Economic Reform: Success in China and Failure in Eastern Europe

Article excerpt

Since Russia, the other countries of Eastern Europe, and China had quite similar economies under their communist governments, any analysis of Russia's current economic crisis must eventually ask why the economic reforms in China since 1979 have produced the greatest economic success of recent times and the structural changes in Eastern Europe since 1989 and in Russia since January 1992 have produced such disasters. This is not an academic question; these disasters affect hundreds of millions of people. As the UN Economic Survey of Europe in 1992 notes, "The cumulative drop of output registered over the last two to three years in some countries has attained proportions that are unmatched even by the Great Depression of 1929--1933." Russia in 1992 has suffered the greatest peacetime decline in ia modern history. The fact that the course of reform it followed has produced disaster in every country in which it has been applied shows conclusively that the failure lies not in particular errors of application but in the nature of the policies themselves. It is these processes which underlie the deepening political crisis in Russia.

The contrast between the results that followed the Chinese reforms in 1979 and those that followed the East European reforms in 1989 illustrates the differences dramatically.

In the decade after the 1979 reforms, Chinese gross domestic product grew 135 percent. The growth trend picked up immediately after 1979 and continued essentially unabated. In Eastern Europe, the immediate effect of the 1989 reforms was a sharp decline in output that has persisted until the present. China demonstrably made the kind of change that Russia now requires. Consumer goods became the leading sector of the economy, the supply of high quality foodstuffs such as fruit and meat increased enormously, the service sector expanded rapidly, small-scale enterprise flourished, the productivity of labor and investment both soared, and living standards doubled. The Russian government has proclaimed these goals, but so far it has completely failed to achieve them.

The contrast is not, of course, accidental. The same "laws of economics" that led to success in China have dictated failure in Russia and Eastern Europe. The mistake of the governments in the latter countries has been to misunderstand the specific character of the Russian economy and those modelled after it. They are altogether different from the competitive economies of the West. Russia, Eastern Europe, and China are "dual economies". Such economies have a large and almost-pure monopoly sector that operates essentially according to the laws of monopoly, and a non- monopoly sector that operates essentially according to the laws of competition. The specific dynamic of economies of this type results from the interaction of the two sectors. Once the character of these economies is understood, then their laws and the policies necessary for them to function successfully are clearly defined.

The National and International Markets

To evaluate alternative growth policies for a country like Russia, with its dual economy, it is essential to consider both the relative sizes of its national and international markets and the structural differences between them. The world market is essentially competitive. Except for a small number of commodities, no one country dominates supply. But the Russian domestic market is part of a dual economy, made up of monopoly sectors and competitive sectors. If the world market dominated the supply side of the Russian economy, one could still say that Russia had an essentially competitive economy, which would therefore be governed by the laws of competition. But since the domestic market is dominant, the Russian economy is subject to the laws of the dual economy. The Russian government and the people advising it fail to grasp the significance of this. They fail to draw the necessary conclusions from the fact that Russia itself and the other former Soviet republics are its dominant sources of supply. …