China and Russia

These two countries were once seen as the last stronghold of communism in the world until the fall of the Berlin wall and which left China as the last bastion of Marxist rule. It is the opinion of some economists that China is slowly following suit, moving toward a market economy while maintaining state control. Socialism has not failed for the Chinese like it has for the Russians. There is a delicate balance of control and freedom within the Chinese system and as such they have enjoyed the privileges of one of the fastest growing economies in the world.

Russia, on the other hand, suffered from government corruption and modern industrial weakness. After the changeover to capitalism, the industrial infrastructure in Russia was considered obsolete and became a major obstacle to achieving a competitive market economy. China has become one of the most competitive economies while operating under Marxists principles. Additionally, China has been historically successful. Their level of technology and the rate at which they produced it far exceeded the level of progress in Europe.

The method of “shock therapy” implemented in the virtually overnight changeover in Russia is the root cause of their challenging shift. The aggressive strategy to shift the economy in as little time as possible was clearly the result of poor planning. In contrast, gradualism would have been a safer and more stable option. Although the Chinese have not necessarily made a complete changeover, their progress has been attributed to gradualism. Russia went in with haste and as a result encountered many difficult obstacles.

The changeover for Russia was especially difficult because it was not limited simply to economic re-planning. It involved the change of political, legal and social institutions. Most of all, it required a change of culture from being guaranteed a job to having to compete for one. The people suffered the most under the new policies because of a reduction in the demand for labor. It is indeed true that there are those who would like to see socialism return to Russia in response to the growing inequality of income distribution.

Privatization became a daunting obstacle to overcome during the economic transformation. What was previously all owned by the state, with minor exceptions, now had to be distributed for private ownership. It is not as easy as it sounds since the previous price system provided no basis for valuing property under the new price system. Additionally, legal framework must exist to outline ownership rights and procedures. The effort to actually place value on the property was difficult because the value would ideally be established by the market; however, since the market infrastructure was still in development at the time it was necessary to have foreign auditors oversee the valuation of these properties. Finally, competition must be created through the transfer of previously state-run industries to multiple private owners.

An unfortunate result of privatization was the “slight of hand” that occurred. Properties we distributed quickly and selectively. The money was held by the elite of the former system, thus creating a new economic structure still in control of the previous regime, so to speak.

The history of Russia’s changeover lies in stark contrast to the progress of the Chinese system during the same timeframe. During the 1990’s China was increasing the number of privately owned enterprises and creating more of a market economy. It seems there are lessons to be learned from the failures of Russian socialism. The emerging market economy in China has provided more financing for social welfare than ever before. The Chinese are aware that a completely state-run economy will not adequately provide for the needs of their mammoth population.

The most quintessential comparison between both socialist systems, in my opinion, is the fact that China was not involved in an arms race and therefore was able to allocate resources to more important activities to strengthen their economy. This was a major downfall of the Russians since much of their production, capital, and natural resources went into strengthening their military presence.

In the decade preceding Russia’s changeover, China had began vigorously developing economic strategies through the liberalization of their former system. It was noted not only by the development of a small-scale free market but also through macro-level planning on the local level. In Russia, the system had been thoroughly planned and centrally controlled which lead to the eventual ineffectiveness of planning. The large-scale economic liberalization in Russia resulted in an obsolete distribution of resources causing both the “market” and “planned” systems to be paralyzed.

The Chinese planning structure is more bureaucratic, having 40 ministries dealing with different segments of the economy. The ministries are responsible for implementing the plans set forth by the State Planning Commission. This commission is responsible for economic planning, including the drafting of five-year plans. These plans are separated into different sections for different sectors of the economy and 5-year goals for each.

Both countries receive financing from collecting taxes, however the structures are different. Russia receives financing in the form of value-added taxes, profit taxes, excises, and personal income taxes among others. Most of them are paid to both the federal and regional governments. Russia’s tax structure is less than ideal, there are many taxes, exemptions and a high amount of tax avoidance. There is a lack of coordination between the tax collection agencies and the Ministry of Finance. The Chinese collect taxes on many of the same things, particularly VAT’s, personal income taxes and other business taxes. Between 1986 and 1996 China made reforms to their tax structure, placing more emphasis on business taxes and VAT’s. The emerging market in China and its competitive strength has been extremely rewarding for the tax collection agencies.

The banking system in China is a good indicator of the level of economic control held by the government. The role of the bank in to finance credit to state enterprises, supervise expenditures of state enterprises and monitor the performance of state enterprises, among others responsibilities. Since the Chinese economy is largely cash-based, an important role of the People’s Bank of China is to implement a cash plan. It functions as a central planning unit that determines the supply of currency. The supply is based on estimates of growth, inflation, fixed asset investment, cash requirements in agriculture, and growth in the consumption fund (pensions, wages, and salaries). In addition to the People’s Bank, there are four specialized banks including the Agricultural Bank, the Industrial and Commercial Bank, the People’s Construction Bank, and the Bank of china which is responsible for financing domestic and foreign trade. There are also regional development banks, which are responsible for loans to state and private enterprises and are located in the fastest growing regions in China.

The Chinese banking system is weak because of the large banking infrastructure under the People’s Bank, which supports around 100,000 state-owned enterprises. Many loans are not paid back because often the state enterprises lose money. As a result, private enterprises find it difficult to obtain loans, despite the fact that they are the main driving force behind the economic growth. The banking system in China is largely government operated, which does not allow for typical market-driven banking policies. They simply do what the government dictates.

During the reconstruction, Russian banks became increasingly privatized. The banking sector was actually the more successful business sector at the time because it was the only one making money and required little startup. However, a lack of rules and regulations in the new banking system has enabled bank abuses and financial scandals. Despite this fact, banks played an important role in financing private enterprises to rebuild the economic framework of Russia. They are continually becoming more stable and reliable. There is much less government control on Russian banks in comparison to the Chinese banking system.

China has a strong trade policy, ranked 10th in the world in total value of trade (1997). The liberalization of the economic structure has increased the attractiveness of foreign investment in China. Market mechanisms are used to determine the value of imports and exports.

Foreign trade in Russia was previously centrally-planned under Soviet rule where goals were determined for the level of imports and exports for each economic sector. Trade had to be done with currencies accepted and valued in international trade because the ruble was inconvertible into other currencies. After the transition, the Russian economy was burdened with the foreign valuation of the ruble, which because increasingly lower in value as time went on, until an upper and lower limit was established to help soften the blow of inflation. Despite these limits, inflation continued to increase until August 1997 when the ruble had to be revalued.

These two economies currently lie in stark contrast to each other in that Russia is getting worse, while China is prospering. By maintaining a socialist structure while allowing private enterprise to flourish in a controlled environment, the Chinese have improved on the inefficient soviet system to become an increasingly competitive world power. China is no longer considered to be a poor country due to their extremely rapid economic growth and prosperity. Russia, however, has suffered as a result of poor economic planning and implementation of the new economic system. The lessons of the Soviet failure have strengthened and improved the strength of the Chinese economy. Gradualism has proven more successful than shock therapy.


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