Introduction
In the 20th century, China and the USSR were two of the largest planned economy systems; they took action to transition towards a liberal market economy. However, the methods they chose were different as China implemented changes gradually while Russia showed a more radical approach. As a result, the countries presented significant differences in their economic transition and, today, are not at the same stage of development. This report argues that Russia should have followed China’s model of transformation and implement the strategies used by the Chinese government. The paper reflects on the nature of the issue and discusses the countries’ economic development and reforms present key arguments in support of this position and respond to the important objections using evidence. The report concludes that although China and Russia were in slightly different positions during the implementation of reforms and changes, Russia should have followed China’s example of a less radical strategy to ensure its economic growth and eliminate negative outcomes of so-called shock therapy.
The Nature of the Issue
China’s Economic Transition
China’s economic transition can be considered one of the most outstanding global phenomena of the past century. The country is the world’s largest developing nation; its gross domestic product (GDP) has increased by almost 10% each year since the introduction of the reform and opening-up policy (Wang, Li, Fang, & Zhou, 2016). It is possible to say that the country’s decision to restructure the economy along with the gradual implementation of new policies improved its position.
Before the late 1970s, the country had been a closed centrally planned system, which gradually shifted towards a market-oriented one. The government implemented changes by slowly eliminating collectivized agriculture, liberalizing prices, establishing fiscal decentralization, and developing international relationships to enhance foreign trade and investment. Moreover, China ensured that state enterprises began to have increased autonomy and created a modern banking system as a substitution for the less effective one. These actions resulted in China’s rapid economic transition, the reallocation of resources, the growing power of the private sector, significant productivity growth, high investment, and savings rates, and sustained returns of capital. Moreover, the country has kept the Chinese yuan tightly linked to the US currency, which led to its significant appreciation against the dollar (Uddin, Baddou, & Gulzar Mohd, 2015).
China continues to implement strategies aimed to enhance its economic growth and eliminate its current economic challenges, including high corporate debt, low domestic household consumption, decreased economic advantages of the middle-class population, and industrial overcapacity. For example, in 2016, the country introduced its thirteenth five-year plan that outlines the need for making the economy less dependent on heavy industry, exports, and government investment (Brødsgaard, 2016). Moreover, China continues to support state-owned enterprises and enhance its market-oriented reforms.
It is necessary to mention that the country’s economic growth contradicts the predictions of conventional economic theories. For example, the closed economy growth model suggests that, in China’s case, the rate of return to capital would decline because of a high investment rate; however, it remained high (Grossman & Helpman, 2018). It is possible to conclude that the Chinese model of transition is exemplary as it shows that effective and timely economic strategies can lead to outstanding results even when the initial conditions of the country are unfavorable.
Russia’s Economic Transition
Russia’s economic development is in close relation with China’s one due to historical and geographical reasons (Wu & Yu, 2017). However, the economic transition of Russia is very different from the one observed in China. Since the collapse of the Soviet Union in 1991, the country has undergone significant changes (Voskressenski, 2012). In the USSR, there was a centrally planned economy, which could be considered isolated from global influence. The economic reforms of the 1990s were radical as they aimed to destroy the socialist system rapidly (Abasov, 2017). The communist government was replaced, the new constitution was introduced, and the country privatized most industries excluding the energy sector and the defense-related ones (Kendall, 2014). In comparison, China did not implement privatization of industry but introduced managerial reforms instead. The country did not enforce significant changes to the government system as well.
The shift towards a market-based economy required the implementation of fiscal and monetary policies, which later led to a high inflation rate. In addition, the government led to the economy’s deterioration due to poor financing strategy, a controversial approach to privatization, and price liberalization. It is also necessary to mention that the exchange rate of the Russian ruble has fluctuated significantly over the past three decades (Wu & Yu, 2017). It reveals that Russia still experiences a large macroeconomic instability.
It is necessary to mention that the Great Recession affected the country’s economy greatly, while for China, the financial crisis of 2008 was not as significant. The crisis resulted in an economic recession, the fall of foreign exchange reserves, a substantial decrease in the ruble’s value, and large permanent losses in GPD. For example, the Great Recession led to an almost 50% permanent drop in Russia’s total exports and an approximately 25% decrease below the potential trend in the real GPD (Wen & Wu, 2018). The financial crisis occurred again in 2014 as a result of the collapse of the Russian currency, which affected the country’s economy significantly, leading to the decreased trust of investors and declines in the stock market.
Today, Russia’s economic development is highly associated with the export of oil and gas. It can be considered a problematic issue because a significant dependence on resources compared to other factors contributing to economic growth is a sign of an imbalance of the country’s economic structure (Wu & Yu, 2017). In addition, currently, Russia shows a high level of the government’s interference in the private sector. It is possible to suggest that the country’s government has implemented ineffective and overly radical economic policies, which led to unfavorable results. Russia should have followed China’s model of economic transition to prevent its current economic challenges.
Key Arguments
The facts presented above allow for the conclusion that although both China and Russia started as communist countries in the 20th century, they followed different economic paths. China’s reform strategy was gradual compared to Russia’s rapid one (Abasov, 2017). The first significant argument in favor of the position described in the paper is that it was vital for the government not to implement shock therapy because the strategy was associated with significant risks. It is evident that Russia had to encounter challenges due to the political situation at the beginning of the 1990s but there were signs that the selected strategy could result in unfavorable consequences. For example, Buck, Filatotchev, Nolan, & Wright (2000) report that in the 1990s, Russia’s aggregate inflow of foreign capital was negligible compared to China’s one, and its expected rates of return were low. Considering these factors along with a high inflation rate, and an unstable political situation, it was possible for the Russian government to predict that the implementation of such a radical transition model would result in negative outcomes.
The second significant argument is that China’s model of transition would have provided Russia with an opportunity to have more independence. China did not allow international organizations and foreign countries to affect its decisions while Russia was relying on the suggestions offered by the western states (Abasov, 2017). China’s approach allowed it to predict possible outcomes of its policies and decide, which of the implemented strategies can enhance its economy. At the same time, potentially, Russia’s advisors could be unaware of the challenges the country encountered. As a result, the country’s model of transition implied the enforcement of changes on various levels in a short time. Evidently, it was impossible to implement such a strategy effectively considering the social, political, and economic aspects of that stage of the country’s development. If Russia had followed China’s transition model and took decisions independently, it would be possible to avoid the negative outcomes of shock therapy by introducing changes slowly and enforcing policies gradually.
Important Objections
One of the most important objections to the position supported in this paper is that the initial conditions of China and Russia were not the same although they were similar. In China, the primary problems the government had to address were the poor state of the economy and ineffective policies, while in Russia, they included the corrupted government and state authorities (Abasov, 2017). It is evident that for China, there was no need in changing the government entirely; only the managing style had to be improved. It is necessary to mention that it was easier for the Chinese government to implement reforms because the population had a low quality of life and did not have high expectations about the outcomes of changes (Abasov, 2017). At the same time, in Russia, citizens had much higher living standards and could potentially disagree with policies that threatened their everyday lifestyle. It means that, to some extent, Russian could not have followed China’s model of transition because it was inappropriate to the country’s position and conditions at the time.
This objection can be opposed by the fact that although Russia had to make significant changes in its government, it could have followed the Chinese example to introduce new policies. For instance, the study by Sachs and Woo (1994) allows for a conclusion that the country did not consider the challenges presented by the recent collapse of the Soviet Union while implementing reforms. Radical commune policies led to the productivity growth of only around 1%, while they were expected to result in more favorable outcomes (Sachs & Woo, 1994). At the same time, it is possible to note that the country was concentrated on the elimination of the old government and related problems rather than developing policies to change the existing circumstances. Thus, although the initial conditions of Russia and China were different, it was possible for Russia to choose a different method to improve its position.
Another possible objection to the position presented in this paper is that China’s decentralization was a significant factor that contributed to its economic growth; Russia could not have followed its model of transition because the political and economic situations in the country were different. This argument can be considered untrue because, after 1990, Russia was more politically decentralized than China (Cai & Treisman, 2006). In addition, significant policy experiments in China had occurred before any significant administrative or political decentralization, which means that this factor did not play a crucial role in the country’s development. Thus, it is possible to conclude that Russia had an opportunity to follow China’s example of transition and implement a similar strategy to enhance its economy.
Conclusion
The models of Russia’s and China’s economic development have several similarities. Both countries were large socialist and planned economy systems that needed to implement changes to achieve sustainable economic transformation. However, the governments followed largely different transition models with China enforcing policies gradually and Russia choosing a radical approach. As a result, China has become the world’s largest developing nation while Russia still recovers from several financial crises and is working on the improvement of its economy. The issues addressed in this report allow for the conclusion that Russia should have followed the Chinese model of transition, implementing changes gradually and taking decisions independently. Although Russia’s reforms aimed to address more challenges compared to China’s ones, it was vital for the country not to take radical measures to solve problematic issues. Thus, China’s approach could have resulted in a more stable economy, an increase in GPD, and a stronger position in the Russian currency.
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