism it is evident that the price increases with enhanced demand and reduced supply and decreases with decrease in demand and increased supply. (Case study of Client)

Moreover, the free flow of price mechanism changed the economic system of Russia from government regulated economy to the free market economy. Irrespective of the fact that the reform of liberalization was infused in Russia it was evident that such restructuring were not as effective as was in China. (Case study of Client) This could be witnessed from the following statistics: Ever since the inception of its reformation the per capita income of China has increased four times. Contrary to this the Russian reformation started in the year 1992 and since then the per capita income decreased by 20-40% taking into consideration the vastness of black market economy. (Could Russia Have Learned from China?) Thus since the economic reform of the 1990's, Russia has made a dismal performance whereas China has emerged successful.

Discussion:

During the past few years Russia had to confront extreme difficult economic situation. The shock therapy in Russia triggered inflation, smashed the industries and made people feel worse. During the early 1997 the Russian economy reached its minimum ever performance index. The Gross National Product seems to have reduced by 6% in 1996 in order to depict a compounding decline of 50% since 1991. Most of the enterprises were on the verge of collapse. About 43% of the enterprises in prime sectors suffered from losses. Even the targets fixed for small enterprise development could not be accomplished in Russia. Not more than 60% of taxes could be raised entailing much difficulty in providing adequate provisions for budgeted programs. Only 25% of the firms and enterprises could fulfill their tax obligations by the end of 1996 and only 73 large enterprises were responsible for the 40% of the overall tax debt to the state budget.

The entrepreneurs faced stringent budget constraints and almost stopped payments to their suppliers and their employees and the customers also stopped payment to the companies. Such never ending cycle completed when the enterprises growingly stopped payment of their taxes. The overdue payables like wage and tax dues and dues to suppliers and banks increased by 21% of GNP by mid-1996. Evidently, the salaries, wages and transfer payments of 65 to 67 million citizens were found to be due as arrears at the end of 1996. Irrespective of the fact that industrial production has grown in the early half of 1997 by about 0.8% in comparison to that during the preceding year. Moreover, the reduction in federal investment programs, higher interest rates for banking credits and the higher potential returns of the short-term state securities resulted in a spectacular decline in domestic investment by 9%. It has been estimated that about 65 billion USD have been flown out of the country since 1992. (Privatization: Lessons from Russia and China)

About 80% of the savings of the people were held idly in dollars and not deposited in national banks. The process of privatization and redistribution of property resulted in conflicts between the major financial and industrial groups and is sometimes accompanied by political scandals. The general circumstances in respect of the social and labor structures also remained critical. Evidently twenty percent of the people have incomes not adequate to reach the minimum subsistence level. The yawning gap between the haves and have not are increasing with the top 10% of the population increasingly capturing national income at increased rate of about 30% of the total in 1996 to 32.2% n the earlier part of 1997. The persistent liberalization of agricultural prices assisted in reducing inflationary stress. The time gap between rural and urban reforms secured farmers from elevated agricultural input costs and entailed them with a precious adjustment period. Thus the approach and consequences were quite reverse in Russia. (Privatization: Lessons from Russia and China)

In contrast to the difficulties in Russia, China seems to have followed the path of 'gradualism'. The reform that initiated the transformation in China brought about a marked improvement in the live of the millions of Chinese people. The economic liberalization extended to the every niche and corner of the country resulting in a persistent average growth of above 10% since the past 18 years. During the period 1978 to 1993, the per capita Gross National Product of China in real terms increased around 280% and in 1996 it concentrated at 2500 USD. There was marked improvement in the standard of living much more than the empirical evidences due to the low price of the goods and services. The rate of utter poverty in urban areas had reduced to about 0.1% during the period 1990 to 1993. (Privatization: Lessons from Russia and China)

The gradual urban reform in China enhanced the income and maintained relative equality while gradual price reform disallowed the inflationary income corrosion. The gradual withdrawal of food subsidies reduced the transitional pain for the urban poor and disallowed the increase in absolute poverty and the consequential yawning inequality. Similar is the case with the strategy of reformation of SOEs. Gradualism assisted in sustaining full-employment and a persistent increment in the income level thereby assisting in avoiding massive urban unemployment and poverty. The economy now has advanced to become a dominant 'socialist market economy' in its prevailing stage. China witnessed a swift growth rate, low inflation and a surge of affluence that elevated the standard of living of all. The inflationary trend has been regulated effectively without many variations. Devaluation of its currency was resorted to during 1994 by its own and could be able to accomplish the benefits of booming exports. (Privatization: Lessons from Russia and China)

To understand further: Diverse historical encumbrances inherited from socialist system have impacted the effects of reconstructions very much. Even though China has been declared a socialist society, its social security network has been included for only 20% of its population residing in urban China. (Russia's fall, China's Rise? - Comparing Transitions of Russia and China: (Part I)) In Russia from 1996, farmers got assured remuneration from government coffers and from 1985, 99% of labor, regardless of urban or rural workers is included by the social welfare system. But, with the liberalization changes, the reconstructions of the welfare system in Russia lingered much behind the social demands. On the other hand, farmers of China whose strength was 80% of China's population till very lately had not been the aims of social welfare services. Therefore, the enthusiasm to establish social welfare reconstructions meant for the farmers in China was of course greater than that in Russia. In case of Russian farmers as reform implied that they would have to bid adieu to "socialist welfare" their enthusiasm truly is feeble. (Russia's fall, China's Rise? - Comparing Transitions of Russia and China: (Part I))

The speedier development of China has primarily arrived from resource reallocation, e.g. industrialization -- low-priced rural labor migrating from low productivity agricultural sector to the industrial sector. Russia on the contrary, is experiencing a very unusual concern. Initially at the early phases of the reformation China was primarily an agrarian peasant economy. (Could Russia Have Learned from China?) Russia on the contrary to this is regarded as a highly industrialized country prior to the inception of the transition. As pointed out by Sachs, the less industrialization entailed China huge potentialities of industrialization attaining huge productivity to the Chinese rural region. In Russia however, such potentialities were already exploited in the era of Soviet Union before. (Russia's fall, China's Rise? - Comparing Transitions of Russia and China: (Part I))

In the year 1978 it was estimated that about 71% of the labor force were engaged in agriculture in China. Much of the reformation strategy initiated with drifting away the laborers out of agriculture-from a low productivity sector to a more productive pursuits in the TVEs. This diversion and reemployment of labor force were seen to be effective in every respect. By the end of 1994 only 54% of the labor force was engaged in agriculture. Simultaneously, the increased productivity gave rise to increased agricultural production. (Could Russia Have Learned from China?) Moreover since agricultural yield and population has taken an increasingly larger part of China's economy and society compared to that in Russia, the yield released from liberalizing agriculture yield in China is consequently much greater compared to that in Russia. (Russia's fall, China's Rise? - Comparing Transitions of Russia and China: (Part I)) (Priority of Privatization in Economic Reforms: China and Taiwan compared with Russia)

As regards, China and Russia, key disparities in sectoral structure puts varied initial targets for changes. China began with jobs in the primary sector of 70.5%, whereas the equivalent allocation in Russia and the erstwhile Soviet Union are less than 15%. Likewise, at the time when reconstructions were being done, a great deal of the China's production started in the primary sector compared to what started in Russia and the erstwhile Soviet Union. Because of the varied economic formations and original circumstances, China preferred to streamline their economies devoid of stressing privatization, and their reconstructions have been very flourishing. (Priority of Privatization in Economic Reforms: China and Taiwan compared with Russia)

Russia had no such alternative. During the period of restructuring to a market economy, Russia was by now very modernized, with a very miniscule portion of rural labor, but a huge number of incompetent public enterprises. This gave little opportunity for fulfilling industry's labor requirements by transferring the low cots labor out of agriculture. Plus, the Soviet Union emphasized total employment to such a level that the industry and service sectors endured excess employment. This rendered decreased efficiency in industry and services one of the main concerns for erstwhile Soviet bloc reformers. Furthermore, for approximately 80 years the economy was indistinct by state planning. Manufacturing was inclined towards military compared to civilian products, supporting heavy compared to light industry. Thus encouraging competence and reorganization in the industrial sector are the main elements in the process of Russia's economic restructure. On paper, it might have been more correct in case of Russia to undergo privatization at an former stage compared to China because of the reality that Russia possesses a higher percentage of public enterprises, however, it was not being capable of achieve this effectively. (Priority of Privatization in Economic Reforms: China and Taiwan compared with Russia)

Another major disparity is that in the erstwhile Soviet Union, more than 85% of the labor force was in the non-agriculture state bodies as against below 20% of the labor force in China. This permitted China to restructure the state sector gradually when it expanded extra agricultural labor to township and village enterprises. However, Russia required culminating the subsidization of the state sector to free resources for the new non-state sectors of the economy. (Has Russia Been on the Right Path?: A Commentary) At the inception of the reformation process in Russia about 85% of the labor forces were seen to be engaged in non-agricultural sectors owned by State. The small firms initiating production process were forced to attract the workers for employing them in their firms drifting them away from the state owned firms, where they found their jobs and wages secured and generous. Thus prior to the settlement of private sectors in Russia, the subsidies to state owned enterprises were required to be wiped out. Politically this was found to be problematic as revealed only recently by China. The continuing liberalization fetches the managers and local bureaucrats enough time to pillage the resources of the state assets while the changeover to the liberalization all of a sudden results in social unrest. (Could Russia Have Learned from China?)

Most of the economists now are of the view that the improvement in institutional quality is crucial to attain prosperity. The rich countries safeguard the interests of the investors so as to make them feel secured with their property rights protected, prevalence of rule of law, tuning up of private incentives in consonance with the social objectives, grounding of monetary and fiscal policies, reconciliation of risk factors through insurance and the citizens have enough choices for civil liberties and political representations. The underdeveloped countries are deficient of these systems and found to be less organized. The differences in Russia and China are testimony to the observation. (Righting Reform: Initiative for Policy dialogue)

In addition to the lack of surplus agrarian labor force, the budding private sector in Russia in comparison to China has been found to have many weaknesses. The risk factors are more associated with new firms and therefore have little scope to raise capital in Russia. The Chinese firms found it advantageous to have the prevailing overseas network of successful Chinese entrepreneurs especially stationed at Hong Kong and Taiwan. These entrepreneurs have the required resources and the motivation to create the initial framework in their own land for necessary takeoff. With the removal of the regulations on foreign direct investment by China, the capital began to flow into China while Russia had to leave her at the mercy of IMF for financing. (Could Russia Have Learned from China?)

The outcome of the privatization restructuring in Russia was not fruitful due to the causes stated below: To begin with, even though the government handed over the vouchers to each citizen, several of the citizens have no knowledge the manner in which to use their vouchers or money that was responsible for the slide in the economy. Apart from that, even though the restructuring of privatization could permit people to have their own private ownership, several people took benefit of this restructuring by benefit or augment their political connections in Russia, that compelled the Russian government to extend some rights in their favor. Besides, the restructuring did not augment the yield and competence, there are a lot of enterprises operated without raking any profits, and the spending was frail. (Case Study) In Russia, an investor theoretically enjoys full protection of a private property rights regime being implemented by an independent judiciary. The Chinese investors however has not such safeguards, since the private property was not acknowledged legitimately till recently and the court cannot be said to be independent. Still during the mid to late 1990s, the investors time and again accord China elevated marks than Russia on the rule of law. (Righting Reform: Initiative for Policy dialogue)

A lot of Chinese residing in Taiwan, Hong Kong and other regions of East Asia, as also other continents of the globe, are the primary suppliers of Foreign Direct Investments (FDI) that kindle China's economic development markedly. For instance, the FDI China drew in 1995 was U.S.$37 billion, and the net investments in fixed assets in that particular year was U.S.$241 billion. FDI's share is more than 10% of the fixed capital formation in China. As against, this the dismantling of the old trade connections among the erstwhile Soviet republics and among the erstwhile Soviet states and their biggest external business associates in Eastern Europe has resulted in a crash in demand and yield in the erstwhile Soviet republics. This has in a big way raised the expenses of transitions of Russia. Several economists examined that at the time of economic fall of the erstwhile Soviet republics, in excess of the 50% of the expenses were made by the termination of the united economic room; just more than 40% were the outcomes of the expenses of "institutional changeover." As against this, the Chinese economy was rather functioned on its own from its international economic system at the starting of the restructuring. Whereas Russia had to vie for new trade partners and fine-tune its efficiency structure as per the requirements of its new associates, China had a completely fresh beginning international trade. (Russia's fall, China's Rise? - Comparing Transitions of Russia and China: (Part I))

The investors were feeling better in China in comparison to that of Russia as evident in consideration to the legal system of Russia during the last decade. However, the gulf between the rules and the way they are to be perceived is considered significant. In order to be successful the presence of a formal legal framework safeguarding the rights of the investor demanding a non-corrupt, independent judiciary with the power to implement is highly essential. Instituting such a judiciary is extremely difficult and involves much longer period of time. The success of increasing property rights with reformulation of domestic legislation varying the formal aspect of institutional framework therefore is considered quite indefinite. This evidently has been acted as the lock in to capture the transformation of Russia for a longer period of time. However, how did China succeed in escaping this trap? (Righting Reform: Initiative for Policy dialogue)

The largest boot in the private investment in China is seen at least until the mid-1990s in Township and village enterprises. The local government had the ownerships of these firms. The private entrepreneurs are merely partners with government. The private entrepreneurs feel secured since the government was barred from confiscating them and since are claiming a portion of profit it had no interest in doing so. This points out to a broader aspect that is absence of any specific, non-context specific mode of attaining the desirable institutional outcomes. China could make available a resemblance of effective safeguard of private property rights irrespective of the fact of lacking the formal rights. The Russian practice brings out that the general choice of legal reform would not have been much successful. Multiplicity of examples can be advanced in this regard.

To illustrate, China guaranteed market incentives through the two track economic reforms rather than across the board liberalization that is the most formal recommendation. The efficacy of pricing mechanism is visualized to be attained not be withdrawing the quotas and planned allocations in sphere of agriculture of industry sector but by permitting the producers to trade at market prices at the margin. In the sphere of international trade liberalization is attained not with reduction in the import restrictions however by instituting special economic zones with different rules than those applicable to the domestic production. Strengthened institutions are felt highly essential for achieving the same. (Righting Reform: Initiative for Policy dialogue)

The Chinese Government has not given up its power over its economy as thoroughly as the Russian government. In the opinion of Li Daokui, the soft "financial impact" rule taken up by Chinese government has been extremely creative in gathering funds and therefore reducing the chances of monetary disaster. In the context of the manner in which the Russian government has forfeited its ability to raise taxes and was therefore not capable of executing large-scale funding. China's "fiscal intimidation" rule seems especially justified. By way of the rule of limiting funds outflow, China has protected its currency and funds flows from the vicissitudes of overseas conjecture as against Russia's strategy of opening accounts. By way of the monopoly of the government owned banks, and by way of authorizing the interest rates which are much lower compared to the market interest rates, the Chinese government has been able to gather a huge amount of money to subsidize government-owned enterprises and invest.

In contrast to the problems faced by the Russian government with collecting taxes, we can conclude that the government laws that might strangle liberalization are helpful in an intermediary point. In the opinion of Li, the "monetary impact" strategy that is a political as well as an economic occurrence is one of the two important policies of China's achievement in changeover. Experimental proof also substantiated this argument. China's "monetary impact" strategy is effective in acute departure to the strategies taken up by the Russian Government. Russia had set up the banking market even prior to the disintegration of the Soviet Union. Numerous banks were established, thereby placing upward force on the market interest rates. Thus the government did not have any means to collect the indirect taxes raised from the government-owned banks. Moreover, in the early part of Russia restructuring, capital outflow was allowed through clearing the embargo on free exchange of foreign currency. Thus in contrast to the Chinese government, Russian government has surrendered its macro-regulative expertise quite hastily. (Russia's fall, China's Rise? - Comparing Transitions of Russia and China: (Part I))