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Transition Economies: Russia and China
BONUS WEB CHAPTER FORTY
TRANSITION ECONOMIES:
RUSSIA AND CHINA
CHAPTER OVERVIEW
Two of the most profound events of the past two decades are the collapse of communism in the
Soviet Union and the rapid emergence of the market system in China. Russia and China are
perhaps the world’s most significant developing economies: Together they constitute 20 percent
of the world’s surface area and 23 percent of the world’s population.
In this final chapter, we first briefly look at Marxist (communist) ideology that gave rise to the
command economies. Then we examine the institutions and techniques of central planning
common to both the Soviet Union and prereform China.
Next, we discuss the coordination and incentive problems that central planning created. Finally,
our attention turns to Russia and China’s transition to market economies.
WHAT’S NEW
Data on Russia and China have been updated. The discussion of the Russian economy has been
revised in light of recent resurgence. The discussion on China reflects current problems the
country is having with unemployment.
The two web-based questions have been replaced.
INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to
1. Summarize the Marxist ideology, especially the concept of the labor theory of value.
2. Identify two major institutional features of the former Soviet system and the prereform
Chinese economy.
3. List seven characteristics of Soviet and Chinese central planning.
4. Describe the coordinating problem found in central planning.
5. Describe the difficult problem of incentives faced by central planners.
6. Explain the causes of the failure of the Soviet centrally planned economic system.
7. Describe the components necessary for the transition to a market system.
8. Identify the problems and accomplishments of Russian economic reform.
9. Compare market reform in China with the reform process in Russia and explain how it has
differed.
10. Identify three institutions developed in China for the support and control of market
activity.
11. Identify four problems that have slowed the transition process in China.
12. Define and identify terms and concepts listed at the end of the chapter.
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COMMENTS AND TEACHING SUGGESTIONS
1. This chapter can be assigned near the beginning of the principles course, after students
have been introduced to the operation of a capitalist market system. The contrast between
central planning and a capitalist system seems to help students realize that the market
system we often take for granted is something worth studying after all. In learning about
the problems with a centrally planned system, students begin to appreciate the market
forces and freedoms of a capitalist system. However, it is worth returning to this chapter
after a thorough grounding in the microeconomics of the preceding chapters.
2. Current economic problems in the former Soviet republics and China are the focus of many
news stories and offer an opportunity to discuss how our system deals with such problems,
if they exist here. Or, if the problems don’t exist in the U.S., students can discuss why not.
Another possible assignment would be to examine the published problems and have
students design solutions for them. Ask students to identify specific types of problems
relating to property rights, coordination of economic activity, and the presence or lack of
economic incentives.
3. An article in the Los Angeles Times, April 18, 1998 “China’s New Tenants Won’t Buy
Excuses” by Rone Tempest is an entertaining example of what can happen when foreign
investors bring consumer rights, a sense of entitlement, and a more sophisticated view of
property rights—along with their money.
4. Above-average classes might be interested in discussing Oskar Lange’s ideas on the
possibility of central planers duplicating market efficiencies with rational pricing methods.
Market socialism is discussed in most texts on comparative economic systems.
STUDENT STUMBLING BLOCK
Students confuse Russia with the whole former Soviet Union. A map showing the size
(stretching over 11 time zones) of Russia and its location relative to the fifteen former republics,
which are now independent countries, is a good lesson in economic geography. A source of
confusion related to this chapter is the common misperception that any government involvement
in an industry is “socialism.” In learning about a centrally planned socialist system, students may
be more aware of what the Soviet brand of socialism was like and less about the Chinese system.
LECTURE NOTES
I.
Ideology and Institutions
A. History
1. The Russian Revolution of 1917 produced a dictatorship under Vladimir Lenin
and later Joseph Stalin.
2. China’s communist revolution took place in 1947 under Mao Zedong.
3. Both nations viewed centrally planned socialism as a solution to the instability of
what they believed were chaotic market systems.
B. Marxian ideology was the basis for the Communist Party’s power and economic
system.
1. Marx’s labor theory of value holds that all value was determined by the amount
of labor time required for its production. However, capitalists owned the means
of production and had power over the workers whom they employed.
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2. Workers were exploited by the capitalists, who bought the labor for a low wage
and got full-time service from each worker. The value of workers’ production
exceeded their wages, and this led to the capitalist earning what Marx called
“surplus value.”
3. Communism’s function was to overthrow the capitalist control of the means of
production so that the worker had control and would no longer be exploited. The
Party viewed itself as the vanguard of the working class, but in practice it was a
strong dictatorship.
C. There were two major institutional characteristics of the previous economies of
Russia and China.
1. There was state ownership of all property, transportation and communication
facilities, banking institutions, virtually all industry including retail and
wholesale enterprises, and most urban housing structures.
2. There was central economic planning, which meant that the economy was
directed by the central government rather than by decentralized market
mechanisms.
II.
Central planning and its problems
A. Planning goals and techniques.
1. Industrialization and military strength had the highest priority in terms of
resource allocation in the Soviet Union. In China emphasis was placed on
developing small-scale industries scattered throughout the rural areas. Both
countries neglected consumer goods industries.
2. Resources were overcommitted and planners committed more resources than
were available, so there were persistent shortages.
3. Resources were initially mobilized to achieve rapid economic growth and this
was successful through the 1950s. Both China and the Soviet Union induced or
coerced a larger proportion of the population into the labor force.
4. Allocation of inputs was done by directive.
5. The government fixed prices of virtually all inputs and outputs, but prices did not
reflect the relative scarcity of a given resource or product.
6. The Soviet Union and China aimed at self-sufficiency and avoided trade with
Western countries if possible.
7. Macroeconomic policies were passive, meaning that money and prices
accommodated output plans but did not play a role in influencing their outcome.
B. Problems of central planning were serious.
1. The coordination problem was massive; outputs of some industries are inputs in
others, so problems in any single sector would immediately be felt in many.
There was no price mechanism to provide incentives to eliminate bottlenecks, as
is true in a market economy. Planners had to coordinate inputs and outputs for
thousands of production enterprises. Bottlenecks were common, with roots
dating to the early 1960s or before.
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2. The incentive problem.
a. In a market system, profits and losses signal success and failure and provide
incentives to increase or decrease production. In central planning managers are
rewarded for meeting assigned goals and have no incentive to respond to product
shortages or surpluses.
b. The centrally planned system also lacked entrepreneurship. Without profit
there is no reward for innovation or enterprise.
c. In centrally planned systems business is essentially a government-owned
monopoly with no reward for improving product quality or developing more
efficient production techniques.
d. Workers lack motivation because there are few material incentives.
III.
The Collapse of the Soviet Economy: The Soviet Union ceased to exist in November
of 1991 and became 15 separate nations.
A. After rapid economic growth through the 1950s and 1960s (5 to 6 percent reported
per year, compared to 3 percent in the U.S.), the rate fell to 2 to 3 percent in the
1970s, and by late 1980s the Soviet GDP was actually declining.
B. The quality of goods was below international standards, the selection of consumer
goods was extremely limited, and technology was primitive by world standards.
Shortages of basic goods were common, leading to long lines, black markets, and
corruption in product distribution.
C. The lack of an ability to fulfill consumer needs contributed to the fall of communism.
D. There was a huge military burden: 15 to 20 percent of GDP was devoted to military
as compared with 6 to 7 percent of a much larger GDP in the U.S.
E. The agricultural sector experienced great inefficiency and consumed 25 percent of
annual investment. It employed 30 percent of the labor force while still not
producing enough for the population to feed itself. Output per farm worker was 1025% that of U.S. farm workers.
IV.
The Russian Transition to a Market System.
A. Privatization
1. Since 1992 more than two-thirds of former state-owned enterprises have been
privatized, including 90% of small companies and 80% of service sector
companies.
2. In the first phase government gave vouchers to 40 million Russian citizens,
which could be pooled and used to purchase enterprises.
3. The second phase, which began in 1994, allowed state enterprises to be
purchased for cash, which enabled foreign investors to buy Russian enterprises,
providing much needed direct investment from abroad.
4. In 1995 wealthy lenders were given shares in many companies in exchange for
loans.
5. Land reform has progressed more slowly. It will take many years to develop a
functional market for farmland.
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B. Price Reform
1. Prices in the former Soviet system bore no relationship to the economic value of
either products or resources.
2. Because input prices did not measure the relative scarcity of resources, it was
impossible for a firm to minimize real production costs.
3. Prices of many consumer items were fixed at artificially low levels and shortages
existed for many of these goods. (See Figure 40W-1)
4. In January 1992, the government decontrolled about 90% of all prices including
the Russian currency. Domestic prices surged and the international value of the
Russian ruble sank.
5. The decontrolled prices began to more closely reflect the marginal cost of
producing goods, which helped reallocate resources to best suit consumer wants.
C. Promotion of competition.
1. The former Soviet Union consisted of large state-owned enterprises—monopolies
that produced 30 to 40 percent of total industrial output.
2. Russian reformers realized an efficient market economy requires competition, but
only limited change has occurred.
3. Joint ventures between Russia and foreign companies are one possible way to
increase competition and recent legislation has opened the door for firms to
invest directly in Russia.
D. Joining the world economy by making the ruble convertible.
1. The Soviet economy was largely isolated from the world economy for over 75
years; joining required making the ruble a convertible currency.
2. The plunging value of the ruble has been detrimental to Russia’s world trade.
The international value of the ruble has been more stable since its crash in 1998.
It traded at about 30 rubles to $1 in October 2003.
E. Price level stabilization. (See Table 40W-1.)
1. The transition to free markets brought hyperinflation.
2. “Ruble overhang”—or hoarding of rubles—existed as Russian households had
huge amounts of currency and bank deposits waiting for consumer goods to be
more abundant.
3. Large government deficits were financed by increases in the money supply.
a. Privatization of state enterprises caused the government to lose profits.
b. The uncertainty of transition led to general disorder and widespread tax
evasion.
c. The government extended massive subsidy credits to both industry and
agriculture.
d. Pensions and welfare spending was increased by printing more money.
4. Russia’s economic reforms included the creation of an independent central bank
that implemented antiinflationary monetary policy, reducing inflation from 1,735
percent in 1992 to 15 percent in 1997.
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Transition Economies: Russia and China
F. Other major problems of the transition.
1. Real output began its fall in the 1980s but the decline accelerated during the
reforms (1992-1996, Table 40W-1); the magnitude resembles that associated
with the Great Depression in the United States. Causes of the declined include
a. Rapid inflation, which caused an uncertain environment.
b. Unraveling trade relationships with former Soviet Bloc trading partners.
c. Bankruptcy and closing of many former state-owned enterprises.
d. Massive reallocation of resources including major cuts in military spending.
2. Because real output equals real income, the Russian living standard has declined
dramatically; at least 30,000 scientists have left Russian to work elsewhere.
3. Economic inequality has increased during the transition. While some new wealth
has been created through entrepreneurship, others have enriched themselves via
corruption and illegal activities.
4. The major disruptions, swift changes, and lack of regulatory oversight created
major opportunities for organized crime.
5. Greater economic freedom has brought greater economic insecurity; medical and
educational services have declined, alcohol abuse has increased.
6. A remaining concern about the transition to markets in Russia is the weakness of
government in law enforcement, particularly the collection of taxes.
G. Recent Revival
1. Aided by rising oil prices and production, and greater political stability, Russia’s
real GDP has increased by at least 5 percent per year since 1999. The
unemployment rate fell from 13 percent in 1999 to about 8 percent in 2002.
2. Recent income growth and stronger enforcement of tax collection has increased
tax revenues, helping to turn the government’s 1998 budget deficit into a surplus
in 2002.
3. The most severe economic dislocations seem to have ended, but the transition to
a fully functioning market economy will require additional time.
V.
Market Reforms in China
A. China has taken a different path to market reform than Russia. The reforms began
earlier, were more gradual, and allowed the old systems to function along with the
new.
B. Market reform began in agriculture in 1978. The key elements were the leasing of
land to individual farmers and the establishment of a two-track price system (lower
prices for government orders and market prices for the surplus). Responding to the
profit motive, individual farmers increased their productivity and agricultural output
soared.
C. The success of reforms in agriculture led the central government to extend the
reforms to state-owned enterprises (SOEs) in urban areas.
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Transition Economies: Russia and China
1. The two-track price system was again employed, gradually increasing the portion
of inputs and outputs that could be sold at market prices.
2. The government also encouraged the formation of urban collectives—enterprises
owned jointly by managers and their workforces. The urban collectives
experienced explosive growth, some at the expense of the SOEs. However, the
competition spurred productivity advance and innovation in many of the SOEs.
D. In 1980 China created special economic zones (SEZs) open to foreign investment,
private ownership, and international trade.
E. Reforms in China also included building institutions to facilitate the market system
and its macroeconomic control.
1. A central bank, a stock market, and currency exchange facilities were
established.
2. China replaced the system of “profit transfers” from state enterprises to the
central government with an enterprise tax system.
F. Transformation of the SOEs.
1. In the 1990s the market reforms continued as the Communist Party operatives
running the SOEs were replaced with professional business managers.
2. In a competitive environment many SOEs found that they were producing the
wrong goods, in the wrong amounts, using the wrong combinations of inputs. In
short they were inefficient, in both production techniques and in allocation of
resources. Some will be allowed to fail, others will issue stock with the
government holding a controlling interest.
VI.
Outcomes and Prospects
A. China’s economic growth rate in the past two decades is among the highest on record
for any country during any period of world history. (See Table 40W-2.)
B. The growth of per capita income in China has resulted from increased use of capital,
improved technology, and shifts of labor away from lower-productivity toward
higher-productivity uses.
C. Rapid expansion of international trade from $5 billion in 1978 to $266 billion in 2002
took place.
D. China still faces some significant economic problems in its transition to the market
system.
1. Outright ownership of farmland is still prohibited and this inhibits investment in
farm equipment and capital improvements on the land.
2. The financial and monetary control systems in China are still weak and
inadequate. Many unprofitable SOEs owe colossal sums of money on loans
made by banks.
3. Unemployment is a problem in China, with an estimated 10 percent
unemployment rate in 2002. The problem is especially acute in the interior
regions of the country.
4. China still has much work to do to fully integrate its economy into the world’s
system of international finance and trade.
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Transition Economies: Russia and China
5. There is great regional unevenness in China’s economic development.
VII.
Conclusion
A. China’s gradual path has been more successful so far, but questions remain about
future prospects.
B. Once Russia stabilizes, it may be in a stronger position than China because it has
become more democratic.
VIII.
LAST WORD: Police Smash Down Smirnov’s Doors
A. In November 2000, masked police smashed through the doors of one of Russia’s
leading vodka makers while factory workers threw bottles at the police.
B. Reports said the police were enforcing a court decision naming a new director of the
company, but its head, Boris Smirnov, said that the court’s decision was illegal.
C. The conflict arose with a claim by one of the leading industrial banking groups, AlfaEco, that it had obtained 50% of Smirnov shares. Smirnov claimed that these shares
were false.
D. Related disputes also continue.
1. Smirnov Vodka is fighting a court battle in the U.S. with UDV North American
Co.’s Smirnoff Vodka, the world’s leading brand, over the use of the name.
UDV says it acquired the name in 1934 when its predecessor Heublein bought
the name from Russian émigré Rudolf Kunett who bought it originally from a
Smirnov founder.
2. Another dispute in Russia in August 2000, was over control of Moscow’s Kristall
distillery, which makes Stolichnaya and other brands of vodka. Two men who
both claimed to be the manager occupied the executive offices with their private
security guards. A court decided the dispute in September 2000.
3. Because privatizations are often questioned, workers seized a paper mill in
Russia to protest foreign ownership and a worker was shot by police. In another
case, rival factions fought for control of a chemical plant in Yekaterinburg.
ANSWERS TO END-OF-CHAPTER QUESTIONS
40W-1 Compare the economic ideology of the former Soviet Union and prereform China with
that of the capitalist economies as to (a) the source and role of profits, (b) the ownership
of capital, and (c) the method of allocating resources.
The ideology of the former Soviet economy and pre-reform China was based on the
theories of Karl Marx and their first leaders, Vladimir Lenin and China’s Mao Zedong,
respectively. They envisioned their system as a successor to capitalism, which they
believed was doomed to collapse. To communists the market system is chaotic, unstable,
and inequitable. (a) Communists accept the “labor theory of value,” which is the idea
that the value of any good is determined by the amount of labor required for its
production. In their view capitalists exploit workers by paying them a wage below the
value of their output. In market economies individual ownership of property resources
requires that payment be made for all factors of production. (b) In the former Soviet
Union and China the state owned all enterprises and physical resources in the country,
with few exceptions. (c) All economic activity in the Soviet Union and prereform China
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Transition Economies: Russia and China
with few exceptions was subject to a complex system of central planning and represented
for all intents and purposes a command economy.
In contrast, the United States and other capitalist economies are characterized by the
private ownership of resources and the use of decentralized markets to direct and
coordinate most economic activity. Government involvement, while significant, is
restricted to areas in which private markets are deemed to be inefficient or unworkable.
In the United States, it is consumer preferences communicated through private markets
that determine the nature of production and resource allocation. In the former Soviet
Union and China, it was government decisions communicated through the mechanism of
central plans that motivated production and determined the allocation of scarce
resources—at least as far as legally sanctioned economic activity was concerned.
40W-2 What does the term “central economic planning” mean? Describe the coordination
problem faced by central planners in the Soviet Union and prereform China. Explain
how a planning failure can cause a chain reaction of subsequent failures.
Planners must not only set output targets for each industry and enterprise, but they must
allocate inputs to each of these enterprises so that their output targets can be met.
Because the outputs of many industries are inputs to other industries, the failure of any
single industry to fulfill its plan is likely to cause a whole chain of adverse repercussions.
For example, if the iron mines fail to supply the steel industry with enough iron, then the
steel industry will not be able to supply steel-using industries, such as automobiles,
tractors, and transportation, with their needed inputs. Bottlenecks are thus created in
many related industries. In a market system, prices would rise to provide incentives to
break such bottlenecks, but in a planned economy, price incentives exist only outside the
official system.
40W-3 Why were new product introductions and the use of new methods of production so
uncommon in the Soviet Union and prereform China compared to such capitalist
economies as the United States, Japan and Germany?
In the capitalist system profits and losses signal success and failure, they also act as
powerful incentives. The centrally planned system lacks entrepreneurship; it does not
allow the profit motive and does not reward innovation and enterprise.
The route for getting ahead in the centrally planned economies of the Soviet Union and
China was by movement up the political hierarchy of the communist party. Moving up
the hierarchy meant better housing, better access to health care, and the right to shop in
special stores. Meeting planning targets and skillfully maneuvering through the
minefields of party politics measured success in “business.” A definition based solely on
political savvy is not conducive to technological advance, which is often disruptive to
existing products, production methods, and organizational structures.
40W-4 What factors contributed to the collapse of the Soviet economy?
In 1991, the Soviet Union broke into several newly independent states, the largest of
which is the Russian Republic. The collapse of the Soviet Union was caused by a
number of economic problems stemming from the failures of central planning. The
Soviet growth rate, at least measured by their statistics, was impressive during the 1950s
and 1960s, fell during the 1970s and 1980s, but then broke down, falling sharply. In
addition the quality of the goods produced was generally poor, with technology lagging
behind the other major industrial producers. Consumer goods were both of poor quality
and in short supply. The Soviet military expenditures were a serious burden, representing
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Transition Economies: Russia and China
15 to 20 percent of domestic output compared to the 6 percent absorbed by the military in
the larger United States economy. Finally, the Soviet Union had an agricultural sector
that required 30 percent of the labor force and about one-fourth of the annual capital
investment. Many of these problems were the result of serious errors in planning and
administration, but perhaps most important was the lack of an effective incentive system.
40W-5 (Key Question) Use a supply and demand diagram to explain why persistent shortages of
many consumer goods occurred under central planning in the Soviet Union and in
prereform China. Why were black markets common in each country?
See Figure 40W-1. Because Russia and China set prices and did not allow them to
change as supply or demand shifted, prices were below the equilibrium price for most
goods and services. When the fixed price, Pf, is below the equilibrium price, Pe, there
will be a shortage since the quantity demanded will exceed the quantity supplied.
Black markets are common where prices are fixed below equilibrium levels. People can
buy goods at the fixed government prices (or pay off clerks to save such goods to sell to
them), and because of the shortages at the low fixed price, resell these goods at a much
higher price to those unable to find the goods in government stores at the controlled
prices. This reselling is said to occur on the black market.
40W-6 (Key Question) What have been the major components of economic reform in Russia?
What is meant when these reforms are described as “shock therapy”? How successful
has Russia been thus far in its reforms?
Privatization of state-owned businesses; market-determined prices; promotion of
competition; integration with the world economy; and price-level stabilization. These
reforms are referred to as shock therapy because they were dramatic and quick rather than
phased in over many years. Russia’s reform has nominally privatized much of the
economy (but property rights are still not clearly defined), establishing marketdetermined prices, and setting the stage for future prosperity. But the transition has
resulted in declining living standards for many and increasing income inequality. Also,
the government still does not have a successful program for collecting taxes.
40W-7 In what general respects have Chinese economic reforms differed from those of Russia?
Do you believe that these differences account for China’s higher growth rate? Why?
China has taken a different path than Russia in its transition to a market economy. Russia
pursued a “shock therapy” approach to reform in 1992, attempting to achieve
“irreversibility” of its reforms through a rapid and radical transformation to private
property and free markets.
China’s market reforms began far earlier—1978—and have been more gradual. Russia
concluded that its political apparatus, the Communist Party, was an obstacle to economic
reform. China, in contrast, has sought economic reform under the strong direction of its
Communist Party. China feels that communist dictatorship and markets are compatible.
China has protected the existence and development of its state-owned enterprises, while
simultaneously encouraging the creation of competing private enterprises. Deng
Xiaoping, Mao Zedong’s successor, recognized that the profit incentives of a market
economy could increase China’s standard of living.
Agriculture was “decollectivized” and a two-track price system was adopted. Gradually
the percentage of farm products sold in competitive markets was increased until by 1990
it had reached 80 percent. Agricultural output increased dramatically. The success of
reforms in agriculture led the central government to extend the reforms to state-owned
enterprises (SOEs) in urban areas. In 1980 China created special economic zones (SEZs)
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Transition Economies: Russia and China
open to foreign investment, private ownership, and international trade. The success of
these special regions eventually undercut support for central planning.
The reforms in China also included the building of institutions to facilitate the market
system and its macroeconomic control. Among these institutions were a central bank, a
stock market and a currency exchange. China also replaced the system of “profit
transfers” from state enterprises to the central government with an enterprise tax system.
China’s economic growth rate in the past two decades is among the highest in the world.
The rapid expansion of China’s international trade has accompanied the expansion of real
output. These exports have provided the foreign currency needed to import consumer
goods and capital goods. The growth of per capita income in China has resulted from
increased use of capital, improved technology, and the shifts of labor away from lowerproductivity toward higher-productivity uses. These shifts were made possible by the
gradual introduction of market reforms allowing market price rather than central planning
to coordinate most of the economic activity.
40W-8 (Key Question) Relate each of the following items to the success of market reform in
China: (a) leasing farmland, (b) price reform, (c) private rural and urban enterprises, (d)
special economic zones, and (e) corporatization of state-owned enterprises.
(a) Leasing of land resulted in individually operated rather than collectivized farms; this
greatly increased production incentives and boosted farm output.
(b) Price reform established market-based prices. These higher-than-government prices
provided incentives for enterprises to expand output; they also enabled marketdetermined allocation of resources to replace inefficient central planning.
(c) Private rural and urban enterprises absorbed workers released by greater productivity
in China’s agricultural sector and established competition for China’s state-owned
enterprises.
(d) The special economic zones—with their private corporations, free trade, and foreign
investment—established the workability and benefits of “near-capitalism.”
(e) Corporatization focused the goals of state-owned enterprises on providing highquality, minimum per-unit cost goods desired by consumers.
40W-9 What progress has China achieved in its transition to a market economy? What problems
remain?
China has made considerable progress in its transition to a market economy. These
significant but gradual reforms were outlined in answer to question 7.
China still faces some significant economic problems in its transition to a market
system. After initial surges in the 1980s productivity in agriculture has stagnated.
One possible reason may be that property rights are incomplete. The government
policy has been to lease land for 15-year periods. But without outright ownership
many farmers are reluctant to invest in farm equipment and capital improvements on
the land. There is the possibility of macroeconomic instability, partly because of
investment booms that have resulted in too much spending relative to production
capacity and partly due to the inadequacy of the monetary control system. Many
unprofitable SOEs owe colossal sums of money on loan from privately owned banks.
China still has much to do to fully integrate its economy into the world’s system of
international trade and finance. China’s record of protecting intellectual property
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Transition Economies: Russia and China
rights such as copyrights, trademarks, and patents is particularly poor. Finally, there
is great regional unevenness in China’s economic development.
40W-10
Do you think that China’s economic reforms will eventually result in the demise of
the Communist Party in China? Explain your answer.
The history of economic reform in China has been one of gradual adaptation to
changing conditions. China’s leadership often acts pragmatically using methods that
show results, discarding less effective means slowly over time. The Communist
Party in China has continued to keep social and political control in the country even
as market reforms have been implemented. I certainly would not anticipate a sudden
demise of the Communist Party based upon the tendency of the Chinese system to
adjust slowly after allowing seemingly incompatible methods to be used
simultaneously.
40W-11
“Paradoxically, Russia’s disorder may provide a firmer base for future growth than
China’s order.” Do you agree or disagree? Explain.
China has experienced very high rates of economic growth, while Russia has suffered
years of declining output and income because of its swift transformation to
capitalism. One could view this as placing Russia in a stronger position to succeed in
the future. The Communist Party in China has been able to maintain power as
market reforms have taken place but this may in fact be a “forced order” that cannot
be contained indefinitely. History suggests that economic freedom usually creates
demand for political freedom: free speech, freedom of peaceful assembly, freedom
to organize political parties, and free elections. Is it possible that China’s period of
disorder is still to come? Forecasts, tealeaves or crystal balls, we have no solid
answer to this question.
40W-12
(Last Word) In what way does the subject of this chapter’s Last Word relate to (a)
the profit motive, (b) the importance of clear property rights to a market economy,
and (c) the privatization process in Russia, including control by the oligarchs?
The dispute over management and control over Smirnov Co. and others indicates that
the profit motive is alive and well as control over the plant will also mean control
over profit income. These disputes highlight the importance of clear property rights.
When ownership is not clear, it can lead to the type of chaos reported, and also, it
will make future investors cautious about investing when their efforts may be seized
by someone else claiming ownership. One possible source of these disputes is the
problem resulting from the program of providing shares for loans. If wealthy and
possibly corrupt oligarchs demand ownership when they make loans, they may then
try to seize control over the companies to which they made these loans. While it
wasn’t mentioned in the Smirnov case, it does seem to be true in the August case
involving production of Stolichnaya vodka.
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