The Soviet Union & China- The Transition from Command Economy to Market Economy Why the Soviet Union Failed and China Succeeded

Three Basic Economic Questions Command Economy What? Dictator or central planning committee decides what products are needed. How? Since government owns all means of production, it decides how goods and services will be produced. For Whom? Government decides who will get what is produced. Market Economy What? Consumers decide what should be produced through purchases they make. How? Production decisions are made by businesses. Businesses compete by producing quality products at lower prices than their competitors. For Whom? The people who have more money are able to buy more goods and services.

Soviet Union

The Soviet Way Under Lenin’s model of rule, the Communist Party controlled all levels of government. At the top, final power to decide the policy rested in the Politburo. Under Joseph Stalin, power was even further centralized. Over-centralization undermined economic efficiency and political legitimacy. It distorted information flow, created resistance to the Party’s orders by officials at lower levels who had their own interests, and produced inertia. Political and economic incentives discouraged innovation, productivity, and risk taking. GOSPLAN set production goals with little regard for wants or needs of the marketplace. As a result, most sectors of Soviet economy ceased to grow.

Problems facing Soviet Union

Mikhail Gorbachev In power Wanted to introduce social democracy and market economy Glasnost (openness) & Perestroika (restructuring)

Perestroika Move towards Soviet social democracy Shifted economy from heavy industry to production of consumer goods Introduce markets to replace government controls Introduction of private property

Implementation of Perestroika Change of leadership on various levels: new generation of leaders into key positions Focus on the economy: acceleration, discipline, the alcohol campaign, automation and labor efficiency Glasnost – allows debate and free expression of opinions; massive political changes Radicalisation of economic reforms: decentralisation, more independence for companies, foreign trade liberalisation Accelerated political change and economic chaos Reforms out of control

People’s Republic of China

Problems Facing China Mao Zedong

Problems facing China Plan was disaster; small commune factories failed to produce quantity, quality of goods China needed Combination of poor weather, farmers’ neglect led to sharp drops in agricultural production Famine spread through rural China; tens of millions starved to death between 1959 and 1961 Failure of Great Leap Forward led to criticism of Mao Soviet criticism, withdrawal of Soviet industrial aid widened rift between two Communist nations By early 1960s, relations had broken down completely; China virtually isolated in world community Great Leap Forward Planning DisasterChina’s Isolation

Problems facing China Cultural Revolution New Movement Mid-1960s, Mao tried to regain power, prestige lost after Great Leap Forward Initiated new movement called Cultural Revolution, sought to rid China of old ways, create society where peasants, physical labor were the ideal Red Guards Campaign meant eliminating intellectuals who Mao feared wanted to end communism, bring back China’s old ways Mao shut down schools, encouraged militant students, Red Guards, to carry out work of Cultural Revolution by criticizing intellectuals, values Destruction of Society Mao lost control; Red guards murdered hundreds of thousands of people; by late 1960s, China on verge of civil war before Mao regained control Cultural Revolution reestablished Mao’s dominance, caused terrible destruction; civil authority collapsed, economic activity fell off sharply

Deng Xiaoping In power Introduced Gaige Kaifang – Socialist reform with Chinese Characteristics Four Modernizations- Agriculture, Industry, Technology, Defense

Implementation of Gaige Kaifang Produce surpluses in agriculture and let farmers sell leftovers for profit Attract foreign investment and technology, promote exports Creation of a two-track pricing system Establishment of a central bank Reforms successful in spurring demand and production, which led to inflation State resorted to stimulative monetary and investment policies to boost the economy Announced their objective to accelerate the process of reform and opening up Called for the founding of a socialist market economy

1989 – The Pivotal Year Tiananmen Square Protests – April-June Fall of the Berlin Wall – November 9

Why Perestroika Failed Policy makers had no firsthand experience with market economics Reluctance to consider China as having any relevance to their own policy formation Maintained many of the aspects of the command economy including price controls, inconvertibility of the ruble, exclusion of private property ownership, and the government monopoly over most means of production Factory managers were expected to meet state demands for goods, but to find their own funding Reform process exacerbated existing social and economic tensions within the Soviet Union, and helped to further nationalism and social fragmentation among the constituent republics

Why China Succeeded Advocates incrementalist policy Incrementalism allowed China to find valuable institutions on an experimental- mainly localized- basis, and the spread the success to the whole of the Chinese economy China avoided the political and economic strife associated with “shock therapy” China followed other Asian nations in economic success at the time Growth was in the non- state sectors of the economy- agriculture first, followed by Township and Village Enterprises, and coastal region export- oriented enterprises Low wages, large base of laborers Experimentalist ThoughtConvergence Thought

Why China Succeeded Proper planning from government Pragmatic approach to changing the system Government held tight political and social controls while allowing economic freedom Government protected the economy- businesses only competing with other Chinese businesses

Russia Today World’s 6 th largest economy Large influx of Petrodollars Low personal income tax More Military spending Conflicts with former Soviet republics

China Today World’s 2 nd largest economy “One Child” policy to prevent overpopulation Access to free press denied Economic prosperity has yet to reach 1.3 billion citizens On pace to dominate world economy in years