Comparison Between Russia and China's Economic Reform in 1990's Term Paper

  • Length: 10 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #31850859

Excerpt from Term Paper :

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.


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…

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