The Move to Privatization China and Russia

The Move to PrivatizationChina and Russia Donald Roley

Overview • Brief History of both Countries • Economic history • Political history • Demographic/ Geographic Overview • Countries in transition • Economic Outlook

The History of Russia/USSR • Tsarist rule ended with Nicholas II in 1917 • The USSR was formerly created in 1922 under Lenin • Stalin replaces Lenin • NEP is replaced with “Five Year Plan” • Mikhail Gorbachev stepped into a system that remained virtually unchanged for 60 years!

History of China • Founded in 1949 as the PRC • Under Mao Zedong China undergoes several revolutions • Great Leap Forward of the late 50’s • Cultural Revolution of the late 60’s • Mao’s death in 1976 marked the period of real transformation • 1978 saw the shift from a command economy to a mixed one

Countries in transition: Russia • The move from planned to market economy was abrupt • They had to quickly accomplish the move • “If there was no breakthrough…in the near future, the entire process could be stalled…”(Sachs) • There were social/political motives as well • Immediately started the voucher program • This successfully privatized 70% of medium and large enterprises and 90% of smaller ones

Countries in transition: Russia • Problems with the voucher system • One voucher = one bottle of vodka • There was still a distrust of Capitalist institutions • Public auctions were run by the bank • Locations changed, phone calls were dropped, etc. • Value of the vouchers changed dependent on number of people at the auctions • Self Dealing

Countries in transition: Russia • Managers would steal from the company • Use the money to buy vouchers • Convinced workers to sell vouchers • Would run firm into the ground • They paid a low relative price for the firm • Could steal plowback money • Default on debts to suppliers • Suppliers would eventually stop dealing with them

Countries in transition: Russia • Second Stage July 94 • Direct selling of firms for cash • After the voucher system, the state still held 15 20% of shares in firms • Real GDP Growth -8.2% (US 2000) • Third Stage “Loans for Shares” • Government gave banks shares in firms for collateral on debt

Countries in transition: Russia • Problems with loans for shares • 80 million dollar budget deficit in 96* • They defaulted on most loans • Rise of the oligarchs *International Finacncial Statistics Yearbook

Russia Today • Population 143 million • Growth rate -.37% • Life expectancy 67.1 years • GDP (PPP) $1.53 trillion • 2005 GDP Growth (real) 5.9% • Unemployment Rate 7.6% • 2004 FDI (current US dollars) 2 billion (WDI) CIA factbook

History of China • Founded in 1949 as the PRC • Under Mao Zedong China undergoes several revolutions • Great Leap Forward of the late 50’s • Cultural Revolution of the late 60’s • Mao’s death in 1976 marked the period of real transformation • 1978 saw the shift from a command economy to a mixed one

Countries in transition: China • China instituted the HRS in 1978 • Basic units were production teams • 1978-1984 China grain output raised 5%, and gross value of agriculture by 7.7% • From here they went on to the two land approach • Land divided into 3 parts • Food, contract, and contingency

Countries in transition: China • Two land system is now widely excepted in the country • Farmers who participate have a 6.7% higher technical efficiency • Problems with HRS • Land Fragmentation • Productive inefficiencies

Countries in transition: China • Township and Village enterprises • From 28.2 million workers to 135 million in four years time and ¼ of the nation’s total output in 1996 (DaCoasta) • Deregulation of monopolies • 1993 share holding approach • Employment in SOEs dropped 20% 1997-2001 • It took the previous 23 years to realize a similar drop

China transition cont. • Rapid Growth without rapid inflation • $40 Billion in Direct Foreign Investment (1996) • Shows trust in the rule of law and legitimacy of the government • Problems still exist • State Owned Entities • No competition in banking industry

China Today • Population 1.3 billion • Growth rate .58% • Life expectancy 72.27 years • GDP (PPP) $8.158 trillion • 2005 GDP Growth (real) 9.2% • Unemployment Rate 4.2% • 2004 FDI (current US dollars) 42 billion (WDI) CIA factbook

http://www.worldbank.org/ecspf/PSD-Yearbook/russia.html

Ownership Structure 1978 to 1994 COE = collective SOE = State owned IOE = Individual OOE = Other owned http://www.ilo.org/public/english/employment/ent/papers/emd24.htm

Percent GDP Growth John Sun - Privatization: P. R. China 2005

In Conclusion • Brief History of both Countries • Economic history • Political history • Demographic/ Geographic Overview • Countries in transition • Economic Outlook

Questions for the future • How will Russia get a hold of the growing black market and curb corruption? • As China continues to reform, will the Communist government eventually reform with it?

Questions???

The Move to Privatization China and Russia