ECONOMIC REFORM OUTCOMES IN CHINA AND RUSSIA

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Economic Reform Outcomes in China and Russia

Russia and china are two of the greatest economies in the world. They have an overall population of over 1billion people, which together occupy a very large part of the nation’s landscape. Both Russia and China came out of administratively and centrally planned economies and then underwent through diametric economic developments. China has experienced, in the last twenty years, the most significant economic development ever seen in economic history. Russia, on the other hand, underwent a huge fall in the level of GDP ever witnessed in any nation all over the world. In 1992, Russia focused on an economic reform policy called “shock therapy”, which was full price liberalization associated with free, most rapid, privatization of state assets and companies (Paige, & Witty, 2010, 88-9). An alternative course was also adopted by china in its effort to launch economic reforms and was carried out with no full price liberalization and liberalization existing in the state owned companies. According to Paige, & Witty, 2010, 78, the “shock therapy” strategy was implemented by the government of Russia headed by Yegor Gaidar, and supported by the IMF. The implementers of the strategy however had the opinion that China would be on the losing end because of carrying out what was referred to as a “half” reform compared to what Russia was doing.

The results witnessed came out to be the exact opposite; with Russia suffering the highest peacetime decline in production ever witnessed to have been suffered by the nation, while China on the other hand celebrated sixteen years of high economic growth ever witnessed in human history. There has been much debate across the world concerning the causes of China’s dramatic development. One factor that is believed to have facilitated the explosive growth of China is its “painstaking, systematic, and gradual implementation of reforms (Rothstein, 2004, 67-8). There are various reasons attributed to the causes of various outcomes of economic growth in the two countries. The first major position states that the key cause of the various outcomes was the choice of policies adopted by the two countries. On the other hand, the orthodox western economists had the position that the initial conditions chosen by the two countries were the key cause of the various outcomes in the two countries. However, this does not mean that policies did not influence the outcome of the economic growths in the two countries. It rather indicates that the initial conditions played a very significant role more than the policies. As much as the policy choice contributed to the success of the economies of the two countries, it is argued that the initial conditions played a significant role in determining the relative success of China and the failure of Russia (Peterson, 2006, 67-8).

Considering the transition results and transition policies, it can be argued that Russia took into consideration both gradual and radical reforms and towards the end of Soviet Union, it was observed that Gorbachev strived to push for gradual reforms. Unfortunately, the economy of Soviet Union was already too messed up to be fixed. In practice, Russia did not achieve what it desired to attain because of political constraints. According to Peterson, 2006, 67-8, radical reforms involved centralized fiscal policies, deregulation of prices, tightened monetary policies, freely convertible currency, liberalized domestic trade, privatization, free trade, and better social safety for the groups of interest. These reforms were encouraged and adopted in the first few years of transition but were later abandoned and eroded due to political compromises. On the other hand, China had chosen to follow the path of gradual reforms, which favored a step by step market and price liberalization and at the same time opened the outside world for the economic operations of the country. As the economy was expanding to the outside world, the political regime also ensured that it maintained a strong control of its powers (Peterson, 2006, 104-5). To attain this, the country first chose to reform its foreign trade and agricultural activities, while at the same time ensuring that it had significant power over some sectors of the economy (Heilmann, & Perry, 2011, 98). The government then opened up the economy to market based incentives while at the same time retaining control over the state owned industries.

The difference existing between the outcomes of Chinese and Russian economic transitions has been diverse and enormous. China’s economy has tremendously grown since it initiated its reforms while Russia experienced a very difficult and challenging period of transition, only stabilizing recently. China’s economic success is very clear; its GDP grew at an average rate of 8% every year upto 1994 from the time it started its reforms in 1978 (Heilmann, & Perry, 2011, 89). This can not be referred to as just economic growth but also economic development that helped raise the living standards of most individuals across the country. Food supplies and the housing conditions in the country have greatly improved. Certain commodities like the television sets became very accessible even to the poor individuals during that period of expansion.

During the first few years of reforms in Russia; from 1989 to 1993, the real GDP of the country greatly contracted by approximately 35%. The GDP gradually decreased between 1993 and 1997 and during the years of transition, the living standards in Russia significantly declined. This was in sharp contrast with the living standards in China where the state of living was improving every passing year. In addition to the poor living standards in Russia, the Russian citizens went through a declining quality of life with reduced life expectancy, decrease in consumption, and housing subsidies phasing out. The outcome of Russian economic reforms have resulted in worsening shortages, increased income inequality, decline in output, and increase in corruption (Gratz, 2009, 90).

The dramatic differences existing between the outcomes of economic reforms in the two countries has sparked serious debate based on whether the reforms were due to policy choices undertaken by the two governments or whether the differences in outcomes of the economic reforms were brought about by initial conditions of the nations. Regarding the policy choice, three perspectives can be used to explain the concept, although the individual arguments are attributed to each member of every group and are limited to such groups (Gratz, 2009, 67-8). The first group has the opinion that the “Big Bang” methodology of radical economic reforms is the most relevant and effective transition policy. They, for example, argue that gradualism was not the best optimal strategy to be adopted by China for economic transition. They instead have the opinion that initial conditions resulted in China’s economic growth, while Russia’s initial conditions resulted in even radical reforms that fell short of its goals and objectives, even though the outcome would have been worse if Russia had adopted more gradual reforms. On the other extreme, those who advocated for gradualism had the opinion that the approach of the “Big Bang” was quite disastrous for transition and economic reform (Chung, 2000, 78). It is however argued that as much as the initial conditions of Russian China were significantly different, the differences can not be used solely to explain the economic outcomes.

In order to achieve better results, Russian officials could have adopted the right policies chosen by China. The individuals who take the intermediate position have the argument that the initial conditions of a nation have great influence on the type of economic policies that the country should adopt (Chung, 2000, 67). This is commonly referred to as evolutionary interpretation of transition. Although the initial conditions of China helped to explain its success, the strategies of reform were equally important. When these positions are closely scrutinized in context of Russia and China, they settle down on two major explanations: initial conditions and policy choice. Since Russia’s policies had unsuccessful results and China’s policies had results of expansion of the economy, it becomes necessary to show that the incentives and the constraints that came about due to policy choice had greater influence than the incentives and constraints that came about due to the initial conditions. This implies that China’s strategy of gradualism need to be shown as more superior to the Russia’s radicalism. As much as policy choice of the two nations resulted in significant impact on the transition economies, it becomes hard to defend the argument that the choice was the determinant in separating China and FSU. Based on the variables stated in the theoretical framework of gradual and radical economic reforms, both the arguments have strong and meaningful points based on the angle of consideration. However, it was perceived in China that the major source of corruption in the country was the adoption of the economic reforms (Chŏng, 2008, 112).

Generally, Russian is ranked higher than China in terms of corruption cases. This partly supports the argument of the position that neither gradualism nor the Big Bang approach can prevent the existing flaws in the system from occurring. This is witnessed in the fact that corruption arose irrespective of the path of reform taken (Chŏng, 2008, 78-9). On the other hand, when stability in the economy is emphasized as the major indicator for economic growth, then it would mean that gradualism becomes the best path to choose for economic growth. Radical reformers have the opinion that gradualist approach results in greater inefficiencies since it encourages speculation for storable goods and products while giving limited incentive for the companies to operate under hard budget constraint. This is because losses become the result of price controls and inefficiency.

For efficient operation of the economic systems of the two countries, vigilant co-ordination is important in order to effectively enforce quotas in cases of dual price systems (Chŏng, 2008, 98-9). A strong central government is also necessary for the economies to administer the transition and at the same time provide a stable and a conducive environment for economic growth. As much as shift in the economic system to a more efficient one may provide a justification for the country for the causes of the country’s potential loss, the cost of compensating the affected employees may become very costly for the government. In some situations where the government can decide on the future reforms, the cost incurred in attaining efficiency may be decreased through gradual reforms (Cheung, 1998, 102). However, it is generally argued that the government is very instrumental in the formulation and implementation of all any economic reform. In order to attain a successful transition, the government needs to have the authority and the command to control all instances of corruption in the public offices and in the enterprises. It should also have the authority to regulate monopolies to promote competition, collect taxes efficiently, control market institutions, and be able to forecast future reform measures.

It is however noted that radical reforms limits the ability of the government to fulfill the responsibilities listed above (Cheung, 1998, 67-8). Those who support the principle of gradualism argue that radically reforming the political system and the economic system were the major causes of chaos and disruptions in Russia. They further argue that the cause of the collapse of Soviet economic system was attributed to the destruction of administrative apparatus. The chaos in soviet further created skewed incentives. It is noted that radical reforms can greatly undermine the government’s operations, which on the other hand can then limit the government’s ability to initiate and implement reforms. Despite the general agreement that a strong and stable government is able to implement strong and effective economic transition policies, it is important to keep in mind that the government should make use of other economic expertise, otherwise it would never succeed.

The economic success of China can be attributed to several strategies and reforms adopted by the country. One can argue that it is China’s strong economic fundamentals such as abundant savings, surplus labor, huge domestic market, and so on. But such factors have always been there in China since 1950’s but China did not take off then in terms of economic growth. It can then be argued that the market system introduced by China, first in the rural areas and then in urban areas, can be considered as the key reason for economic success and reforms. However, Russia also implemented such market systems but experienced disastrous economic results (Cheung, 1998, 56-7). This brings in the question of what really is the secret for the success of China while others tried but failed. Three important factors can be attributed to its success: First, China adopted a strategy of openness; whereby it allowed international trade and massive investments from other nations across the world. Secondly, it adopted the principle of pragmatism, which involves the willingness to try everything to find anything that can best work for them. The third idea is that its economic reform was designed in such a way that it is pareto-improving, which implies that the economic reforms makes everybody better off and nobody is made worse off (Peterson, 2006, 88). These factors explain the reason why China has succeeded in its economic reform implementation and economic growth ahead of other countries, and in this case Russia.

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