Essay:Difference between Chinese and russian economic reform

NOTE: NOT YET COMPLETE

Summary

An essay designed to find the qualitative and quantitative differences in the structure of both China's and Russia's economic reforms. Described as Reform and Opening Up in China and Shock Therapy for Russia. The argument of this essay is simple, the nature of China's economic reforms is not tantamount to simply "restoring capitalism" unlike what Russia did. We will measure the reforms from 1989 to around 1996, when the Russian reforms and Chinese reforms were both well under way. We will look at the effects on quality of life, structure of economic reorganization, public and private sectors, but most importantly, whether or not China has restored the capitalist road, like Russia has.

Summary on "Shock Therapy"

The US State Department’s Agency for International Development contracted the now-defunct Harvard Institute for International Development to advise the Russian government on privatization and the creation of capital markets. The policy advice given and implemented was to go for a ‘big bang’ approach. or otherwise known as shock therapy by engaging in a rapid mass privatization programme. This started in 1992, and by 1994, 14,000 medium and large state enterprises – or 70% of Russian industry – had been transformed into joint-stock companies

The architects of Shock Therapy had pressed ahead without creating the necessary laws and institutions to protect private property and to prevent self-dealing by managers. They believed that privatization would result in the emergence of private property owners who would then lobby the government to create laws and enforcement institutions that would prevent their expropriation. Except, what ended up happening was the complete opposite. Instead, company managers and other kleptocrats lobbied to oppose the strengthening of laws and institutions that would protect shareholders

The largest enterprises, mainly those in oil and metals, were not part of the voucher privatization scheme. Instead, they were auctioned off in a highly rigged manner (at very low prices) to a small number of well-connected men who had made their wealth by expropriating funds and assets from the government. Essentially creating a group of Oligarchs and Kleptocrats. The results were as follows:

• Corruption rose According to Transparency International’s Corruption Perceptions Index, based on surveys of international businessmen, Russia was ranked to 126th out of 159 countries surveyed in 2005, with a score of 2.4 out of 10,
• Russia suffered the worst peace time increase in mortality experienced by any industrialized country.
• For the years 1987 and 1988, roughly 2% of Russia population lived in poverty (surviving on less than $4 a day), by 1993-1995, it was 50%
• IMF economic reform programs are associated with significantly worsened tuberculosis incidence, prevalence, and mortality rates in post-communist Eastern European and former Soviet countries.
• Male life expectancy in Russia has fallen to just 57 years: ‘By 1993 Russia’s death rate had risen above even the level of low income countries. Russia’s death rate now stood on a par with that of such countries as Bangladesh, Nigeria, Sudan and Togo, a dreadful testimony to the awful results of the reform process.’
• The United Nations Children’s Fund (Unicef) reported at the end of 1995 that 34 per cent of Russia’s population had fallen below the subsistence minimum and that for men in the 20–39 age group in Russia, Ukraine and the Baltic states ‘the mortality increase due to heart, digestive and infectious diseases has taken on frightening dimensions unequalled in its magnitude in peacetime.’
• Russia had the dollar value of its exports nearly halved, from $63 billion in 1990 to $35 billion in 1994, and has been reduced to an exporter of raw materials and energy which, by 1993, made up 80 per cent of its exports.
• In Russia, the poor performance of Gorbachev’s early years turned into a very poor performance in the later period of his rule. It became nothing less than a disaster in the 1990s. Output declined precipitously.
• The cumulative drop of output registered over the last two to three years in some countries has attained proportions that are unmatched even by the Great Depression of 1929-1933.
• Hungarian GDP fell by 11.7 per cent, Romanian GDP by 18.6 per cent, and Polish GDP by 19.0 per cent. Czech Net Material Product (NMP) fell by 12.8 per cent, the NMP of the former USSR by 16.0 per cent, and Bulgarian NMP by 30.9 per cent.
• The beginning of 1990 to mid-1991 industrial output declined by 25.9 per cent in Czechoslovakia, 27.2 per cent in Hungary, 38.1 per cent in Bulgaria, and 40.1 per cent in Poland.
• Between 1989 and the middle of 1991, employment fell by 11.6 per cent in Rumania, 13.8 per cent in Czechoslovakia, 16.9 per cent in Poland, and 20.1 per cent in Bulgaria. As the fall in output in Eastern Europe was even more rapid than the decline in employment productivity sharply declined.
• The Eastern bloc economies saw declines of 13% to 65% in GDP.

Summary on Reform and Opening Up

Reform and Opening Up is a policy of internal reform and external opening that China began to implement at the Third Plenary Session of the Eleventh Central Committee in December 1978. The central government officially approved the implementation of special policies and flexible measures in foreign economic activities in Guangdong and Fujian provinces. Opening up to the outside world has become a basic national policy of China. This revolutionary policy set forward by the Chinese government allowed for the development of the market sector alongside the public sector. In contrast to the Russian economic reform, public ownership remained a central feature of the property rights regime in every sector. The economy remained highly protected from the forces of international competition.

The state remained at the canter of the economic process, having fundamentally shifted its approach away from economic commands towards economic planning which worked in tandem with market forces. In every major area, China pursued a reform strategy which ran counter to the transition orthodoxy. In terms of the conventional wisdom of the late 1980s about how to reform a communist system according to the Capitalist West, China had gotten all of the main policies wrong. Yet it has become the most dynamic economy, in stark contrast to Russia, who had listened to the Capitalist West, who was now miring in poverty and wasting away. While China's economy became far, far stronger.

The results of Reform and Opening Up are as follows:

• A three fold increase in average consumption of meat and eggs between 1978 and 1991.More than doubling of living space in rural areas in the same period and the television set was owned by an average of one of every two rural households and by virtually every urban household in 1991.
• By 1993, 83 per cent of city households had a washing machine, and, in Shanghai, 98 per cent of households had a refrigerator, 92 per cent a colour television, and 45 per cent a video recorder.
• Grain output grew by a third in six years, cotton almost trebled, oil bearing crops more than doubled, fruit production went up by a half. Real incomes in the countryside grew even more spectacularly – threefold in eight years.
• Between 1978 and 1991 grain consumption of the average Chinese went up by 20 per cent; seafood consumption two fold; pork consumption two and a half times; egg consumption more than three fold; edible oil and poultry consumption four fold.
• In the decade after 1979 Chinese Gross Domestic Product (GDP) grew at an average 8.8 per cent per year. The Chinese economy more than doubled in size – expanding by 135 per cent.
• Chinese industrial output expanded at an average 11.2 per cent a year. Chinese industrial production nearly tripled in 1979-89 – increasing by 195 per cent.
• Chinese employment increased by 3 per cent a year. Unemployment fell from 5.3 per cent to 2.6 per cent. Labor productivity grew by 5.9 per cent a year.
• Chinese steel output quadrupled between 1980 and 2000.
• The average annual real grown of net farm output per worker accelerated sharply from only 0.3 per cent between 1957 to 1978 to 4.3 per cent from 1978 to 1991

Thoughts On Both Economic Policies

The economic policies which have devastated Eastern Europe and the former Soviet Union since 1989 and 1991 is contrasted with the spectacular success of the reform of the world’s second major centrally planned economy – China – a model now being increasingly applied in Vietnam, Laos and Cuba.

Since 1978 China has been the most rapidly growing economy in the world. Economic growth averaged 9.4 per cent a year between 1980 and 1993, and moved into double figures after 1991:

‘China doubled its output per person in the ten years between 1977 and 1987, one of the shortest time periods for any country to achieve such a record. This impressive growth has in part been the result of significant increases in factor productivity in both the state and non-state sectors, a point of some importance given the well-documented failure of centrally planned socialism to raise productivity. The result is China’s economy is now estimated (using purchasing power exchange rates) to be surpassed in size only by the US and Japan and there is a real possibility that China will become the world’s largest economy by 2025.’

By contrast, under the guidance of the IMF the economies of Eastern Europe and, even more so, the former Soviet Union, have experienced an economic collapse unprecedented in peacetime in the modern world. In the former Soviet Union output is now less than half its level prior to capitalist economic reform – and falling. In Russia productivity declined by 22 per cent in 1992 alone. So, what this means is quite simple. The nature of Chinese economic reforms inherently took a different character to the one of Russia.