Transitional economies describe economic settings undergoing a change from centrally planned or command economy to liberalized state, involving free market system. Else, they refer to all nations making attempt to convert their basic constitutional elements to the adoption of market style fundamentals. An economy can be described to be in transition if it goes through liberalization, stabilization restructuring and privatization. Liberalization is a process in which market prices are set or determined by the market forces of demand and supply, therefore minimizing possibility of trade barriers.
Stabilization is a situation in which the frequency of high inflation is adjusted to and maintained under control. Restructuring is the modification of the old economic structures to fit another system of operation, therefore meaning the flexibility for change. Privatization is a process that demands creation of financial sector that can allow and accommodate the departure from public ownership of resources to private ownership. After the above processes are allowed to take place, initiated and implemented they usually lead to rapid changes.
The changes include creation of private enterprises and institutions and changes in the role of state (Aslund, 1995, 23). The government now directs its attention towards promoting private owned firms, creating different fundamental and governmental institutions and enhancing independent financial and market institutions. In line with the above credentials, economic transition can widely be looked at. Its broad sense implies reallocating resources to their most efficient use and liberalizing markets, prices and economic activities.
It also involves development of market oriented and indirect instruments to ensure macroeconomic stabilization. The privatization process ensures that economic efficiency and affective enterprise management are achieved. Transitional economy also provides incentive to increase efficiency through imposing hard budget constraints. Because an economy is collectively owned by its stakeholders, transitional economies establish legal and institutional frameworks to secure transparent market entry regulations, the rule of law and property rights.
The history of transitional economies or trajectories can be explained as idiosyncratic. Adoption of these economic systems has usually been accompanied by political upheavals, collapse of governments, independence declarations, and overthrow of dictatorial leaderships and integration of a nation with other nations. Therefore the rate and kind of transitional trajectories rested upon the extent of relinquishment of central planning and the scope of liberalization efforts. The most significant point of departure of this transitional movement is the communism system of Russia, in response to the October 1917 revolution.
This revolution was imposed on the nations of eastern and central Europe, under the governance of soviet rule after the Second World War. In Russia, the core of this system could be perceived in three features. To start, the whole economic life was controlled by one party, the communist party of the Soviet Union. Secondly, economic institutions were state owned, based on the means of production. By then, the private sector was negligible and nonexistent. The way in which the market functioned was only found in an illegal underground economy (Braguinsky, 2000, 29).
Finally, there was mandatory central planning that regulated distribution of incomes, trade and production. These three elements pushed the transition process by rejecting the communist economic system. The Berlin wall fell on November 1989, triggering the three fold process and the collapse of communist parties. The three fold process involved departure from state to private ownership of property, one party rule to democracy and from planned to market economy. Following these skirmishes and unrest, the Soviet Union was officially dissolved in December 1991.
During this time, Russian federation was the economical and political giant within the soviet republic. In Asian nations and especially China, the transition was underway in the beginning of the twenty first century. However, the transition process did not touch the political structure of China by then, meaning the political structure remained communistic. In both Russia and China, basic transition policies were similar in design. This is because they were prepared by international organizations in conjunction with western experts.
The dominant influence in the economic design came from the European bank for reconstruction and development, the World Bank and the international monetary fund (Kolodko, 2000, 11). The transitional building blocks also adopted a three fold strategy. First, economic activities were on overall basis liberalized by freeing prices and exchange rates and interest rates that were initially controlled by the government. People were initiated to participate in foreign and domestic trade, as part of freeing economic activities.
The second strategy was implementing stabilization program, instituted to limit foreign debt, control budget deficit and eradiate inflation. Thirdly, institutions of market economy were created to ensure structural transformation took place in the required pace. Such transformations also implied reforms in the banking sector, allowing new private sector to be financed by credit and also putting an end to single state bank monopoly. Construction of new financial sectors and tax reforms in both nations were also crucial. The social security systems were changed through subsidized recreation systems, education, health and housing.
As opposed to China, the transition process of Russia took more than ten years to be accomplished. This failure and slow phase was credited to its huge natural resources, it size and diversity and the length of communist rule in Russia. The size of Russian natural resources made the nation reluctant on radical reforms, allowing corrupt businessmen to grab the resources by mechanisms of privatization (Kolodko, 2000, 11). The above arguments indicate the initial structures of China and Russia, as both states were engaged and matching towards economic transition.
However, the journey to transition seemed a very challenging obligation to Russia. It is said that the differences that appeared later in these countries were due to difference in the structures governing work practice and price determination. For example in Russia, the structures which later on emerged conferred monopoly powers to businessmen considered socialism leftovers. Because of their dominance, Russia could not adopt superior technology, making their work practices inefficient. In China, a competitive arrangement was adopted, that conferred no monopoly powers to any factor supplier, as there was a ground play ground for competitors.
As a result, efficient operation was achieved because of better technology. Another clear difference within these economies was brought about by the strength of central governance before the onset of the transition process. Both nations were characterized by great desire by leftover communists towards monopoly powers in the supply of factor services, and product markets that could employ their factors of production. The reason why these businessmen fought for monopoly powers was to ease their access to economic rents. They knew that once superior technologies are introduced in the market, such gains could only decay.
It was upon the local governments to decide whether to aloe monopoly structures or not. In this respect, benevolent central government could not erect barriers because of the perception that monopoly powers could lower the average living standard of the nation. In Russia local governance was very weak, allowing prevalence of monopoly structures and systems. As opposed to Russia, the government of China stood strong against monopoly through erecting stern barriers to entry, preserving economic rents to their citizens (Lavigne, 1999, 27).
According to what the after independence government anticipated in Russia, the political leadership aimed at enhancing a market system of coordination. Their method to achieve transition was known as the neoliberal transition strategy, designed by western neoclassical economists. The strategy advocated for minimum intervention of the government in the process of transition. To transform the economy, it was advisable to rely on self interested initiatives. China started the move to economic transformation in 1978 by using a state directed transition strategy, suggesting a very active government role in the whole process management.
Surprisingly, transition process of China went on superiorly to Russian. Up to 1996, Russian economy declined precipitously whereas Chinas economy grew rapidly. Paradoxically, economists prefer the transition system in Russia to the one in China. The Russian strategy emphasized on liberalization, privatization and stabilization. It also recommends immediate cessation of removal of trade barriers as well as state allocation of resources. The government’s role in the market is overtaken by market forces and individual initiatives.
Following this policy, government spending sharply reduced by twenty percent in 1995. Money supply fell from 100 percent to sixteen percent by 1994. In 1994, industrial output accounted composed of 78. 5% non state enterprises. The nation also established free currency exchange, free international capital and free imports. Since 1992, the nation has experienced the most prolonged and severe economic decline. Industrial production and real GDP have reduced by half, with agricultural and investment outputs falling by more than seventy percent. The output of fuel, metals and raw materials have contracted.
Seemingly, the countries strategy is taking it back to a centered economy (Bukhman, 199, 22). In the case of China, the decision to use the state directed transition strategy was not welcomed by many. Before the strategy was fully applied, western experts made all possible efforts to persuade the nation to replace the strategy with the one applied in Russia, a request that China turned down. The nation maintained dual system of prices; government providing a certain level of output sold at lower prices and the output above that sold at market price.
Price controls were maintained on specified communities. Periodic brief spells of selectively tightened credit were combined with direct administrative measures to control the rate of inflation. To facilitate economic growth, the state undertook substantial investments and also cut state spending. China did not embrace tight monetary policies but instead allowed substantial credit expansion. Credit was being directed into productive investments by directly setting interest rates and controlling bank lending. Centrally to the case of Russia, the money supply rose.
Still the state did not privatize state enterprises but instead encouraged new non state enterprises formation by villages, worker collectives, private individuals and townships. State sector remained under the control of central planning. To make sure their industries grew, China retained protection of its domestic market (Kolodko, 2000, 11). Because of the above aspects, the economy of China was none of the best in the world since 1978. The difference between the results of these two nations indicates that the strategies differed in performance.
Seemingly, Russia was relying on workable strategy while China was not. In history, nations that employed the strategy similar to Russians have never escaped negative net growth and severe economic downturn. After critical analysis o the difference in performance of these two strategies, Russia has been reminded of the faults within its strategy. First, the strategy did not appreciate the fact that the process of building a market system takes along time and should involve active government role. Secondly, dismantling old economic systems before building effective market system was a mistake.
Sudden or quick liberalization in a formerly commanded economy leads to inflation rate that can hardly be contained. Tight monetary and fiscal policies prevent modernization, restructuring and encourage long depression in industries, situations that require adequate credit and substantial state spending. Privatization in an economy without legitimate wealthy class turns out to theft of state properties, with the society benefiting partially. Lastly, a sudden free trade policy exposes domestic economy to superior competition without the maturity to compete internationally (Aslund, 1995, 23).
Yet nineteen years after the moves towards transition, China and Russia do not fall in line with confident predictions of democratic and liberal determinists. Their political elites are still pursuing all possible alternatives to the western model. Currently, the new Russo Chinese model is not democratic but authoritarian, marrying large state role with capitalism. They hold western consumerism and rejects western political liberalism. Both nations do not rely on democracy or communist ideology in creating political system loyalty but stress combination of economic growth and nationalism.
This is supported by the international manifestation of the shared ideology, the Shanghai Cooperation Organization. The ideology in this organization advocates absolute respect to national sovereignty. Since 2005, China and Russia have been conducting joint military exercises. With this description, it is not right to thing of the two powers to have monolithic world view. A strong element of strategic rivalry and mutual suspicion exists, with Russian worrying over how China is expanding into the mineral rich and sparsely populated Siberia.
Chinas economic boom is broadly based on manufacturing and has been going on for a generation. Russians rapid expansion is fragile driven by hiking prices of gas and oil. Politically, Chinese communist party still rules with Russian communist party formally in power today. Regarding foreign policy, China is launching its muscles outside Asia with Russia holding the ideology of being a global power. China has embarked on sustained military build up whereas military power in Russia is felt declining (Braguinsky, 2000, 29).
The nations have several similarities regarding their official ideologies. Both pay lip service to Marxist Leninist texts. Their elites behave the same towards political and economic pressures. Official spokesmen of the two nations emphasize that democracy remains their long term goal. Because of the challenges the nations are facing towards democracy, they usually argue that there are no perfect democracies around the world. President Hu Jintao from China refers democracy as the common pursuit for mankind. Both nations stir up fear of chaos to fend off political liberalization demands.
In China, political liberalization evokes Cultural Revolution, meaning that if communist party happens not to be in power, social disorder and violence are experienced. It is because of this feeling that Chinese majority suggest democratization can lead to civil war and separatism. In Russia, democratization is linked to state capture by small group of ultra rich oligarchs, national decline, lawlessness and falling living standards. As much as the two nations talk of gradual democratization, space for dissent and political freedom seems to be shrinking instead of expanding.
Freedom of expression is higher in Russia as compared to China. Media in China has reported series murders of investigative journalists. The contraction of the freedom of expression has been demonstrated through the Chinese internet control by use of the great firewall of China. Access to political power is still very tightly controlled in both nations. In Russia, elections are held to legitimize prior decisions. To understand how the country is governed, Russian political analysts are reverting to Kremlinologist. In both nations, political elites and ruling parties strengthen their power base through expanding business affairs.
In Russia, political power is founded within the energy sector and personal wealth of the ruling elite. This is supported by the fact that Russian president is the chairman of a state controls gas monopoly (Lavigne, 1999, 27). In China and Russia, ruling authorities employ new found wealth to rediscover and polish up national culture aspects that heyday of communism discouraged. There is a potential dark side to use of nationalist ideology in both states. There is high popularity of assertiveness on international scene because of influence of the president.
In China, school pupils are enticed to strong nationalistic curriculum, making the country a perennial victim of external interference by Japanese and western colonialists. The trends taken by these two nations in their journey towards transition triggered debate on the best way to convert communist country to democratic one (Kolodko, 2000, 11). The debate has been based on the argument whether political and economic reforms should be introduced at the same time or in different phases, and if in phases, which should come first.
Several studies have concluded that the reforms followed by China to be one way of democratization; where economic reform should lead and political reform follow. Russia falls in second way democratization, starting with political reforms followed by economic reforms. Questions have revolved around global economists whether there really exists different ways of democratization. Chinas successful reforms without political reforms and the Russian backlash to non democracy questions the existence of different democratization mechanisms.
Although the two sides used different ideologies, all of them emphasize the relevance of capitalistic economic development in the process of social evolution. Seemingly, there are no political reforms in China. But Deng Xiaopin engineered a debate countrywide on ‘seek the truth from facts’, emancipating the nation from radical Maoism and Cultural Revolution disillusionment. To initiate economic reforms without compatibility with communist ideology, political liberalization should be adopted to initiate economic reform.
From the beginning, what Gorbachev chose was more radical compared to what Deng chose. The former started with liberalization and later made efforts to turn to democratization. His glasnost evolved into freedom of publication and freedom of speech. On the other hand, Deng was emphasizing that the most important thing to maintain during economic reforms was stability. Studies still indicate that before the big events, public opinions were conservative in both nations (Braguinsky, 2000, 29). Before this time, both nations had evolved from feudalism to communism.
This described an environment without democratic knowledge, democratic tradition and capitalist development. Given that the two nations have groups of well educated professionals and intellectuals, there is high preference and campaign towards liberalization promoting democratization and political reforms. These groups of persons should conduct liberalized movements in people’s minds and their culture, preparing for the sake of future bourgeois revolution. Alternatively, Chinese intellectuals do not emphasize capitalistic economy but concentrating more on the outside influence.
This makes the ideas of Chinese professionals ideal or else theoretical. Theories on modernization provide that economic modernization and development leads to political democratization. Generic form of Dahl thesis contents that economic development enlarges the middle class by increasing education and therefore expand receptivity to democratic political tolerance. On my own opinion, it is worth mentioning that the struggle towards economic transition is really involving. This is because the process involves vary radical and diversified reforms.
The reforms needed seem to be economic only, but for transition to be achieved, the changes will have to affect all spheres of life including social, Political and cultural areas. For example, Russia tried all means to achieve economic reforms only to be seriously changed by the political arena, which may seem separate from the economy of the nation. China emphasized transition in which no great attention was directed to politics. Political reforms in China have also been spared by the citizens in fear of tribal enemity and clashes, meaning that economic transition involve cultural considerations (Aslund, 1995, 23).
The future of these economies can no longer be viewed from their national point of view, but from an international perspective. This is because both economies have diversifies and starched their trade frontiers to many parts of the world, winning admirable shares of market. However their shares their performance is characterized by dissimilarities due to development dynamics in 1990s. China is serving as the leading global economy through production of agricultural and manufactured commodities; cement, steel, peanut, meat, TV sets, chemical fertilizers, raw cotton, grain and coal.
It is also the second largest electricity producer in the world. Russia leads the world in producing rough diamonds and natural gas. It is the second in producing construction bricks, potatoes and crude oil. It is the third in producing milk and iron. It occupies the fourth position in producing chemical fertilizers, electricity generation, cotton fabrics, steel and grain. Chinas economy has led to big debate by world economists and mass media, claiming that in absolute terms, it will surpass American economy by 2015 or 2020 (Lavigne, 1999, 27). China therefore outstrips Russia in the volume of foreign trade and the share of global trade.
Russia massively exports machine built products, defense technologies nuclear power plant technologies. It is however doubtful whether Russia will maintain its present position in world trade because of tense competition in trading nuclear power equipments and weapons, together with large political influence in the trade of war equipments. The nation therefore does not have any articulate strategy to improve its import structure. Based on the above statistics and explanations it is quite clear that economic fate of China is bright whereas Russian may not be quite promising.
The down surge of the Russian economy can be attributed by the option it chose to transition its economy. The fact that Chinese economy is still prospering indicates its formula was economically plausible, suggesting to the world that is the best transition strategy which it should adopt to release itself form economic difficulties (Kotz, 1997, 17). Work cited Aslund Anders. How Russia Became a Market Economy. Washington, DC: The Brookings Institution, 1995, p. 23. Braguinsky Serguey. Incentives and Institutions: The Transition to a Market Economy in Russia.
Princeton, NJ: Princeton University Press, 2000, p. 29 Kolodko Grzegorz. From Shock to Therapy: The Political Economy of Post socialist Transformation. Oxford: Oxford University Press, 2000, p. 11 Lavigne Marie. The Economics of Transition: From Socialist Economy to Market Economy. New York: St. Martin’s Press, 1999, p. 27 Bukhman Gene. Neoliberal Economic Policy, `State Desertion,’ and the Russian Health Crisis. Monroe, ME: Common Courage Press, 1999, p. 22 Kotz, David. Revolution from Above: The Demise of the Soviet System. London: Routledge, 1997, p. 17Sample Essay of Paperial.com