Comparison of the transition process in the former Soviet Union and China

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Abstract:

Transitions from state socialism generated a startling array of early economic outcomes, ranging from severe economic crises to steady economic growth, and igniting debates about the causal role of policy choices, institutional design, and initial economic circumstances. The worldwide transformation of state socialism during the 1990s yielded a series of surprises, generating widespread controversy and an enduring intellectual puzzle. The distortions typical of Soviet-style economies led most analysts to expect short-run hardship as manufacturing was downsized to correct decades of overinvestment in heavy industry, and as a shift to market pricing in economies of shortage led to price inflation and lowered living standards. In this paper, we will do a relative comparison between China and Former USSR.

Introduction:

The race to transform centrally planned economies into market economies has led, ten years later, to one group of countries approaching the finish line, others languishing at various points along the track, and a few barely off the starting blocks. Some Central and Eastern European economies (CEE) and the Baltics are knocking on the doors of the European Union. But in many economies in the Commonwealth of Independent States (CIS), including Russia, there has been uneven progress and prospects remain murky.

At the start of the transition, most economists agreed that, to get market price mechanisms working, liberalization and macroeconomic stabilization should proceed quickly, despite the economic hardship they might impose. The view was that the hardship would be temporary and less severe than if the process were dragged out over time.

The transition thus started in most economies with prices being rapidly liberated from artificially low levels, which led to an immediate burst of corrective inflation. The pent-up demand that had built up during the period of central planning sustained the inflation. Early in the transition inflation averaged 450 percent a year in CEE, nearly 900 percent in the Baltics and over 1000 percent in the CIS. By 1998, however, annual inflation had been lowered to the single digits in the first two groups and around 30 percent in the third.

Along with the burst in inflation, the transition began with another shock: output fell in all three groups of countries at the start of the transition, on average by 40 percent before it bottomed out, far more than was expected.

What were the starting economic, social and political conditions of market oriented reforms in the Soviet Union and China?  :

It is widely acknowledged that China has been vastly more successful than Russia in her transition from a planned socialist economy to a market-based economy.  The primary cause of the outcome was the policy choice taken by the respective governments.  On the other hand, the position, taken by most orthodox western economists, is that the initial conditions rather than the policies the governments of these countries chose, was the primary cause of the different outcomes. This is not to say that policies did not affect the outcome of the economy; rather, they assert that initial conditions played a larger role than policies or, even at times, constrained the possible outcomes of the policies.

I take this position for a number of reasons.  First, it is difficult to reach a firm conclusion about the relative advantage of gradual over radical reform or vice versa, as the variables involved are as complex as those involved in planning the Soviet economy.  Furthermore, it is difficult to separate the initial conditions of the country from the policy choice because, often, the policy choice was the consequence of the initial conditions.

The pace of reforms and their sequencing; their economic and political determinants:

Big Bang versus Gradualism:

It may be argued that Russia undertook both radical and gradual reforms.  During the end of the Soviet Union, Gorbachev tried to push through gradual reforms.  Unfortunately, the Soviet Economy was already too diseased to be fixed.  When the Soviet government collapsed, the new regime had to decide whether to continue gradual reforms by maintaining state control over a large portion of the economy or whether to follow the advice of Western economists and undertake radical reform.  The regime chose the latter options, first undergoing rapid liberalization of prices and then privatization of most of the economy. In practice however, Russia achieved less than full liberalization because of political constraints. Radical reforms entailed a centralization of fiscal policy, tightened monetary policies, deregulation of prices, liberalized domestic trade, freely convertible currency, free trade, privatization, and a new social safety net for groups in need. While these reforms were pushed through during the first years of the transition, many of these reforms were later eroded by political compromises.

China on the other hand chose the gradualist path.  This model favored step-by-step price liberalization and increased openness to the outside world, while the political regime maintained a strong grip on its power. Thus, they chose to first reform only foreign trade and agriculture, while maintaining control over other parts of the economy.  Then, the government opened the economy more and more for market-based incentives while maintaining control of certain state owned industries.

Results of reforms in economic and social terms:

The difference between the results of the Russian and Chinese transition has been enormous.  China’s economy has grown tremendously since its reform while Russia has had a difficult transition period, only recently stabilizing. The economic success of China is clear, as the GNP grew an average of 8.5% per year until 1994 since the start of reforms in 1978. This is not merely economic growth, but also economic development that benefited a large portion of the population.  Housing condition and food supplies greatly improved; even television sets became accessible to the poor during this period of expansion. The Russian Federation on the other hand has not fared nearly as well. 

The real GDP of Russia contracted over 35% during the first years of reform from 1989 to 1993; from 1993 until 1997 the GDP decreased at a more gradual rate. Russia’s standard of living has also fallen during the transition years.  In sharp contrast to the improving living standards in China, the Russian people have faced deteriorating qualities of life with a lower life expectancy, a phasing out of housing subsidies, and a marked decrease in consumption. The results of Russian reform have led to worsening shortages, decline in output, increases in income inequality, and an increase in corruption.

Comparison of the current economic systems in China and in the successor countries of the former USSR:

In a historic reversal of fortunes, China is overtaking the territory of the former Soviet Union in GDP per capita. China’s rapid economic development has been driven by ‘regionally decentralized authoritarianism’ (RDA). But only the economy is decentralized. Political centralization, the objectives and patronage of the centre, and the centre’s relative performance evaluation are essential elements of the model. It has been said that China’s advantage over the Soviet Union was that it carried out economic reforms while postponing political reforms. In reality, this is not true. The Soviet Union made reforms similar to China’s, but without the same success.

China’s success so far owes much to its unique circumstances: the great opportunities of initial poverty, exceptional economic size, and the commitment of its leaders, supported by long-standing traditions of RDA. China’s stock has risen most obviously in the West, where the major economies are burdened by recession and debt.

To break out of relative poverty and catch up with the world technological leader, an economy must undergo continuous policy and institutional reforms. When a country is some distance from the technological frontier, its growth is aided by institutions that implement technologies developed elsewhere. At very low levels of development, such as China’s in the 1970s, large gains may be realized simply by allowing workers to move from agriculture to factories and towns, working with established technologies. As the economy begins to close the gap with the global technological frontier, however, the emphasis must shift gradually away from implementation to autonomous innovation, which can be fostered by opening product markets to more stringent competition and, for example, raising the quality of education.

China presents an obvious contrast. In 1978 Deng Xiaoping, the Chinese leader, pointed the way to the ‘four modernizations’, namely agriculture, industry, science and defence.  In 1989, unlike President Gorbachev (USSR), he blocked demands for a ‘fifth modernization’ (democracy), thereby preserving the Communist Party’s monopoly as well as China’s state capacity.

The Russian economy has undergone massive changes since the fall of the Soviet Empire, transitioning from a state controlled, socialist structure to a more market-based and globally integrated economy. Economic reforms in the 1990s privatized most industries, and some energy and defense related sectors. The Russian economy has averaged 7% growth since the 1998 crisis, resulting in the emergence of its middle class. But Russia’s heavy reliance on commodity exports made the country vulnerable during the global economic crisis of 2008, though recovery signs were evident in 2010. This was due to the rising oil and commodity prices, and the government’s $200 billion rescue package to increase liquidity in the banking sector.

Russia is one of the most industrialized of the former Soviet republics. However, years of low investment have left much of Russian industry antiquated and highly inefficient. Besides its resource-based industries, it has developed large manufacturing capacities, notably in metals, food products, and transport equipment. Russia is now the world’s third-largest exporter of steel and primary aluminum. Russia inherited most of the defense industrial base of the Soviet Union.

Differences between successor countries of the former USSR in their reform strategies and outcomes:

Initial expectations envisioned a dramatic early payoff to the transition from plan to market. Reality proved different, as output collapsed amid surging inflation. While the picture has substantially brightened since the mid-1990s, income levels in all but a handful of transition economies remain below their 1989 levels. Close to thirty countries embarked on the path from plan to market at roughly the same time, but starting from rather different initial conditions, selecting different strategies and proceeding at different speeds.

Fischer and Sahay conclude that “the most successful transition economies are those that have both stabilized and undertaken comprehensive reform” and that “more and faster reform is better than less and slower reform.” In like vein, Wyplosz (1999) concludes that “Clearly the countries that bit the bullet early and hard are those that have done better over the last decade.”  Belarus and Uzbekistan provide prima facie counter-examples to the notion of a uniform positive link between reform and economic performance.

To understand the trajectories of growth we group together seven contributions, covering two rapidly reforming countries (Poland and Lithuania), four reform laggards (Slovakia, Romania, Bulgaria, Croatia) and one reform laggard from the Commonwealth of Independent States, or CIS, Ukraine.

Ukraine was once described as the breadbasket of Europe, producing more than a quarter of the Soviet Union’s agricultural output. But the country went through a period of rapid economic decline and runaway inflation after independence. Although trade with EU countries now exceeds that with Russia, Moscow is the largest individual trading partner. Ukraine depends on Russia for its gas supplies and forms an important part of the pipeline transit route for Russian gas exports to Europe. A dispute over price rises in 2006 and 2009 prompted Russia briefly to cut supplies. The economy’s dependence on steel exports made it particularly vulnerable to the effects of the global financial crisis 2008.

Forthcoming economic and social challenges in China and successor countries of the former USSR:

China has succeeded where the Soviet Union failed. RDA has allowed competition among China’s provincial leaders to harness the private sector to the objectives of national economic modernization. China’s modernization has thus proceeded without universal market freedoms, the enforcement of third-party property rights, or the subjection of leaders to the rule of law. Linked to this pattern of reform and modernization are genuine risks that deserve urgent attention, and these could undermine China’s success in future as the country develops towards middle-income status.

Lack of government accountability:  While GDP measures market output, social welfare and market output are only imperfectly correlated. Along with a heavy emphasis on boosting measured output have come greater income inequality, excessive spending on military projects and urban infrastructure, abuses of power and rising social discontent.

Losing the momentum of policy reform:  In the past, China has often been spurred on to further innovative reforms as a result of external difficulties. Indeed, reforms took place in the 1980s when China emerged as one of the poorest countries in the world. Precisely because China was still so poor, reforms were eased by the spectacular gains that were quickly realized and could be widely shared – an advantage that Soviet reformers lacked. Continuous policy reform is essential to modern economic growth. China’s RDA so far has provided a mechanism for continuous policy reform, but it is inherently fragile.

As the country moves towards middle-income status the question is whether its leaders will cease to pursue reforms in the national interest and acquiesce to the private interests of bureaucratic or corporate incumbents. If they do, China’s economic modernization will come to a halt. This could happen in two ways, which can be characterized as the complacency trap and the conflict trap.

The end of the Soviet era brought about fundamental changes in Russia’s economy and its conditions. The transformation from a command to a market economy was painful and caused numerous derivative problems. Privatization paved the way for the oligarchs, who were able to accumulate immense riches due to their connections with politicians and secret-service officials. The old structures in the country’s economic life dissolved but were not replaced. This, in turn, resulted in a tangle of corruption involving the state, the secret service, and the mafia which, working hand in hand, drove the country’s economy into a decline in the long run.

The economy logged high growth rates which, however, have been declining again since 2003 and would hardly have been achieved in the first place without the exports of crude oil and natural gas.

According to plans, 13 to 15 million new consumers are to be connected to the gas supply system each year. To do this, new deposits would have to be developed which, however, are located in Eastern Siberia and the Far East, where there is no suitable infrastructure and nobody who could address themselves to the tasks on the spot.

Domestic capital formation is absolutely insufficient, so that Russia’s industry is forced to draw on foreign capital resources. At the moment, the foreign debts of the government and Russia’s enterprises total 527 billion US Dollars.

The social situation of the population is problematic. The reasons for this lie in low wages and the constantly growing inflation (officially put at 16 percent at the moment), against which the state takes little or no action, and which is exacerbated by the international financial crisis. Moreover, the public-health system must be improved. The state does talk about providing health care free of charge, but most Russians cannot afford medication. Finally, housing shortage is another highly explosive issue, especially in the cities.

Note: This paper was originally submitted as a mandatory requirement to finish a MOOC  “Economics of Transition & Emerging Markets”  on Coursera.

New paradigm ahead -A rethought on MOOCs

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Education is a life-long pursuit focused on turning knowledge into intelligence and skill into value. Learning and intellectual curiosity is the real currency of education, not money. With that in mind, MOOCs have had a great impact on education of late.

The aim of a MOOC is to deliver education with flexibility and affordability to students all across the globe. It makes education accessible to people . Working professionals are encouraged to continue their education by means of MOOC. Therefore, it can be considered as a blessing of technology in education.

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Benefits

By now, I have participated in about ten MOOCs . For someone like me – a lifelong learner;  MOOCs are an efficient way to learn about topics of interest to me via high quality resources created by people/organizations who know what they are talking about.

The good part is, it exposes learners to content they would otherwise  never have the opportunity to experience.  For interested, engaged and dedicated students, it is a chance to try to make sense of content they aren’t in a position to otherwise interact with.

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Is MOOC a disruptive innovation?

Massively Open Online Courses were, a few years ago, trumpeted by companies like Udacity, Coursera and others as the death knell of traditional education. Sebastian Thrun, who was one of the first to create a MOOC, famously said that in 20 years there would only be a few dozen colleges and universities left.

The University of Illinois-Urbana Champaign,  has recently announced  that it will offer an MBA degree via MOOCs. How this will work out and whether this model will be implemented  by other schools is something that is yet to be witnessed. As with any MOOC, the content would be available for free. Learners who wish to earn a credential but have no need for academic credit can pay a small fee, $79 a course, for an identity-verified certificate. Students can also apply to the College of Business and, if accepted, pursue the full M.B.A. degree. Finally, students can choose to take the courses individually for credit, postponing a decision about whether to go for a degree until they are well into the program.

In few rare cases, companies are hiring people who do not have a formal degree but have the skills they are looking for — coding being one that many are searching for. There have been reports in the recent past that a high school student was brought in as an intern at Google based upon his MOOC certificates and recommendation from his MOOC professor. Though it is quite early to reach a judgement that admission process will change dramatically in the next few years, but schools/universities are already using data to predict yield and to recruit prospective students. If they find that these alternatives will help them enroll more and qualified students, then the way students apply to schools may change drastically in the years ahead.

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Business model

The people/groups who claim MOOCs would destroy the traditional brick and mortar education system are the ones who have high stakes and have something to lose and are thus very intimidated by it. Specifically, top universities, professors and banks who enjoy the student debt as a byproduct aggregate a lot of power. If anyone can study for free, they will significantly lose those sources of power and money.

One might be tempted to ask. Why are universities developing MOOC offerings in the first place?  Well, simply because they are more afraid of being left behind and become irrelevant. Especially as we see huge corporates like Google, AT&T, CISCO, Microsoft, nvidia and more – developing their own MOOC courses that bare a higher chance of getting you a job than almost any university. The old adage is still relevant- if you can’t compete with a realistic chance of emerging winner, join the race.

Challenges

The fear of imminent  death of traditional brick and mortar education has received a lot of comment and concerns from pundits and educators. However, as the cliche goes, the rumors of the death have been greatly exaggerated. Instead of MOOCs heralding a Gutenberg-level revolution (a.k.a. e-books), these must be seen as yet another set of bells and whistles that will help some people around the world get exposure to a huge range of topics and subjects, but won’t make much of difference to the way education works particularly in first world countries. Colleges and universities will continue to bring students to campus and train them for the job market and for graduate school, perhaps with some implementation of MOOC technology, but to expect that it will force schools to either join the on-line revolution or sink into oblivion is to look far ahead of present.

On the downside, most of the MOOCS I have joined  personally have been lecture based and not particularly engaging.  While the lecture model does have a place in education, it has often proved to be largely ineffective in supporting students thinking, reasoning, and deep understanding (things prospective employers often complain are sorely lacking in their applicant pool).

Much of the hope and hype surrounding MOOCs has focused on the promise of courses for students in poor countries with little access to higher education due to little or in some cases totally absent infrastructure.

The problem with MOOCs (if at all there is one) may well be in the design. The design at least of all the ones I have seen is pretty much the same. The course content is divided into weeks, each week having a series of video lectures, slides and readings; some have multiple choice quizzes to check understanding (seriously doubtful); some have writing assignments (often peer graded) or small projects, and discussion forums. That pretty much sums up the extent of the course. Whether a course is any good (at least for me) is primarily a function of how good the video lectures are (a point in this case is Data Science Specialization offered by John Hopkins University on Coursera) and how relevant the readings are. The quizzes and assignments have added little value; even if they are well-designed since most of them is digitally graded and  there is no meaningful feedback available.

Indian context

Most of the naysayers of MOOCs hail from first world countries where access to a decent education is a sort of entitlement. Public education is relatively well funded, universities provide access to decent facilities and quality lecturers, class sizes are relatively small, teachers are relatively well-paid, well-educated, and teaching expertise is relatively plentiful. Evaluated in this context, MOOCs are indeed of limited value.

In the developing world, all the above do not necessarily apply. Teachers are mostly overworked, underpaid, and due to severe skill shortages are often forced to teach subjects beyond their expertise. Technical subjects such as maths and science often receive short shrift. The poorer the country, the worse the shortage.

MOOCs can help solve that in a big way. By providing a well organized and directed set of courses for their students, ill-equipped teachers in the developing world can delegate the teaching to experts from the outside, and change their role from being transmitters of knowledge to coaches who guide, encourage and support their students. Here we are not just flipping the classroom, we are flipping the whole system.

In their current form however, MOOCs are far too broad in category and far too focused on adult education to be of any significant use in schools. This is where limitations of MOOCs overshadow its apparent advantages. In a developing country like India, which has focused and invested more on the tertiary education than on the primary & secondary, there aren’t too many MOOC offerings which could be utilized to bridge the deficit. But I think MOOC-type analogues tailored for the educational needs of individual countries can go a long way towards solving the educational gap between the first and third worlds.

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Statistics

I have been using MOOCs to supplement my existing knowledge. I don’t sign up in order to attend a regular course. I bet there are thousands of others like me, messing up the MOOCs metrics (read: the average course completion rates for MOOCs are not very encouraging~15%) because we only ever plan to use such courses to supplement current knowledge at out own pace. Many of the people like us never intend to stick to the course schedule and shouldn’t really count as a dropout.

As a working professional and a curious learner, I love MOOCs. I can take the classes when I need. I can fast forward through certain lectures. I can slow down others. I can quit a class when it’s usefulness for me and my particular situation has been satisfied. At times it also provided me with a reason good enough to miss classes during graduation years.

Conclusion

Not a chance they could destroy education.  MOOCs can only improve educational standards if universities use them to support and complement what they are already doing.  On their own, MOOCs cannot really teach the majority of students; students need face to face interaction to learn. This is one of the chief reasons why MOOCs have such a high dropout rate.

MOOCS are in an infant stage.  As with most new innovations, and most models of education, there are good ones and bad ones.  Are they destroying education?  Definitely not.

An enigma called Innovation

The biggest secret of innovation is that anyone can do it. The reason is simple: It’s just not that hard. Look up the word “innovate” in any dictionary and see what it actually means, instead of what you think it means. You’ll find something like this: To innovate is “to introduce something new.” That’s it. It doesn’t say you need to be a creative genius or a workaholic. It’s just three little words: introduce something new.

The key word in the definition is “new.” The common trap about newness is the assumption that new means something the universe has never seen before. This turns out to be the  most ridiculous assumption in the history of mankind. Here’s proof: Name any great innovator, and I guarantee they borrowed and reused ideas from the past to make whatever it is they are famous for.

Even in today’s high-technology world you can find easy connections between what we call “new” and ideas from the past. The World Wide Web and the Internet get their names from things thousands of years old. The first webs were made by spiders, and the first nets were used to catch fish by indigenous people around the world, thousands of years before the first computer The trick to innovation is to widen your perspective on what qualifies as new. As long as your idea, or your use of an existing idea, is new to the person you are creating it for, or applies an existing concept in a new way, you qualify as an innovator from their point of view, and that’s all that matters.

The easiest place to start is with things you do every day. Simply ask: Who else does this, and how do they do it differently? If you only know one way to do something, you’re making a big assumption. You’re betting that of the infinite ways there are to do it, the single one you know is the best. The problem is that people have to go out of their way to find  alternatives and put into practice.Many great innovators asked better questions than everyone else, and that’s part of why they were successful. It wasn’t genius, whatever that means, special top-secret brain exercises they did every morning, or even how much money they had. It was through the dedicated pursuit of answers to simple questions that they found ideas already in the world that might be of use.

Asking questions is one thing, but trying to answer them is another. There is no substitute for firsthand experience when creating things. The unique aspects of who you are, including qualities you may not like about yourself, are an asset when it comes to creative thinking. No one can see the world exactly the way that you do. This means that if you can experience, watch, or make something yourself, you may discover lessons and make observations that other people failed to notice. Those observations are the seeds of innovation. You might see an old idea or tool in a way no one else in your family, business, or city has before done before. The knowledge we have today about the universe did not come from magic books that have been sitting around waiting for us since the dawn of time. It came from curious people who not only asked questions, but followed them to places others weren’t willing to go.

Progress depends on people thinking independently and following their curiosity as far as they can, including doing things others around them refuse to try. Since long hours of work might be required to satisfy your curiosity, what’s important is how you respond to failure. Can you find the courage to respond not with embarrassment or regret, but with more questions: Why did this fail? What can I learn now? What will I do differently next time? If you have a convincing answer to each of these, you are probably well on your way.