Globalization and the postsocialist transition:
Russia and China Compared
Peter Rutland
Working Paper CSGP 07/6
Trent University, Peterborough, Ontario, Canada
www.trentu.ca/globalpolitics
Abstract
During the 20th century the two socialist giants, Russia and China, each developed their own
political and economic system that stood in stark contrast to the prevailing Western model of democratic
capitalism. In the 1990s, both countries abandoned many elements of their model, a process that coincided
with the onset of a new wave of globalization. This paper compares and contrasts the trajectories followed
by Russia and China over the past 20 years. Russia and China started off in very different situations and
they pursued radically different transition strategies. But they are both now converging on a similar model
of state-led development in the face of common global challenges and opportunities.
At first glance, the contrasts between China and Russia seem stark. In the 1990s Russia embraced
democracy and an economic “big bang,” but China maintained most of the features of Leninist party rule
while adopting gradualist economic reforms. China welcomed foreign investment, while Russia kept it at
arm’s length. The Russian path led to initial and rapid failure: economic collapse followed by democratic
collapse. The Chinese path produced 28 years of robust economic growth, and has turned China into a
leading member of the international economic community. Many Western observers believe that the spread
of capitalism will lead eventually to the spread of democracy, as it did in Taiwan, Thailand and South
Korea.
However, by 2006 the Russia/China comparison has started to change. Now the picture is more
one of convergence than divergence. Since 2000 Russia has seen political recentralization under President
Vladimir Putin. Democratic elements have been squeezed out of the political system, while the autonomy
of the business “oligarchs” has been curtailed. In contrast to Russia, the Chinese economy is significantly
more competitive and pluralist, but the Chinese Communist Party still rejects political liberalization. There
has been some devolution of power, but this stops well short of liberal democracy.
Both countries now seem to be converging on a regulated market model in which elements of
market pluralism are embedded in post-communist institutions and practices. Both China and Russia
present a common lesson for theorists of globalization: that the world is not “flat,” and that strong states
can find a niche role in the new global economic order.
INTRODUCTION
In the 1930s the Soviet Union opted for a capital intensive, heavy-industry led development
model, one that required an authoritarian state to extract the necessary factors of production from society.
The Soviets stuck with their model until it collapsed in the wake of abortive reform efforts between 1985
and 1991. China followed the Soviet example in the 1950s, with disastrous results. After decades of
economic stagnation, in 1978 the Chinese leadership started on a new path of development combining state
control with gradual marketization. By the 1990s, both countries’ search for a more effective development
strategy was caught up in the broader process of international transformation known as globalization.
While Russia experienced rapid political liberalization under Mikhail Gorbachev, followed by
system collapse, China embarked on a managed transition that involved the step-by-step introduction of
elements of capitalism while the Chinese Communist Party (CCP) retained a monopoly of political power.
The Tiananmen Square crackdown in 1989 led some to believe that Communist China was being torn by
the same profound contradictions that had sent the Soviet system into political oblivion. However, the
Chinese political system remains intact, and expectations that the introduction of capitalism must inevitably
lead to the introduction of democracy have eroded. 1
China’s transition is generally considered a success, while Russia’s is generally considered a
failure. China has doubled its GDP every decade, and has lifted 400 million people out of absolute poverty.
In key development indicators such as phone lines, internet usage, life expectancy to high-tech exports, it
has closed the gap with Russia. (See Table 1) These economic achievements have translated into a
1
Andrew Nathan, “Authoritarian resilience,” Journal of Democracy, 14, 1, 2003, 6-17.
2
substantial rise in China’s global status. In contrast the Soviet state lost half its territory and population, and
the Russian Federation has struggled to maintain its status as a great power. Although the implosion of the
Soviet state was shocking enough to Chinese leaders, equally disturbing was the collapse of Russian
society that occurred after the collapse of the Soviet state – economic recession, an upsurge in crime and
lawlessness, a falling birth rate rise and rising death rate, and a decade-long war with terrorism in
Chechnya. Russia saw its GDP fall by 40%, only recovering to the 1990 level in 2002.
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The first section of this paper examines the transition path followed by Russia and China since
1980, noting the main developments in the spheres of politics, economic reform, foreign trade, and social
structure. The second section analyses the reasons for the differences between the trajectory of the two
countries: initial conditions, leadership choices, the international context, and the learning capacity of the
respective elites. Finally the paper outlines the principal features of the regulated market consensus towards
which both countries have converged.
Globalization and pluralism
By 2006, both Russia and China have become substantially integrated into the international
economic system. International trade accounts for one half of Russia’s GDP and 60% of China’s. 2 China
joined the WTO in 2001, and Russia is close to joining. 3 Russian and Chinese companies are major players
in international capital markets: raising loans, selling shares, and acquiring foreign companies. 4 China’s
economy has been growing at an average of 9.4% a year for some 28 years; Russia has grown by 6% a year
since 1999.
To what extent has this embrace of globalization produced an increase in pluralism within these
two countries? On the political front, neither China nor Russia shows much evidence of substantial
democratization. The Chinese political system remains a one-party state, and Russia has regressed from a
shaky electoral democracy to an authoritarian presidential regime. This widening gulf between economic
progress and political stagnation is a serious challenge to the liberal paradigm laid out in such influential
works as Francis Fukuyama’s End of History and Thomas Friedman’s The World is Flat. 5 It has been a
long-standing tenet of liberalism, at least since the Enlightenment, that all good things go together, that the
tide of Progress raises all boats. 6 The past 200 years have proven that the most efficient form of economic
organization is a market consisting of multiple autonomous producers and consumers. It seems reasonable
to assume that the most efficient form of political organization may be one closely analogous to that of the
market: liberal democracy. When Joseph Schumpeter made this argument about the congruence between
market capitalism and representative democracy in 1942, it was more an act of faith than an empirical
observation, since there were barely a dozen democracies in existence and they were fighting for their
survival. 7 But by the 1990s, the correlation between democracy and economic development was more
2
See Table 1. Russian trade was 17% of GDP in 1990.
Russia started negotiations to join in 1994, and has concluded bilateral agreements with just about all 145
member countries, most recently signing an agreement with the US in November 2006.
4
In 2003 China had four firms with more than $1 bn in foreign assets: China Ocean Shipping $8.5 bn,
China National Petroleum Corp. $4.1 bn, China State Construction $3.4 bn, CNOOC $1.5 bn, China
Minmetals Corportation $1.2 bn. Russia had three: Lukoil $7 bn, Norilsk Nickel $1.5 bn, Novoship $1.0
bn. UNCTAD, World Investment Report 2005 www.unctad.org
5
Francis Fukuyama, End of History and the Last Man (Harper, 1993); Thomas Friedman, The World is
Flat. A Brief History of the 21st Century (Farrar, Strauss and Giroux, 2005).
6
This was also the view of “New Enlightenment” Chinese intellectuals in the 1980s. Wang Hui, China’s
New Order (Harvard University Press, 2003), 156.
7
Joseph Schumpeter, Capitalism, Socialism and Democracy (Harper, 1942).
3
3
firmly established, and the case for congruence was the accepted wisdom in the West. 8 There are still some
skeptics in the West, such as Fareed Zakaria, who pointed to the danger of “illiberal democracy”: populist
leaders who rise to power through elections but then violate the rights of targeted groups, such as ethnic
minorities or the wealthy. 9 The deepening of globalization over the past decade has intensified these
debates. While democracy advocates see globalization as cementing the global spread of democracy,
skeptics argue that globalization is generating a pluralism of levels and types of authority that challenge the
traditional state from above and from below. 10
Part A
THE RUSSIAN AND CHINESE CASES COMPARED
For most of the 1990s, Russia and China seemed to be headed down very different paths.
1) Politics
Looking back, one sees a surprising pattern. In both Russia and China, the highest level of democratic
debate occurred in the late 1980s, during the early experimental period when various reform paths were
being debated by the national leadership. Over time, as the economic reforms eventually took over, the
scope for political dissent actually shrank. This is the opposite of what one would expect from
modernization theory. 11
Russia emerged from the Soviet collapse with a more or less free press, a spectrum of independent
political parties and social movements, and an elected legislature and president. In stark contrast the
Tiananmen square incident in June 1989 signaled that the Chinese Communist party (CCP) would not
tolerate any more experiments with democratization. 12 In the wake of the crackdown, oppositionists were
jailed or driven from the country; reformists were purged from the ranks of the party leadership; and
intellectuals lost their faith in the possibility of the “fifth modernization” – democracy.
However, Deng Xiaoping in his 1992 tour of the south made the historic decision to accelerate
economic reform – in a bid to build a new basis for CCP legitimacy, and thereby prevent a repeat of 1989.
This danger was magnified by the dramatic implosion of the Soviet state at the end of 1991. The failure of
the August 1991 coup attempt by Soviet hardliners was a blow to CCP leftists who thought that repression
was a sufficient basis for rule. Subsequent political reforms have been limited to the spread of electoral
competition at village level, introduced in 1988; a strengthening of the oversight role of national and local
legislatures; and steps to bolster the rule of law and fight corruption. 13 None of these measures have been
allowed to infringe on the authority of the CCP. The CCP has undergone some organizational reforms to
maintain its effectiveness post-Mao – a renewed commitment to collective leadership, plus some new
norms such as retirement of aged cadres and professionalization of the party ranks. 14 It has also reached out
to co-opt new social groups into its ranks – most notably, the 2002 decision to allow private entrepreneurs
8
For the former: Adam Przeworski, Democracy and Development (Cambridge University Press, 2000); for
the latter: John Mueller, Capitalism, the Market, and Ralph’s Pretty Good Grocery (Princeton University
Press, 1999).
9
Fareed Zakaria, The Future of Freedom. Illiberal Democracy at Home and Abroad (Norton, 2003). This
was an expansion of his article “The rise of illiberal democracy,” Foreign Affairs, November 1997, 76, 6.
10
Philip G. Cerny, “Globalization and the erosion of democracy,” European Journal of Political Research,
1999, 36, 5, 1-26.
11
Minxin Pei, “China: Can economic growth continue without political reform?,” Strategic Asia 2006,
(National Bureau for Asian Research, 2006), 303-32.
12
Minxin Pei, China’s Trapped Transition, (Harvard University Press, 2006); Joseph Fewsmith, China
Since Tiananmen. The Politics of Transition (Cambridge University Press, 2001).
13
Pei, ibid., ch. 2; Fewsmith, ibid. Even so, the Standing Committee of the National People’s Congress
only rejected government-proposed bills three times in 28 years. A more positive statistic is that 21% of
lawsuits filed against government officials succeeded in 2002. Pei, ibid., 60, 67.
14
Fewsmith, 8.
4
to become CCP members. 15 Groups that are deemed threatening to the state have been suppressed – such as
an effort to create the opposition China Democracy Party in 1998, or the mass demonstrations of Falun
Gong in 1999. 16
Ironically, the quality of Russian democracy arguably peaked in 1990-91, the last year of the
Soviet Union, when there was an aggressive free press, considerable political mobilization, and
unpredictable elections. 17 During the years of President Boris Yeltsin (1991-99) elections were regularly
held, and the results generally reflected the will of the voters, although the mass media were heavily biased
in favor of the president. 18 But in 1992-96 politics settled down into an ugly standoff between a reformist
president and an opposition-dominated parliament. After 1996 the level of competition steadily eroded
from election to election. The situation has further deteriorated under Vladimir Putin, who was elected
president in March 2000. 19 Elections are still held on schedule, but state control over the media (especially
TV) and the restrictions on organized political opposition have been stepped up. After the 2003
parliamentary elections Putin established secure control over the legislative branch, and in 2004 he
abolished popular elections for regional governors, one of the few remaining elements of electoral
contestation (about one third of incumbent governors had lost their re-election bids).
The most well-known democracy index is that compiled by Freedom House since 1972, grading
the level of political rights (PR) and civil liberties (CL) on a 1-7 scale, with 1-2 being “free” and 6-7
“unfree.” Freedom House regarded the new Russian Republic as “partly free,” ranking it 3 for PR and 4 for
CL from 1993 through 1997. Russia’s grade slipped to 4/5 in 1999 and 5/5 in 2000-2003. In 2004 Russia
was relegated to the category “unfree”, with a 6 for PR and 5 for CL. 20
There has been much less variation in the political climate in China, especially since 1989.
Freedom House scored China a 7/7 from 1972 through 1977, when it jumped to 6/6. In 1989 it slipped back
into 7/7 and stayed there until 1998, when it rose to 6 for civil liberties and 7 for political rights. Freedom
House has kept that score for China through 2005, arguing in its most recent report that “the country
remains an authoritarian state under the complete control of the Chinese Communist Party.” 21 Among the
few positive remarks in that report is recognition of the 2002 decision to allow private entrepreneurs to join
the CCP; the observation that “security forces are generally under civilian control;” and that “The gradual
implementation of reforms over the past several decades has freed millions of Chinese from CCP control of
their day-to-day lives.” Although some interventions in personal life continue, such as the one-child policy,
the registration system has been eased, though not entirely eliminated. (Persons without a residence permit
are denied health and education benefits.) Likewise in Russia personal daily life is quite free, and the
registration system was legally abolished. In both countries there has been extensive privatization of urban
housing, giving individuals exposure to and a stake in the new market economy.
NGOs have flourished in both Russia and China, some with international links. 22 More than 200
foreign NGOs work in China investing an estimated $200 mn a year, but not until a new law was
introduced in 2005 were they allowed to legally register. 23 However, NGOs which are seen as politicallymotivated have been the target of state crackdowns. In Russia, even under Yeltsin some groups were
15
Bruce Dickinson, “Threats to party supremacy,” Journal of Democracy, 14, 1, 2003, 25-35. 20% of
entrepreneurs are members, but the CCP has branches in less than 1% of the 1.5 million private enterprises.
16
Dangerous Meditation: China’s Campaign Against Falun Gong (Human Rights Watch, 2002).
17
Lilia Shevtsova, Yeltsin’s Russia: Myths and Reality (Brookings Institution, 1999).
18
Richard Rose and Neil Munro, Elections Without Order: Russia’s Challenge to Vladimir Putin
(Cambridge University Press, 2002).
19
Lilia Shevtsova, Putin’s Russia, (Carnegie Endowment for International Peace, 2nd ed. 2005).
20
Robert W. Orttung, “Russia,” Nations in Transit 2005 (Freedom House, 2005), at
http://www.freedomhouse.org. That puts Russia’s political system below that of Afghanistan, Bahrain or
Burkina Faso.
21
Freedom House, China Country Report, 2005, http://www.freedomhouse.org
22
Sarah Henderson, Building Democracy in Contemporary Russia. Western Support for Grassroots
Organizations (Cornell University Press, 2003).
23
Tang Yuankai, “More room for foreign NGOs,” Bejing Review, 20 October 2005.
5
harassed, and Western observers were alarmed by the 1997 law on religious organizations which forced all
congregations founded during the previous 15 years to re-register. The Putin administration got more
serious about curtailing such groups’ activities after Georgia’s “rose revolution” in 2003 and the “orange
revolution” in Ukraine the next year, both of which were actively assisted by Western-funded NGOs. 24 A
new more restrictive law requiring all foreign-based NGOs to reregister came into effect in Russia in April
2006. 25
2) Economic reform
Russia launched price and trade liberalization in 1992, accompanied by a program of mass privatization of
state-owned factories and farms. The government was unable to control monetary and fiscal deficits, which
meant that high inflation and macroeconomic instability prevailed until stabilization was finally achieved in
1999. By 1995 70% of the nation’s assets had been shifted into legally private corporations. 26 The
privatization program was hijacked by a small group of well-connected insiders (and a few outsiders),
leaving the Russian public feeling cheated and the Russian treasury depleted (both in terms of assets and
current taxes). The chaos and uncertainty engendered by the privatization process made it difficult for
Russians to invest, while foreign investors were largely shut out. The Russian government wanted to keep
the “crown jewels” of the economy – oil, gas and metals – in Russian hands. Foreign companies that did
come in to these key sectors were usually burned by opaque property rights, unreliable courts and the
vagaries of the licensing process.
Putin has both consolidated and rolled back the reforms since taking office. On one hand he has
created a more robust legal infrastructure, increased taxation, and oversaw seven years of economic growth
averaging 6% a year. On the other hand he has strengthened state control over key industries. Although the
basic structures of a market economy had emerged by 1999, free entry was still limited, oligopolistic rents
were high, and the incentives to efficiency and investment were low.
Beijing’s reforms were middle-up rather than top down in nature – the center encouraged and
tolerated initiative from below, and local entrepreneurs and politicians responded to the challenge. There
was a spirit of pragmatic exploration rather than top-down declarations. The operative metaphor in China
was “feeling the stones as you cross the river,” 27 while in Russia one of the reformers’ favorite sayings was
that “you cannot cross a chasm in two jumps.” 28
China started in 1978 with the freeing of peasant farmers from plan controls through the
introduction of the household responsibility system. This boosted output and also started freeing labor for
factory work. This was followed by granting permission for local state authorities to set up profit-seeking
town and village enterprises (TVEs). State owned enterprises (SOEs) were likewise freed to become more
entrepreneurial, including leasing units to managers. The seventh five year plan that began in 1986
encouraged coastal regions to engage in manufacturing assembly for foreign markets. Between 1978 and
2003, China recorded an annual growth rate of 9.4%, while per capita income rose from $150 in 1978 to
$1,700 in 2005. 29 China maintained the state sector with its social guarantees, initially through budget
subsidies and then through soft credits via the four state-controlled banks. Over time the rapid growth of
the private sector meant that the state sector’s share of the industrial labor force fell from 80% to 29%
24
Graeme Herd, “Colorful revolutions and the CIS,” Problems of Post-Communism, 52, 2, March 2005.
Anastasia Kornya, “NGOs fail the test,” Vedomosti, 29 June 2006.
26
Andrew Barnes, Owning Russia. The Struggle Over Factories, Farms and Power (Cornell University
Press, 2006).
27
Fewsmith, op. cit., 83.
28
George Taber, “Rx for Russia: Shock therapy,” Time Magazine, 27 January 1992. Taber writes that the
well-known advisor Jeffrey Sachs “frequently cites the old Russian maxim that you cannot cross a chasm in
two jumps.” The maxim seems to have originated, in English at least, a century ago with British Prime
Minister David Lloyd George.
29
Pei, op. cit, forthcoming 2006.
25
6
1978-2000. 30 The OECD concludes that “the changes in government polices have created a largely marketoriented economy in which the private sector plays a key role.” 31 Small and medium SOEs began to be
privatized in 1994 – though the government avoided that term, instead talking of restructuring and asset
transfers. In 1997 a major program of restructuring SOEs was launched, leading to wage arrears and
layoffs. The government softened the blow by introducing severance pay at 60% of the previous wage for
three years. Overall, the state planners showed caution and flexibility in introducing these reforms. For
example, price controls on grain were lifted in 1993, but restored in 1995 after the move triggered shortages
and price gouging. In 2001 controls were once again eased in grain consuming regions. 32 They have also
tried to stimulate development in interior provinces, and to guarantee free education through ninth grade in
all regions.
While the Chinese state kept firm control of the banking system, in Russia the lifting of controls
led to the sprouting of 1,500 private banks in the early 1990s, most of them “pocket banks” attached to
individual firms. Many banks collapsed in the August 1998 financial collapse, enabling the state-owned
Sberbank to strengthen its dominant role as the depository of personal savings. The Chinese reforms began
in the countryside, but in Russia the organization of farm production was largely untouched by the whole
reform sequence, with private farms still accounting for less than 5% of food production.
Russia in 1992 launched a massive top-down privatization of firms through the formal creation of
legally independent corporations. In this they were following Western advice, which stressed the
importance of creating clear property rights in a rule of law system. China pursued a very different path: no
mass privatization, but the evolution of a hybrid model of SOEs and TVEs behaving as profit-seeking
entities with unclear property rights. These Chinese enterprises were also deeply embedded in strong local
and even family networks. 33 One important step was the 1998 decision ordering the CCP and army to
divest themselves of businesses.
In practice, the Russian approach failed to generate the transparent and secure property rights that
the reformers claimed as their goal. There were hundreds of cases of organized crime groups seizing
control of enterprises by force, and loopholes in the 1998 bankruptcy law provided a legal channel for such
expropriations, aided by compliant local courts. Putin’s expropriation of the leading private oil company
Yukos in 2003-5 and Shell’s forced sale of its majority stake in Sakhalin II in December 2006 are two
striking examples of the political contingency of property rights.
So in practice the weakness of property rights is something that unites rather than divides the
Russian and Chinese cases. And in neither Russia nor China has the state given up control over key
strategic sectors such as telecommunications or power generation. 34 Small steps have been taken in both
countries to create competition in these sectors and create a modern regulatory framework, but in practice
political dirigisme is still decisive.
Regional and social inequalities sharply increased in both countries as a result of the reforms. In
Russia the Gini coefficient rose from 0.29 in 1992 to 0.40 in 1997, where it stayed through 2004, while in
China it went from 0.28 to around 0.45 1978-2000. 35 In Russia the boom regions were Moscow (where the
oligarch headquarters were located) and a handful of oil and gas producing regions, notably Tyumen. In
China it was the coastal provinces that saw the most successful TVEs and export plants. A key part of the
Chinese reform was the switch in 1994 from tax-sharing between federal and provincial authorities to a
flat-rate contribution, above which the region could keep additional revenues. In return for this devolution,
Deng got strong support from regional leaders for his reform efforts. 36 In both countries the tax-gathering
30
Pei, op. cit, 2006, 3. SOE share of industrial output fell from 78% to 41%.
OECD, Economic Survey of China 2005 (OECD, 2005).
32
Pei, op. cit, 2006, 97-102.
33
Shu-Yun Ma, “Understanding China’s reform,” World Politics, 52, 4, 2000, 586-603.
34
Margaret Pearson, “Institutions and norms of the emerging regulatory state. The business of governing
business in China,” World Politics, 57, 2, 2005, 296-322.
35
Rosstat, www.gks.ru; Pei, op. cit, 2006.
36
Fewsmith, op. cit, p. 46.
31
7
capacity of the central state shrank and then recovered in the course of the reforms. In China central
government revenues fell from 31% of GDP in 1978 to 10.7% in 1995, rebounding to 17.1% in 2001. 37
Similarly, Russian federal revenues fell to 9.2% of GDP in 1998, recovering to 17.1% in 2001. 38
3) External integration
Both countries relied on external integration as a key driver of their economic transition. China’s trade
tripled in every decade, raising its share in world trade from 0.8% in 1978 to 7.7% in 2005. But because of
the 1990s slump Russia’s share of world trade fell from 3.4% in 1990 to 1.5% in 2000 and 1.8% in 2005. 39
China’s economic regeneration was led by an explosion of manufacturing assembly plants in coastal
locations, importing components and raw materials and exporting manufactured goods to foreign markets.
40
China’s key resource was its seemingly limitless supply of cheap labor. Russia had neither the labor
reserves; nor the ports close to global shipping routes; nor the entrepreneurial spirit; nor the political will;
to embrace this kind of export manufacturing-led growth path.
The Chinese strategy required a prominent role for foreign capital, while Russia was much less
enthusiastic about foreign direct investment (FDI). 41 On the other hand, Russia threw open the doors to
portfolio investors, while China kept them at arm’s length. China attracted an average of $12 bn FDI 198595, and in 2004 pulled in $60 bn. 42 Russia averaged $1.3 bn FDI 1985-95 and $11.7 bn in 2004. (And in
Russia this was balanced by an annual outflow of $869 mn in 1985-95 and $9.6 bn in 2004). By 2006
China had accumulated a net stock of $207 billion FDI (15% of all capital), while Russia had only $17
billion. While most Western observers see this influx of FDI as an unqualified good thing, some skeptics
suggest it points to weaknesses in the Chinese economy, such as dependence on foreign expertise and
inability to channel domestic savings into productive investment. 43
To facilitate this inflow of capital China created Special Economic Zones with favorable tax and
regulatory conditions. This process was greatly facilitated by the existence of Chinese capitalist exclaves in
Hong Kong and Taiwan, part of the 50 million-strong Chinese diaspora whose annual income is equal to
two-thirds of China’s gross domestic product. 44 Though foreign investors were encouraged, they were
typically forced into joint ventures with their own stake capped at 50%.
Despite this opening to foreign trade and investment, the Chinese preserved tight controls on
capital flows. The renminbi is convertible on current account but not on capital account, and has been
pegged to the dollar since 1995, at a rate equal to about 25% of PPP. (In July 2005 the peg was switched to
a basket of currencies.) Thanks to these controls, China has maintained its cheap labor advantage, and has
prevented the speculative capital inflows and outflows that have devastated other developing economies.
They even managed to ride out the 1997 Asian financial crisis largely unscathed. The under-valuation of
the renminbi has attracted growing criticism from the US, concerned at its ballooning trade deficit with
China, and from China’s low-wage competitors who have lost business to their under-priced rival. But for
37
Dali Yang, “State capacity on the rebound,” Journal of Democracy, 14, 1, 2003, 43-50.
OECD, Economic Survey: Russian Federation 2004 (OECD, 2004).
39
Martin Wolf, “China should risk bolder trials,” Financial Times, 6 June 2006; Giorgio Navaretti,
“Patterns of trade and protection,” World Bank, May 2004; WTO, “World Trade 2005,” 11 April 2006.
40
Shang-jin Wei, ed., The Globalization of the Chinese Economy (Edward Elgar, 2002);
Peter Nolan, Transforming China: Globalization, Transition, and Development (Cambridge University
Press, 2004); Nicholas Lardy, Integrating China into the Global Economy (Brookings Institution, 2001).
41
Mary Gallagher, “Reform and openness: Why Chinese economic reforms have delayed democracy,”
World Politics, (April 2002), 54, 3, 338-372.
42
UNCTAD, World Investment Report 2005 www.unctad.org
43
Yasheng Huang, Selling China: Foreign Direct Investment During the Reform Era (Cambridge UP
2003).
44
Brunson McKinley, “Migration is here to stay, so get used to it,” International Herald Tribune, 24 June
2005.
38
8
practical purposes the asymmetrical US-China trade relationship has served both sides well for the past two
decades.
In contrast Russian reformers largely followed Western advice to pursue external liberalization –
in part because IMF credits were conditional on such policies. 45 Russia lifted many capital controls in
1992-94 and allowed the ruble to float, trying to use the exchange rate as the nominal anchor of the
stabilization program. Dollars flooded in, forming a parallel currency for most of the 1990s. Most of the
proceeds from Russia’s oil and metals export boom were hidden in offshore accounts, while some $40 bn
of speculative capital flooded into the country – mainly to cover the government’s yawning fiscal deficit.
This reckless borrowing led to the August 1998 financial crash, which was triggered by the slump in the
price of oil following the 1997 Asian crisis. August 1998 saw a 75% devaluation of the ruble, an effective
default on foreign loans, and the destruction of the assets of most of the financial oligarchs. The crisis
ironically cleared the decks for an economic recovery by making Russian food and manufactures more
competitive with imports. More importantly, it enabled a renaissance of state power by fatally weakening
the oligarchs financially and politically.
4) Winners and losers
In Russia the radical reforms of the early 1990s took place during a massive breakdown of economic and
political institutions, with GDP contracting by 40% 1989-96 and inflation of 1400% in 1992. The general
breakdown in law and order also contributed to the pool of reform losers: millions of people lost their
savings through the collapse of fraudulent banks and “pyramid” investment schemes in 1992-95. In contrast
the Chinese reforms took place in an economy that was rapidly rising. The Chinese talked about “growing
out of the plan,” while Russia was effectively “falling” out of the plan. 46 In Russia the losers from
economic reform clearly outnumbered the winners – but in China the proportions were reversed, at least
until the mid-1990s. 47 This made it easier for the state to protect the potential and actual losers in China
than in Russia. On top of which the CCP continued to function and the pre-reform state structures
continued to operate. The Russian state’s capacity to raise taxes was eroding so rapidly that efforts to
protect reform losers were fruitless.
In both countries the broad sociological portrait of the losers looks similar: the elderly, the
unskilled, peasants in remote villages. However, formerly privileged sectors of Russian society were also
hit hard – the intelligentsia, state-sector employees such as teachers and doctors, and the workers and
researchers of the defense industry complex. Such groups were not so dramatically affected by the Chinese
reforms. Increased participation in international trade and production chains seems to increase inequality
within the participating countries, both by region and by social class. It also stimulates labor migration,
both within the country in question and across international borders. (Russia hosts an estimated 10 million
migrant workers, mostly from the former Soviet republics.) These dynamic changes are likely to cause
social tension and protests and increased demands on the government for services from law and order to
housing and education.
Turning to the winners, the picture in the two countries looks rather more similar. Broadly
speaking, the young and the entrepreneurial did well, and current and former party and state officials (and
their children) tend to dominate the ranks of the new capitalist class in both countries. In Russia there was a
more extreme concentration of wealth in the hands of the new oligarchs than in China. The more
uncontrolled nature of the privatization; the weakness of law enforcement agencies; and the resource-base
of the economy, all left more scope for the rapid accumulation of vast fortunes. By 2006 Forbes magazine
45
Randall Stone, Lending Credibility (Cornell University Press, 2004).
Barry Naughton, Growing Out of the Plan: Chinese Economic Reform, 1978-1993 (Cambridge
University Press, 1995).
47
Wang argues that reform was beneficial to all social groups between 1978 and 1993, but with rising
inequality it has become more of a zero-sum game since then. Shaoguang Wang, “The problem of state
weakness,” Journal of Democracy, 14, 1, 36-42, 40.
46
9
was reporting 33 dollar billionaires in Russia, but “only” eight in China.48 Estimating the oligarch’s
fortunes was made possible by the appearance of a vibrant but volatile stock market in which shares of the
companies were floated.
In contrast to the Russian oligarchs, Chinese tycoons stay in the political shadows, colluding with
regional political bosses but avoiding anything like a direct challenge to the national state.49 Pearson argues
that “although China’s business elite is a clearly defined group, it lacks horizontal ties that bind the
members of the group together and facilitate collective consciousness and collective action.” 50 Clearly, the
political invisibility of the tycoons is connected to the lack of democracy and the continuation of CCP rule.
It may also have roots in the Confucian culture of disdain for merchants, and has a parallel in the historical
role of the Chinese merchant diaspora, who form a rich and influential but politically vulnerable minority in
south-east Asia.
5) The degree of pluralism
To what extent has the spread of market relations translated into a dispersal of political and economic
power? In both countries, the traditions of one-party rule have created a culture inimical to pluralism, in
which politics is seen as a “winner take all” game. The key liberal argument for pluralism is that you
cannot always be sure of being a winner, so it is better to share power and grant rights to all political actors.
But in neither country has the political elite accepted this idea. Both countries have preserved one-party
systems based on clientilistic networks in which particularism rather than pluralism is the structuring
principle of political life.
Gilboy writes that “China’s unreformed political system suppresses independent social
organization and horizontal networking and instead reinforces vertical relationships.”51 Gilboy sees this as
a barrier to China’s long-term economic development, since it fragments China’s domestic markets and
hinders the emergence of nationally-competitive firms. It also makes the economic more dependent on
imports of foreign technology and expertise.
In Russia, the rapid privatization of a highly-centralized economy saw many state monopolies
handed over to private owners. Successful entrepreneurs created conglomerates which absorbed their rivals
and pursued vertical integration in their chosen sector. By 2001, according to a World Bank study of
industrial concentration, the country’s 23 largest firms accounted for 30% of Russia’s GDP, and these firms
were effectively controlled by a mere 37 individuals. 52 Some firms were not broken up, but were privatized
as state-controlled monopolies – most notably Gazprom (natural gas), UES (electricity), the Russian
Railways, and Transneft (oil pipelines). In addition to the national oligarchs, many regional markets were
controlled by local monopolists. There was some evidence to support the pluralism hypothesis at regional
level – in that provinces dependent on a single wealthy firm were less likely to have competitive electoral
politics than regions with several competing economic elites. 53 The former is more common than the latter.
Likewise in China devolution tended to produce “feudal lord economies,” controlled by a unified local elite
who erected barriers against competition from other regions. 54 Since 1998 the government recentralized
48
India has 23 billionaires. Forbes, April 2006, at http://www.forbes.com/billionaires/
For example they are absent from the national legislature, in contrast to the Russian case – Margaret
Pearson, China’s New Business Elite: The Political Consequences of Economic Reform (University of
California Press, 1997), 111. Bruce Dickson, Red Capitalists in China: The Party, Private Entrepreneurs,
and Prospects for Political Change (Cambridge University Press, 2003)
50
Pearson, ibid., 139.
51
George Gilboy, “The myth behind China’s miracle,” Foreign Affairs, 83, 4, July 2004, 33-48.
52
World Bank, From Transition to Development, April 2004, www.worldbank.org.ru.
53
Kelly McMann Economic Autonomy and Democracy. Hybrid Regimes in Russia and Kyrgyzstan
(Cambridge University Press, 2006); Kathryn Stoner-Weiss, Local Heroes: The Political Economy of
Russian Regional Governance (Princeton University Press, 2002).
54
Fewsmith, op. cit, 40.
49
10
administration through the creation of regulatory agencies not answerable to local authorities. This has been
partly successful, though it has served more to strengthen provincial rather than federal authorities. 55
The sudden appearance of the Russian oligarchs took everyone by surprise. Many in the West
welcomed their appearance as a sign that capitalism and pluralism were taking root in Russian soil.
However, their ability to acquire and retain their assets rested on their close relations with the political
establishment. And the dramatic rise in the political power of the Russian oligarchs was followed by an
equally dramatic decline. Their power peaked in 1996, when they helped Yeltsin win reelection by
providing cash and favorable media coverage. But then they slipped into internecine conflict when it came
to dividing the spoils in the remaining rounds of privatization. The oligarchs did not have a mechanism for
resolving disputes among themselves, other than appeal to Boris Yeltsin. Moreover Yeltsin’s final term as
president was due end in March 2000, and there was no procedure in place for picking a successor.
The oligarchs were severely weakened by the 1998 financial crash, but still played an important
role in the 1999 parliamentary election, bankrolling a variety of opposition parties. Yeltsin resigned and
appointed Prime Minister Vladimir Putin as “acting president” in December 1999. After Putin won election
in March 2000 he started an energetic campaign to strip the oligarchs of their political influence. Putin’s
power rested on his command of the “repressive apparatus;” the broader “administrative resources” of the
presidential administration; and his surprisingly deep base of popular support. His first step in 2000 was to
deprive the oligarchs of the two TV channels that they controlled. In 2003 the most politically active
oligarch, oil magnate Mikhail Khodorkovsky, was jailed on tax fraud charges, clearing the stage for a
sweeping victory for the pro-government United Russia party in the December 2003 parliamentary
elections. The assets of Khodorkovsky’s Yukos company were then renationalized. By 2006 60% of the oil
and gas sector was back in state hands. Officials from Putin’s presidential staff were appointed to head the
boards of these SOEs, and by 2005 it was clear that a new system of state corporatism was taking shape,
spearheaded by a team of ex-KGB officials handpicked by Putin. The post-Soviet state bureaucracy had
asserted its dominance over the newly-minted capitalist oligarchs.
The peak of pluralism in Russia was probably 1997-99, when Yeltsin’s administrative capacity
was at a nadir and the succession question left the future of the Russian polity wide open. The economy had
been sufficiently liberalized to enable the oligarchs to enrich themselves, but not so much as to expose
them to effective competition (from foreign companies, for example). At that time Joel Hellman published
an influential article in which he argued that the oligarchs’ newly-acquired wealth gave them the ability to
stop the reform process half way – such that the second stage that would usher in competitive market
capitalism may never materialize. 56 Hellman failed to foresee the possibility of a resurgence of state control
(as did the oligarchs themselves). Most Western observers assume that the state corporatism that Putin has
put into place is bad for market competition, bad for democracy, and bad for Russia, in that it may not be
able to sustain long-term economic development.
Grass-roots pluralism is present in both Russia and China, but is sporadic and disorganized. In
Russia, the state discourages the formation of new groups and has succeeded in incorporating the most
powerful interest groups into peak organizations that are loyal to the state – as is the case for labor unions
and employers’ associations. 57 There are occasional mass protests in response to government actions, such
as the pensioners’ demonstrations against monetization of social benefits in spring 2005, or
environmentalist protests in the spring of 2006 that successfully stopped a plan to build an oil export
pipeline along the shore of Lake Baikal. The most successful independent groups have been those
organized around single issues, such as the Soldiers’ Mothers movement, or the groups of defrauded
investors.
55
Andrew Mertha, “China’s soft centralization,” China Quarterly, 184, December 2005, 791-810.
Joel Hellman, “Winners take all. The politics of partial reform in post-communist transitions,” World
Politics, 50, 1, January 1998, 203-34. Pei (2006) uses Hellman’s partial reform trap to explain the existence
of stagnation in China.
57
Peter Rutland, “Business and civil society in Russia,” in Al Evans, Laura Henry and Lisa Sunstrom
(eds.), Russian Civil Society: A Critical Assessment (ME Sharpe, 2006), 73-94.
56
11
In China, organized dissent is not allowed, but the reforms stimulated a broad range of locallyspecific protests in the 1980s from workers affected by wage arrears and the depredations of corrupt
officials. 58 Protests stepped up after a restructuring campaign was launched for SOEs in 1997, leading to
many lay-offs. At the same time there was a mounting wave of disputes in rural regions against local
authorities engaging in land seizures and levying illegal taxes. 59 87,000 violent protests were reported in
2005, and in June 2006 the government responded with a $42 billion rural assistance program. 60
Corruption is a debilitating problem for both countries, a drag on efficiency and a turn-off for
foreign investors. 61 Its practice is so commonplace at both high and low levels that bribery and clientilism
seem to be the glue holding the political system together. 62 The phenomenon is somewhat different in the
two countries: Chinese guanxi are more reciprocal and sociologically embedded than Russia’s blat,
although both translate as “connections.” 63 The character of corruption in Chinia shifted after 1992 as
marketization took root and the role of guanxi diminished. 64 Leaders in both Moscow and Beijing say that
battling corruption is a top priority, and there are occasional exemplary arrests, but these actions barely
make a dent in the problem. Anti-corruption campaigns threaten the unity of the elite, since they may
trigger bitter factional battles that further undermine the elite’s legitimacy in the eyes of the public.
6) Future prospects: stability or instability?
According to conventional Western assumptions about the congruence of political and economic liberalism,
the current situation in Russia and China is unsustainable. In both countries, the economic system is
significantly more market-driven and hence pluralist than the political system. “The market’s irresistible
force is meeting the party’s immovable object. At some point, one of them must surely give.” 65 Liberals
assume that a breakthrough to democracy is still possible and necessary in both countries. Pessimists expect
the state to take more steps to rein in the market – jailing businessmen, nationalizing private companies,
erecting protectionist barriers.
Moves by the CCP to broaden the political elite to include businessmen have exposed the
contradictions within a regime that embraces capitalism while maintaining Marxism-Leninism as its
official creed. The dismantling of the Maoist-era social safety nets, and the never-ending battles with
corruption, also raise doubts about the long-term viability of the Chinese model. The country is highly
vulnerable to cyclical and exogenous shocks – the bursting of the property bubble; the collapse of the
pyramid of bad loans to loss-making SOEs; a slump in demand for China’s manufacturing exports; health
58
Timothy Weston, “The Iron Man weeps,” ch. 3 in Hays and Rosen, op. cit.; Elizabeth Perry and Mark
Selden (eds.), Chinese Society. Change, Conflict and Resistance (Routledge, 2000).
59
Patricia Thornton, “Comrades and collectives in arms,” ch. 4 in Hays and Rosen, op. cit.
60
Edward Cody, “This time, officials respond to farmers’ protest with pledge to review land deal,”
Washington Post, 28 June 2006.
61
Transparency International’s Corruption Perceptions Index, based on surveys of international
businessmen, rates Russia 126th out of 159 countries surveyed in 2005, with a score of 2.4 out of 10, while
China is seen as less corrupt, ranked 78th with 3.2. The situation is unchanged since 1998, when Russia
ranked 52nd (out of 85) with 2.4, and China 76th with 3.5. www.transparency.org
62
Pei, op cit., 2006, ch. 4; Yan Sun, Corruption and Market in Contemporary China (Cornell University
Press, 2004.
63
Alena Ledeneva, “Informal practices in changing societies. Comparing Chinese Guanxi and Russian
blat,” University of London School of Slavonic and East European Studies, Working Paper no. 45,
September 2003.
64
Sun, op. cit. Sun’s data suggest that the number of cases did not substantially increase in the 1990s,
although the author herself does not highlight this point. Table 1.2 shows the number of economic crimes
fell from 65,000 in 1992 to 35,000 in 1999, and Table 1.8 shows the number officials investigated rose
from 150,000 1992 to 175,000 2001.
65
Martin Wolf, “An autocracy of bureaucrats can only crush China’s growth,” Financial Times, 31 May
2006.
12
crises and ecological disasters. 66 This all leads Pei to conclude that without democratic reform, economic
growth will stagnate and regime will be face a series of mounting internal challenges, 67 though his
pessimism is not shared by all China watchers. 68 The international climate that was so favorable for
China’s export led growth cannot continue indefinitely. At some point the US will stop buying on credit,
and even before that India and Vietnam may undercut China’s low-wage advantage.
In a world replete with failed and failing states, the Chinese state still looks fairly effective. It is
still able to identity problems and deal with them, to complete massive projects such as the Three River
Gorges dam or the building of pipelines from Kazakhstan. Even their ability to create a system to
effectively censor the Internet is something of a technological and political achievement. 69 Corruption is
indeed a severe problem – but the state has recognized the seriousness of the situation, and has shown the
ability to arrest thousands of top officials, even including a Beijing mayor and two governors. 70 Russia has
been less decisive in this regard. Putin’s anti-corruption campaigns have taken down top private
businessmen and some police generals, but it was not until 2006 that a sitting governor was arrested.
There are also plausible crisis scenarios in Russia’s near future. The main source of uncertainty is
the fact that in Putin’s second and final term (according to the constitution) will expire in 2008. Will the
constitution be amended to give him a third term, or will he follow Yeltsin’s example and leave office after
picking a chosen successor? There are opposition parties in Russia, and there are private businessmen with
the resources to turn them into electoral winners if the state would give them access to the television
airwaves. It is very possible to imagine that divisions within the Kremlin elite might lead to a breakdown in
the tight media controls that Putin has put in place, and a reemergence of the sort of electoral pluralism that
was a real threat to the Kremlin’s power as recently as the 1999 parliamentary election.
Part B
THE SOURCES OF DIFFERENCE
In explaining the differing trajectories of transition, four issues will be discussed:
1) initial conditions (i.e. structure)
2) leadership choices (i.e. agency)
3) the impact of globalization
4) the leaders’ learning capacity
1) Initial conditions
Looking at the initial situation in Russia and China in 1980, few outsiders would have predicted the extent
to which capitalism would penetrate those countries by 2000. And it would have been equally hard to
suggest which country would be more successful under capitalism. Did Russia’s higher level of
development make it easier to embrace capitalism, or did that mean that the leaders were shielded from the
need for radical change?
66
Gordon Change, The Coming Collapse of China (Random House, 2001).
Pei, op cit, forthcoming 2006.
68
Andrew Nathan, “Present at the stagnation,” review in Foreign Affairs, 85, 4, July 2006, 177-82.
69
Pei, op. cit., 2006, 84-88.
70
Yan Sun provides a list of 21 such officials 1986-2004 – op. cit, 49.
67
13
i)
Similarities
Prior to 1914, “there were really only two countries of any economic significance that
were not on gold, China and Russia.” 71
Both Russia and China are large autonomous countries with strong state traditions. They both turned their
backs on the global capitalist system in the 20th century, and adopted communist systems. Prior to that, they
had emerged historically as land empires in the center of Eurasia. This left them with a deep legacy of a
strong central state with a distinct identity and legitimacy. Correspondingly they had weak traditions of
civil society. The state acted as a gatekeeper for their interactions with the outside world, which was hostile
and threatening. Both had been subject to military defeats in the 19th -early 20th century and loss of territory,
and had emerged bloodied but victorious from WW2. Both Russia and China have distinct cultures, tracing
their roots and maintaining their identities outside of European culture. However, Russia’s interactions with
Europe were much more intense, so Russia is a hybrid with strong European elements, unlike China.
Their size and political independence gives them a self-identity as front-rank powers, rule-makers
rather than rule-takers in the international system. China’s 1.3 billion people dwarfs Russia’s 147 million –
but Russia is still much larger than the next biggest European state (Germany, with 82 million).
Both countries currently see themselves – and have long seen themselves – as economically
backward compared to the West (since the early 19th century in the case of China, since the 16th century in
the case of Russia). “Modernization” is a term both countries’ leaders still use when discussing their goals.
ii) Differences
a) Development level. At the start of the transition process the Soviet Union was at a much higher
level of development than China. It was an urban, educated society: only 15% of the Soviet workforce were
peasants compared to 80% in China. The average living standard was around $5,000 PPP, ten times the
Chinese level. The USSR had some world-class industries (nuclear power, aviation, weaponry). But China
had a huge pool of under-utilized labor in the villages, which could be tapped to dramatically increase
productivity. 72
b) Resource endowment. Russia is the world’s no. 2 oil producer and no. 1 natural gas producer.
It is a major exporter of a range of ferrous, non-ferrous and precious metals, and since 2004 has once again
become a grain exporter. China in contrast has an acute shortage of arable land and of many natural
resources, being a net oil importer since 1993. Russia’s economic development is increasingly shaped by its
dependence on oil and gas, which account for 60% of export earnings.
c) Superpower status. During the Cold War the Soviet Union was recognized as a global
superpower, a military and political threat to the United States, while China was on the margins of the
international system. In the post-Cold War world, Russia is seen as a declining power and China as a rising
power. This difference undoubtedly weighs heavily on the minds of the respective leaders, though it is hard
to predict in what direction it pushes their behavior.
d) Ethnic diversity. The Soviet Union was a multi-national empire where Russians only made up
only 53% of the population, while China is 90% Han. This is the main factor explaining why the Soviet
Union collapsed while China is still intact. Even in today’s Russian Federation, ethnic Russians only make
up 80% of the population. Still, the Chinese state faces ethnic challenges in Xinjiang and Tibet – not to
forget Taiwan. These plus the existence of strong regional identities among the Han Chinese mean that
preserving the integrity of the state is just as much of a concern to Chinese leaders as to those in Russia.
71
Jeffry Frieden, “Is globalization here to stay?,” Transcript of an IMF Center Book Forum, 29 March
2006. www.imf.org
72
Jeffrey Sachs and Wing Thye Woo, “Structural factors in the economic reforms of China, Eastern
Europe, and the former Soviet Union,” Economic Policy, n. 18, 1994, pp. 102-145.
14
e) Regime longevity. The Soviet Union was a mature regime, and it looked and felt its age. It had
been in existence for 68 years when Gorbachev came to power in 1985, and he represented the sixth
generation of political leadership. In contrast Deng Xiaoping, born in 1904, represented only the second
generation of CCP leadership, and he had been present at the inception of the party. One might suppose that
this proximity to the revolutionary founding would have made Chinese leaders more ideologically
inflexible. It turned out to be just the opposite way: their connection to the revolution gave them the
legitimacy and confidence to adapt CCP policies in light of changing global realities.
2) Leadership choices
i) Pace and sequencing.
It is often said that the key difference between Russia and China was the sequencing of reform.
Gorbachev’s big mistake was to opt for political liberalization first and economic reform second. Clearly,
the Chinese leadership cannot be accused of making this mistake. The economic reforms launched in 1978
did lead to pressure for political change, especially when the economy stumbled in 1985. But the 1989
crackdown showed that the leaders were not willing to allow liberalization to get beyond the party’s
control.
In Gorbachev’s defense, it can be argued that economic reform without political reform had been
tried in the past by a succession of Soviet leaders since the 1950s – and was attempted again by Gorbachev
in 1985-87. It was the failure of these earlier economic reforms in the face of bureaucratic intransigence
that forced Gorbachev to embrace political reform.
Western scholars had predicted that political liberalization would cause problems for economic
reform in the socialist bloc. Subsequent events proved them right – but they got the political mechanism
wrong. In an influential 1991 book Adam Przeworksi argued that democratization in Eastern Europe would
empower the workers, who would mobilize to protect their state-guaranteed jobs. 73 Thus political reform
would enable the interest groups created by the socialist economy to block radical economic reform.
As it turned out, this did not happen. In Eastern Europe, the workers were swept up in the
nationalist project of getting out from under Soviet influence by joining the West – which meant embracing
economic reform. 74 In Russia, the political turmoil that the country experienced in 1989-93 – mainly driven
by nationalist unrest in some of the non-Russian republics – was so severe that the workers were politically
neutralized and were unable to prevent Yeltsin’s embrace of liberal market reforms. What happened next
was equally unexpected: the emergence of a small group of powerful oligarchs, who helped to keep Yeltsin
in power, while blocking a second wave of reforms.
Second, there is the contrast in pace. The conventional wisdom is that China followed a gradual
path while Russia embraced shock therapy in 1992. The Chinese were burned by a century of failed efforts
at radical change and were thus philosophically committed to incrementalism. 75 Yeltsin was forced to
embrace of radical change by the crisis conditions he faced in the fall of 1991. 76 It also reflected his
advisors’ conviction that the only way to break with central planning was to enforce hard budget
constraints and market-clearing prices as part of an integrated package. The reformers also made a
Przeworksi-type argument about a political window of opportunity: that Yeltsin had to capitalize on his
power in early 1992 before anti-reform forces rallied and used the democratic process to unseat him.
73
Adam Przeworksi, Democracy and the Market: Political and Economic Reforms in Eastern Europe and
Latin America (Cambridge University Press, 1991).
74
Hilary Appel, Building a New Capitalist Order (University of Pittsburg Press, 2004); Mitchell Orenstein,
Out of the Red: Building Capitalism and Democracy in Post-Communist Europe (University of Michigan
Press, 2001).
75
Fewsmith, op. cit,.80-83.
76
Yegor Gaidar, Days of Defeat and Victory (University of Washington Press, 1999).
15
Generally speaking, this picture of contrasts regarding the pace of transition is correct. However,
as Pei points out, China’s introduction of the household responsibility system amounted to a “big bang” in
China’s countryside. 77 And in Russia, shock therapy advocates complained from the very beginning that
the “big bang” never really happened, because Yeltsin delayed certain key aspects of reform – such as
control of the money supply and budget deficits, or liberalization of energy prices. 78
ii) The preservation of political power.
In retrospect, it is neither the sequencing nor the pace of reform that is the crux of the problem.
The key question is more basic – the need to maintain political power and state capacity. Putting economic
reform first allowed the Chinese state to maintain the political capacity to manage the process, correcting
for mistakes and imbalances as they arose. In a more negative light, Pei argues that it gave the political elite
the resources they needed to maintain their repressive system of rule. 79 In contrast, Gorbachev threw out
the very tools with which he hoped to promote economic reform. Gorbachev’s reforms disrupted the
organization cohesion of the Communist Party apparatus and directly undermined its ideological
legitimacy. 80 His reforms destroyed the party and then the Soviet state itself.
Both Gorbachev and Yeltsin failed to ensure the cohesion of the ruling elite. On the contrary, in
their personal pursuit of power they used divide-and-rule strategies that fragmented political institutions.
Gorbachev deliberately split the party into reformers and conservatives, and then went outside the party to
try to weaken the conservatives, using the media, Western support, and finally popular elections. In a
parallel fashion, from his power-base as head of the Russian Republic in 1990-91Yeltsin used the federal
structure of the Soviet Union as a lever to weaken Gorbachev’s Soviet government. After 1991, Yeltsin
found himself in a political fight with the Russian Congress of People’s Deputies over his economic
reforms. As part of that battle, Yeltsin appealed for support from regional political bosses – and by
devolving power into their hands he weakened the authority of the central state. Even within his own
presidential administration, Yeltsin’s political style revolved around setting rival claims against each other
– liberal reformers versus defense industrialists, a succession of favored confidantes, etc. 81
Chinese leaders seem to have managed to avoid such divisions – despite, or perhaps because of,
the fact that the CCP leadership was historically much more ridden by factionalism than its Soviet
counterpart. The Chinese learned their lesson from the Cultural Revolution – and from the Soviet break-up.
Despite deep disagreements over policy (such as over Tiananmen 82 ) they have managed to preserve a
united front in the public arena. They have also undergone two relatively smooth transitions in the top
leader position (from Deng Xiaoping to Jiang Zemin in 1997, and then to Hu Jintao in 2002) without
experiencing a political crisis. 83 This is something Russia has not managed even once in its entire 1,000
year history. All the Soviet leaders died in office except for Nikita Khrushchev, removed in a palace coup
in 1964, and Mikhail Gorbachev, who lost his job because the country of which he was president ceased to
exist. Yeltsin’s nomination of Putin as his successor in December 1999 is the only case in Russian history
that comes close to an institutionally smooth transition, and even that was accompanied by the outbreak of
war in Chechnya.
Similarly, neither Gorbachev nor Yeltsin was able to develop an effective “mass line” and
maintain the trust of the people. Popular sympathy for Gorbachev quickly evaporated in 1985 because of
77
Pei 2006, 26.
Anders Aslund, How Russia Became a Market Economy (Brookings Institution, 1995).
79
Pei, op. cit, 2006, 19.
80
Stephen Solnick, “The breakdown of hierarchies in the Soviet Union and China: A neo-institutional
perspective,” World Politics, 48, 2, January 1996; Shiping Hua, “The Deng reforms and the Gorbachev
reforms revisited,” Problems in Post-Communist Politics, 53, 3, May 2006, 3-16.
81
Shevtsova, op. cit., 1999.
82
Liang Zhang, Andrew Nathan and Perry Link (eds.), The Tiananmen Papers (Public Affairs, 2001).
83
Nathan 2003, op. cit.
78
16
his ill-conceived efforts to curb alcohol use. His support further eroded as his reforms caused a breakdown
of the planning system and widespread economic chaos. Likewise although Yeltsin won popular election as
president in June 1991, his 1992 market reforms proved very unpopular (partial confirmation of the
Przeworski thesis).
3) Leaders’ learning capacity
The Chinese leadership has outshone their Russian counterparts in their ability to learn from their own
mistakes and from the mistakes of others. Deng and many of his colleagues had worked in the Soviet Union
and were clearly open to drawing lessons from the Soviet experience, while Soviet leaders (including
Gorbachev) knew little of the outside world and did not show much interest in learning from others. The
Cultural Revolution provided a powerful incentive for China’s leaders to think through policies in order to
forge an elite consensus and avoid chaos. (Given that it was driven by mass participation, it also sowed
some doubts about the wisdom of democracy among the intelligentsia. 84 } In contrast Stalin’s purges had
occurred more than 30 years earlier, were not discussed publicly or privately, and were effectively a closed
book for the Soviet leaders and for most of the Soviet people.
More than global economic trends, the most important international factor influencing Chinese
decision-making was undoubtedly the dramatic collapse of the Soviet Union and the East European
socialist regimes. Christopher Marsh makes the important point that the Russians failed to learn from
China, while the Chinese did learn from the fate of the Soviet Union. 85 Chinese leaders scrutinized
developments in the Soviet Union very closely, and adjusted their policies accordingly. They concluded not
only that they must be willing to use repression, but also that reforms were needed to bolster the regime’s
legitimacy in the eyes of the people – by boosting living standards, and by nurturing nationalism to shore
up the waning Marxist ideology. Marxism would however be maintained as an instrument for ensuring the
unity of the ruling elite.
Russian leaders were interested in learning from the West – not the East. The one lesson they took
from China was that mass repression (the “Chinese variant”) was morally unacceptable. Even the leaders of
the August 1991 coup proved unwilling to directly order the use of force. Otherwise, Russian elites
regarded China as economically and politically backward, and were not inclined to study and draw lessons
from their reform experience. Both Gorbachev and Yeltsin put a priority on developing good relations with
the West, and to some extent were measuring themselves against Western norms. This was not just a moral
choice on their part, it also reflected Russia’s national interests in maintaining a security dialog with the
West (to extricate themselves from Afghanistan and then central Europe) and an economic dialog (to roll
over Soviet debts, which ran up to $50 billion by 1991). China was free of such dependencies.
The Chinese ability to learn from the Soviet experience is validation of the argument that the laws
of social science are fundamentally different from the laws of natural science. Human beings can learn
from the experience of others, which is not true of inanimate objects. China is disproving the hypothesis
that globalization, or even capitalism, must lead to the end of communist-based political regimes.
4) The impact of globalization
How was the transition form socialism affected by the spread of globalization? The relationship is complex.
Some argue that globalization weakened the Soviet and Chinese states, forcing them to embrace reform.
Some even suggest that globalization caused the Soviet collapse. The Soviet elite were exposed to
international norms during the diplomatic détente of the 1970s, and because Gorbachev had internalized
Western values he decided to launch his economic reforms. Others dispute this account, arguing that
84
Hui, op. cit. 2006, 159.
Christopher Marsh, Unparalleled Reforms. China’s Rise, Russia’s Fall and the Interdependence of
Transition (Lexington Books, 2005).
85
17
Gorbachev was still operating within a Leninist mind-set. And it hard to use the international norms
argument to explain the actions of the Chinese leadership.
In general, it is wrong to think that globalization caused the collapse of state socialism. The
regime crisis in China and Russia preceded the onset of the current wave of globalization. Deng’s reforms
were launched in 1978 and Gorbachev’s in 1985: before the internet, and before the floodgates of
international capital flows were opened. However, the socialist transition fed into the whirlpool of
globalization, and was in turn accelerated and affected by it.
Certainly the revolution in transport, communications and financing facilitated the demand for
manufacturing exports from China and the investments to make this production boom a reality. And the end
of the cold war meant that the political barriers to such economic integration had fallen away. But Russia
gained little from the international economic climate of the 1990s. Its main import was bad economic
advice, and the premature liberalization of its currency that led to the 1998 crash. Not until the commodities
boom that saw the oil price rise from $12 a barrel in 1997 to $60 in 2005, did Russia enjoy a clear benefit
from global integration.
It is usually assumed that globalization weakens the state by forcing governments to liberalize
economic controls, reduce tariffs and taxes, and hold down wages in order to attract international
investment and trade. At the same time, the trade and investment boom empowers new players such as
home-grown capitalists who may challenge the authority of the state from within. But globalization may
also strengthen the state in other respects. Integration generates growth, and if the government is able to
capture some of this growth through taxation, then the state may be able to benefit from globalization. This
has been the case with the small states of Western Europe, where deep integration has coincided with
increased state capacity, especially in the area of human capital. Also, the government is the gatekeeper for
the country’s economy as it adapts to integration. It is the government that must negotiate and enforce trade
and investment agreements, such as the licensing of mineral deposits or protection of intellectual property
rights. In this respect, the international community can be an ally of the central government as it seeks to
implement rule of law and impose these agreements on recalcitrant regional political authorities, often in
unholy alliance with local businesses.
The global spread of democracy in the 1990s paradoxically made political liberalization less likely
in China. First, there were the negative examples of democracy producing state collapse and even civil war
in the former Soviet Union and Yugoslavia. Second, democratization was associated with a boost in US
power, that began with the 1991 Gulf War and continued through the 2003 Iraq war. Third, the
democratization of Taiwan after 1997 emboldened the Taiwanese leadership and increased the possibility
of an independence declaration, a step that would trigger armed conflict.
The differing trajectories of Russia and China underline the point that the impact of globalization
on individual states is unpredictable. Despite the common pressures brought by global economic
competition, leadership choices and the contingencies of historical evolution still play a decisive role.
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Part C
THE “REGULATED MARKET” CONSENSUS
China and Russia started off in different circumstances, and set off on different routes in their transition
away from state socialism. However, they now seem to be converging on a new common pattern of a neoauthoritarian model of a semi-market economy under the shelter of an authoritarian state 86 (This is
sometimes called, the “Beijing consensus” 87 .) What are the elements of this new “regulated market”
model?
1) The leaders are committed to preserving the integrity of state sovereignty and national
identity. This means preventing foreign leaders and institutions from forcing political or economic
decisions on the government of Russia or China. Participation must not require a trade -off of national
sovereignty. Critics argue that this insistence on sovereignty is merely a façade to justify the leaders’ grip
on power. Defenders would say it is a principled stance, based on a concern for the welfare of their people,
whose histories have shown the dire consequences of allowing foreigners to infringe on the country’s
territory.
Nationalism is part of the leaders’ rhetoric, but they do not want to allow it to get out of control,
lest it ignite a destabilizing mass movement, and/or threaten relations with important trading partners. 88
Still, it seems clear that nationalism has been strengthened in both Russia and China as they opened up to
international market forces, contrary to the argument that globalization necessarily produces “the
continuing fragmentation of identities and institutions.” 89
2) The leaders are focused on economic growth as a major goal – something that is good for
national security and good for boosting the popular legitimacy of the regime – at a time when other
ideological justifications are eroding. Growth also expands the opportunities for personal enrichment by
political cadres – while regrettably taking their attention away from human development issues.
3) The market mechanism is the most effective tool for economic growth, both domestically and
internationally. International trade is a win-win situation for all participants. 90 The country must find the
most appropriate place in the international division of labor, by accepting the logic of comparative
advantage. In China, that means exploiting the country’s pool of cheap labor, through export-oriented
manufacturing. In Russia, it means selling off the country’s mineral resources. But in each case, the leaders
want to move up the food chain by developing more capital and technology-intensive industries. China has
outpaced Russia in accepting the logic of globalization. Bejiing is even more committed to lowering trade
barriers than the old US ally Japan. 91
4) The market has its limits, which must be policed by the state (see point #1). Market forces that
erode state legitimacy and capacity, that unleash uncontrollable social protests, must be corrected. The state
must step in to provide public goods, from investment in infrastructure to compensation for the reform
86
See Wei-Wei Zhang, “The allure of the Chinese model,” International Herald Tribune, 1 November
2006; and the debate between Professor Wu Shuqing and Cheng Enfu, “Washington Consensus and Beijing
Consensus,” People’s Daily, 18 June 2005 (online). Harley Balzer uses a more neutral term,“managed
pluralism,” to describe the Russian-Chinese convergence, “China in comparative perspective,” ch. 12 in
Peter Hays Gries and Stanley Rosen (eds.), State and Society in 21st-century China (Routledge, 2004).
87
The term “Beijing consensus” was coined by Goldman Sachs advisor Joshua Cooper Ramo, in his article
“The Beijing consensus,” Foreign Policy Center, UK, May 2004. http://fpc.org.uk/fsblob/244.pdf Ramo
focuses on China’s embrace of the neo-liberal paradigm, and he arguably overlooks the distinctive political
features of China’s policies which are outlined in this section.
88
Peter Hays Gries, “Popular nationalism and state legitimation in China,” in Gries and Rosen, ibid., ch. 9.
89
Cerny, op. cit., 20.
90
China’s Peaceful Development Road, State Council Information Office, 22 December 2005.
http://www.chinadaily.com.cn/english/doc/2005-12/22/content_505678.htm
91
William H. Overholt, RAND Corporation, “China and globalization,” testimony to the U.S.-China
Economic and Security Review Commission, 19 May 2005. http://www.rand.org/pubs/testimonies/CT244/
19
losers, to the creation of a regulatory framework. The political elite is uncomfortable with the idea of
economic actors beyond their control. So the political economy that emerges is one characterized by the
hybridity of political and economic power. This may be less efficient than a separation of politics from
economics, but it has the advantage (for the leaders) of ensuring the indispensability of the political class.
5) Liberal democracy is inappropriate or unnecessary, and open public contestation between
rival members of the ruling political elite is to be kept to a minimum. The Chinese leadership
unequivocally rejects the liberal-democratic paradigm: as Andrew Nathan puts it, “The argument that
democratization, freedom, and human rights would lead to a truer kind of stability—as convincing as it
may be to the democrats of the world—holds no appeal for these men.” 92 They even have the audacity to
issue a report critical of human rights in the US in response to the State Department’s report on China’s
human rights record. 93 The Russian position is more nuanced: the leadership officially embraces
democratic values, and they are enshrined in the 1993 Constitution. But Russian practice diverges markedly
from democratic theory. 94 In partial recognition of this, Kremlin ideologists have floated notions of
“managed democracy” and “sovereign democracy” to try to bridge the gap between Russian practice and
Western ideas. 95
6) The new middle class that the economic boom has produced serves as a social basis for the
regulated market regimes. This is contrary to the expectations of Western liberals, who traditionally saw the
middle class as the trusted standard bearers for democracy. Fewsmith writes that the basis of the post-1989
social contract in China is “economic prosperity in exchange for political quiescence.” (p. 103) Ed
Freidman argues that “The new middle class in urban China tends to imagine democracy as a system that
would empower the majority who are the rural poor.” 96 The Chinese middle class were also frightened by
the chaos that followed the Soviet collapse and were thus more willing to support a technocratic
authoritarian leadership. 97
In Russia, professionals were traumatized by the economic shocks of the 1990s and welcomed the
stability brought by Putin’s firm hand, as is evidenced by opinion surveys and election results. In both
countries the middle classes have embraced consumerism and “bourgeois individualism” with a vengeance,
fusing it with politics in what Wang Hui has called “consumer nationalism.”
92
Nathan, 2003, op. cit, 16.
“The Human Rights Record of the United States in 2004,” issued by the State Council of the People's
Republic of China, People’s Daily, 3 March 2005.
http://english.people.com.cn/200503/03/eng20050303_175406.html
94
Andrew Wilson, Virtual Politics. Faking Democracy in the Post-Soviet World (Yale, 2005).
95
Nikolai Petrov. “The full cycle of political evolution in Russia,” PONARS memo # 413, December 2006,
Center for Strategic and International Studies. For a defense of “sovereign democracy,” see Vladislav
Surkov, “Nationalization of the future,” Ekspert, 20 November 2006.
96
Ed Friedman, The Rise of China and its Impact on the World, International Political Science Association,
Fukouka Japan, July 2006.
97
Gongqin Xiao, “The rise of the technocrats,” Journal of Democracy, 14, 1, 2003, 60-65.
93
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CONCLUSION
Does this “regulated market” approach really exist as a coherent paradigm, intellectually and practically?
Or is it a contradictory mixture of ideas and policies, a temporary coincidence of diverse trends that will
pull apart within a few years?
The previous wave of authoritarian developmentalism of the 1960s-80s, from Brazil to East Asia,
fell apart in the 1990s. The context of that previous wave was quite different. There was a real anticapitalist threat, both internationally (global communism) and domestically (powerful labor unions). So the
state needed to defend the market from its adversaries. When those adversaries were weakened by the end
of the Cold War, the rationale for authoritarianism dissolved. But the regulated market model is rooted in a
different world order, that of globalization, which is not likely to vanish any time soon.
The regulated market seems to represent a viable organizational response to the exigencies of life
in the post-Cold War world for these two large, ex-socialist powers. The globalized world is not flat, its
topography includes peaks and valleys, and quite a few surprises.
Table 1 Development Indicators, 2004
Life expectancy (years)
Fertility (births per woman)
Infant mortality (per 1000 births)
GNI per capita ($)
Agriculture as % of GNI
Inflation (%)
Gross domestic capital formation as % of GNI
Phone lines (per 1000 population)
Internet users (per 1000 population)
High tech as % of manufacturing exports
Trade as % of GNI
Foreign direct investment (net inflow, $ bn)
Foreign debt as % of GNI
China
71.4
1.8
26.0
1,500
13.1
6.9
38.7
499
72.5
29.8
59.8
54.9
14.5
Russia
65.2
1.3
16.8
3,400
5.0
18.1
21.1
508
111.2
9.1
48.1
12.5
45.7
Source: World Development Indicators, April 2006. www.worldbank.org
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