Transition to Market Economy

Russia & China

Transition to Market Economy

“What is Transition?”

Liberalizing Economic Activity Reforming Business Activity Establishing Legal and Institutional Framework

Transition to Market Economy



The Breakup of the Berlin Wall



The Overthrow of Eastern European Communist Dictatorship in 1989

Transition to Market Economy

We can classify transition to a market economy in two groups: 1. Eastern Europe’s Transition: Poland, Hungary, and Czech Republic 2. China’s Transition

Transition to Market Economy

Centrally Planned Economy: Fixed Price Centrally Planned Investment Incentive Problem

Transition to Market Economy

Centrally Planned Economy Market Economy

Russian Transition The Common Goal: To gain membership to the European Union (EU)

Russian Transition Includes political and economic transition at the same time.

Initial transition steps resulted in steep economic declines.

The transition has involved massive, although not all together effective, privatization.

Russian Transition Soft budgets have continued Hard administrative constraints have disappeared and are being repleced with connections and corruption Debts and deficits are a real challange

Russian Transition “The Russian economy is prepared to fully take part in the world economy” Vladimir Putin

Chinese Transition China’s Unique Initial Conditions: Centrally Planned Economy Large Agricultural Force Low Subsidies to The Population Rather Decentralized Economic System

Chinese Transition •Heavy Industry Development Strategy •Capital Scarce Agricultural Economy •Low Technical Efficiency •Low Incentives •Planned Allocation System •Low Interest Rate Policy •Overvalued Exchange Rate Policy •Low Wage Rate Policy •Low Input Price Policy

Chinese Transition

To adopt Heavy Industry Oriented Development Strategy:

Declining the level of Interest Rate Agricultural Developments Acquring Living Necessities to the Population Total Value of Agriculture and Industry grew from

15%

in 1952 to about

40%

in the 1970s.

Chinese Transition China paid high price for such achievement: Low Allocative Efficiency Low Technical Efficiency

Market Reforms In China Agricultural & Rural Reform (Household Based System) Township & Village Entreprises (TVEs) State Owned Entreprises (SOEs) Special Economic Zones (SEZs) Development of Supporting Institutions Macropolicy Enviromental Reform

Chinese Transition’s Outcomes and Prospects Positive Outcomes of Reform

Problems:

Incomplete Property Rights Macroeconomic Difficulties Integration into Global Economy

Conclusion

Russian Transition Process:

• A major reason that Russia's transition has been so wrenching is that the country is remaking both its Soviet-era political and economic institutions at once. •It was impossible to set up a tax collection system capable of generating enough public resources as to fund the reforms.

• The appearance of (criminal) parallel decentralized organizations that have taken over some essential state functions.

• The incapacity to put forward clear political priorities for coherent decision making, as well as the difficulty in living up to them due to corruption phenomena

China’s Transition Process:

• China’s Communist Party prevented the turmoil. Authorities had a great control over stages of reform programs, their timing and contents. • Chinese Communist Regime was not eliminated in one night, on the contrary, communist party had made many reforms to make the transition process easier. • In this period of time there were no crises in China and reforms were completed with the support of the community.

Hazırlayanlar: Burcu Büyükerkmen Çağla Öztuna