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Macroeconomic Disorder: A Comparative Analysis of China and Russia's Economic Transitions

This analysis by Andrei Belousov and Lance Taylor, alongside contributions from several experts, explores the contrasting macroeconomic paths of China and Russia during their transitions to market economies. It examines key factors such as government transfers, trade levels, savings rates, and investment strategies. The study highlights China's gradual liberalization versus Russia's rapid reform approach and discusses the impacts on their economies, including the vulnerability to external shocks and the effectiveness of financial systems. Insights on GDP development and sustainability are also presented.

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Macroeconomic Disorder: A Comparative Analysis of China and Russia's Economic Transitions

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  1. Macroeconomic Disorder By Andrei Belousov and Lance Taylor with Elena Abramova, Dongyi Liu, Alexander Vorobyov, and Stanislav Zhukov Matthew David Hauer Yia Yang

  2. China • High level of transfers between firms and government (31% to gov., 24% to firms) (All numbers expressed in percentages of GDP) • High level of trade (16.8%) • High savings from firms and households (37.5% and 10.4%) • High investment and capital accumulation • With large deposits by firms and households hyperinflation seemed imminent • Curbed by increase in output and monetization of rural economic activity

  3. Russia in 1989 • More closed than China (8.7%) in foreign trade • Slightly lower savings rates (7.6% for households and 26.8% for firms) • Still run by command economy

  4. Russia in Early Transition 1992-1993 • Large increase in foreign trade (50.4% in 1992) • Huge price jumps with removal of controls (3.5 to 7.7 times) • Drop in household income (60.8% in 1989 to 46.7% in 1992) • Firms savings spike in 1992 (74.5%) • Firms couldn’t pay high prices for intermediate goods, ran mutual arrears, 39 billion Rubles in Jan. 1992, 3,900 billion Rubles in July 1992

  5. Russia in 1993 to 1995 • Household income and firm income had moderate recovery (54.4% for households and 54.8% for firms in 1995) • Larger shares of household income for social payments and distributed profits • Savings peak in 1994 but drop in 1995 because of investment scams • Falling inflation • Declining tax shares (40.2% in 1990 to 25.5% in 1995) • Ruble appreciated leading to increase in foreign assets held by Russians and a drop in manufacturing exports

  6. Differences between Russia and China • China’s high savings absorbed by domestic investment, in Russian savings went to foreign assets • Russia’s financial system incapable of promoting domestic investment • China’s growth fueled by exports • Russia’s export are mostly raw materials, low domestic demand, due to low consumptions and investment, cannot fuel growth either

  7. “The development and Sustainability of the Russina GDP” by SimoLeppänen • Depreciation of Ruble in late 1990’s fueled industrial output • Russia is highly vulnerable to changes in energy prices and real exchange rates • Financial system still struggling to close gap between saving and investment • Services increasing in GDP share

  8. McKinnon, Ronald I, Aslund, Anders, & Rostowski, Jacek. (1993). Gradual versus rapid liberalization in socialist economies: The problem of macroeconomic control. The World Bank Research Observer:Annual Conference on Development Economics,63.  Retrieved November 29, 2009, from ABI/INFORM Global.  • China took the gradualist approach • Russia took the rapid liberalization approach • Wanting an unrestricted foreign trade with other industrialized countries • Sharp decrease of output • A weak communist party • Collapse of Council for Mutual Economic Assistance (CMEA)

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