Besides the fundamental dissimilarities mentioned above, China and Russia also showed several other differences.
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The role of agriculture and distribution of the labour force: before the reform, agriculture accounted for 70% of the GNP in China and only 13% in Russia, supported by the fact that the “men employed in the agriculture sector/land” ratio was higher than 0.6 in China whereas lower than 0.044 in Russia. Statistics now show that agriculture contributes for less than 35.8% of China’s GNP.
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Land ownership: before the reform land was still collectively owned in China (today instead it has been decentralized to a household level) whereas in Russia it was nationalized during the communist period.
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The welfare system: despite her social political and economic system China provided social welfare to only 20% of the population living in the urban areas compared to 99%, since 1985, of the entire labour force in Russia.
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The level of centralized planned economy: Even if both countries employed centralized planned economies, the level of implementation was extremely different. Russian leaders, such as Lenin and Stalin, introduced a rational and scientific approach to planning, to the extend that sometimes it is referred as the “scientific planning” system. On the contrary Mao’s revolutionary spirit impeded any attempt for China to have a real centrally planned economy. Indeed he supported decentralization of the administrative apparatus and small scale local economies, but simultaneously he discouraged a true planned economy. In conclusion, during Mao’s time China had “neither a planned economy nor a market [one]” whereas Russia’s economy was highly centralized.
3. The Chinese Bottom-Up Micro-economic Approach versus the Russian Top-Down Macro-economic One
As a result of the her significantly decentralized administrative and economic systems and her gradualist approach to reform China adopted a so-called bottom-up implementation. On the other hand Russia’s high degree of planning led to a great superimposition of different economic and governmental sectors, making regional experimentation of new measures extremely expensive and probably not significant to the entire nation’s conditions. Consequently a top-down method was adopted instead.
The majority of the measures the Chinese government has employed during the transition have been first promoted as local trials, and only afterwards launched on a national scale. This made possible the regional development of a big number of “mutants” of the same policy, thus enhancing the chances for the central committee to find the best option. This strategy has become for China a low-cost way of developing new economic policies and institutions never experienced before.
This experimental strategy was first applied for the reform of the agricultural sector in Fengyang county, Anhui province. Local governments, in fact, took the inventiveness to give out land to single households. The excellent results were found out by the state only later on, and consequently the method was implemented in all China.
This example shows how the first big target of the Chinese reform was the renewal of agriculture, as it was the leading sector of China’s economy, in contrast with the Russian industrial approach.
After the Third Plenum of the CCP in 1978 Deng Xiaoping decided the general reduction of the state’s control on agriculture by (1) decentralizing its management and establishing a household land ownership system, (2) raising selling prices and (3) opening the agriculture market to diversification. Under the new system, a predetermined proportion of the output had to be delivered to the state in return the peasant had the right to manage the land and tools and then remaining output.This has left the Chinese households with a greater independence, probably the main reason for China’s great economic expansion. Her achievements in this sector are vast: from 1978 to 1994 China has seen an annual growth of more than 4%; for instance the output of main agricultural products, such as grain, cotton and tea have more than doubled, whereas fruit and fish have seen an eightfold increase.
On the contrary Russia’s approach to agricultural reform has not been rosy. The state decided to give out “collective and state farmland equally per capita […] in the form of paper shares or certificates”. According to Macours and Swinnen 50% of the farm enterprises have reported that no real changes have happened in the Russian farming system.
Russia’s implementation of the reform measures was exactly the opposite. The former URRS in fact attempted to put in practice, in only one year, simultaneously three different strategies: (1) mass privatization of SOEs, (2) liberalization of market, prices, etc. and (3) stabilization of the state’s finances; which collectively gained the name of the “big bang” approaches. Russia considered the bottom-up tactic expensive and not significant to her economic context, thus she preferred a top-down method, where the policy making process was centralized and implemented on a national scale.
For example, Russia’s main reform targeted to mass-privatization of her SOEs, which accounted the majority of her GDP. This consisted in dispensing SOEs’ shares to people, freely or only low-price, through vouchers and privatization accounts. It has been estimated that an equivalent of 70-80 billion roubles of state property have been sold and 150-200 billion have been given out for free. In addition, the state tended to distribute shares mainly to employees and managers of the enterprise at very reasonable prices, resulting the case of the “inside buyout”: in mid-1994 65% of the SOEs’ capital was owned by insiders, 13% by the state and only 12% by outsiders. Consequently the majority of the decisions regarding the enterprises (wages, investments, etc.) were taken by insiders, who understandably tried to improve their profits slowing economic growth.
In this context China has continued to pursue her gradual approach to reform, indeed, she has not yet started privatization of her SOEs. On the contrary China promoted the creation of new nSOEs. Following the constitution of the household land ownership, peasants gained more independence in both work force reorganization and investments so that a new sector arose in Chinese rural economy. After 1978, private owned TVEs (Township and Village Enterprises) have grown so quickly that right now they account for 66% of the labour force employed in the industrial sector. TVEs’ output has grown from 49 billion Yuan in 1978 to more than 4200 in 1994 and they now constitute 71% of the rural output (compared to a 24% in 1978).
4. Foreign Investment Policies in China and Russia
FDI (Foreign Direct Investments) constitute another aspect of the opposite approaches adopted by China and Russia as a result of their diverse pre-reform conditions. Before 1978 China allowed little or even no foreign investments, in other words she did not depend significantly on the international market. On the contrary with the fracture of the URRS, Russia lost the bulk of her “FDI” causing a major loss for her economy.
China’s reform policies have been designed to encourage FDI. Indeed, foreign investments are allowed in almost any sector of industry; if 25% of the enterprise’s total investments are from abroad it is considered a joint venture, thus is eligible for tax incentives. In certain cities (such as Shanghai, Beijing, etc.) FDI up to US$ 30 million can be approved by local officials whereas in other cities this reaches US$ 10 million These methods have made investments bureaucracy much faster and easier.
An example of how the Chinese governments promoted FDI is SEZ (Special Economic Zones). These cities were explicitly created to attract foreign traders, produce new jobs and gain technical know-how. In SEZ foreigners can create new enterprises benefiting of no taxes for the first year and reduced ones for the following ones (a “tax clock” has been introduced). Labour force in SEZ is cheap and several other policies (mainly concerning pollution and other issues) are absent.
Figures are enormous when considering foreign investments: only in 1995 China’s FDI reached US$ 37 billion, constituting 10% of the Chinese fixed capital formation. This is logical if considering that the majority of these capitals comes from the Chinese living abroad (Hong Kong, Taiwan, and other parts of the world).
On the other hand Russia has implemented rather discouraging FDI policies. She, in fact, lacked a coherent FDI legal backbone. Limitations and bans are imposed on specific industrial sectors for FDI, and before 1991 laws still limited FDI to 49% of an enterprise’s capital. Additionally, each case of FDI must be directly approved by the central government which only slows down economic growth.
Figures support these arguments: from 1991 to 1995 FDI were estimated to be US$ 6 billion, 3.2 billion between 1991 and 1993, 1 billion in 1994 and 2 billion in 1995.
5. Conclusion
It is common to believe China will become in the following decades the next super-power, thanks to her incredible economic growth; whereas Russia is almost always seen as a decaying country. This situation, as we have seen, mainly arises by the opposite strategies the two nations have adopted in implementing their reforms as a result of their initial social, political and economic conditions. China preferred a gradualist approach, reforming first her rural areas, then promoting (1) the creation of new TVEs and (2) FDI. On the contrary Russia chose a “big bang” approach, mass-privatizing her SOEs, considering only little her agricultural sector and restricting FDI.
Despite these considerations it is difficult to deduce which of the two countries will “win the race”. In Russia from 1992 to 1996 inflation was reduced from 245% to almost 0%, exports have rose by 16% and GDP is steadily growing by 3-4%. On the other hand, according to some scholars, China’s official growth statistics have been overestimated by 1-2%, furthermore some Chinese economists believe them to exceed even 2-3% the real data.
Market conditions are random and prediction on the relative economic performances of China and Russia cannot be made; only time and maybe new reform strategies will determine which of two will be economically successful and which a failure.
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