China v Russia: communist mask v democratic hat

Christoph Neidhart
21 May 2008

World leaders are calling for a boycott of the Beijing Olympics, US presidential contenders are accusing China of ‘stealing American jobs.’ That racist term the “Yellow Peril” has even resurfaced.

Western media characterize China as a ‘communist dictatorship.’ They stress her lamentable human rights record and the ‘inhuman brutality’ of her rapid modernization. Russia, on the other hand, is treated at worst as a ‘flawed democracy’. Despite his provocative statements, Western leaders always maintained good relations with the former President Putin.

While the outbreak violence in Tibet made headlines across the world, the on-going violence in Chechnya goes widely unreported. Russia’s economy is regarded by the West as a free market, far from perfect, but at least free. China’s capitalism, on the other hand, is often characterized as state-run.

The Western world’s perception of the two former communist giants is very different. By and large, Russia is seen as benign, almost acceptable; Moscow violates Western values, and gets away with it. China, however, is under heavy scrutiny and regularly criticized.

You could write a shelf of books about the profound differences between China and Russia and their political and economic structures. But a brief comparison of Russia’s transition from communism to Putinism and China’s emergence as a dynamic economic powerhouse reveals fundamentally different choices.

Comparing transitions

Russia’s transition from a centrally planned command economy to an open market was called ‘shock therapy’, although the freeing of prices, controls and subsidies was much less sudden than in Poland or Estonia, for example. The quick transition was justified as being the easiest way of wresting the economy from the iron grip of the nomenklatura. Politically motivated, it was intended to dispossess the party and the old bureaucracy. Yeltsin’s successive governments and their foreign advisers believed that once freed, the market would eliminate loss-making enterprises and depoliticise economic decision- making. The decision to embrace ‘shock therapy’ also won the West’s approval. That included pledges by Western governments for substantial economic aid, most of which never materialised.

When President Yeltsin launched the transition to an open economy and society, there were very few stable institutions in the crumbling Soviet Union. The Communist Party of the Soviet Union (CPSU) did not tolerate organisations it could not totally control, and it established no legal or political structures beyond its control. So when the system collapsed, the few existing structures, like the KGB, the CPSU and its numerous sub-organisations, were severely discredited and on the point of collapse.

However, a free market and an open society rely on laws and rules, institutions and stable mechanisms. It probably needs them more than a command economy and a dictatorship. The ‘invisible hand of the market’ cannot operate in a vacuum, as Adam Smith would have been the first to concede.

China, on the other hand, introduced no economic measures for ideological reasons. When the Chinese government made its first steps towards economic liberalisation in 1978, it did so only in order to improve the economy. For a long time, there was no privatisation. It kept its state-owned and collective enterprises running. These may have been working inefficiently and wastefully, and many still are. But they kept China going. People had almost nothing, but they survived. They had jobs and they had housing, and there was no reason to think that they could not manage for another few years. Keeping those state enterprises running helped the Chinese leadership to contain unemployment and unrest too. So from the early 1980’s onwards, the Communist Party of China (CPC) preferred to allow a grassroots capitalism to emerge than tamper with the existing economy.

By keeping the dinosaur enterprises of the command economy going rather than privatising them, the state avoided having to hand these huge ventures over to gamblers. They kept control over production, even if the quality was low. The cities or regions could still collect profit or taxes too. Avoiding large scale, rapid privatisation also helped China prevent the emergence of a group of irresponsible, yet powerful oligarchs, as happened in Russia.

So it was that China’s dual economy emerged, with a rapidly growing market economy developing in parallel to the old state sector, and with it a new middle class in the coastal cities. For a while, the countryside and inland China remained poor, and to this day the economy of some regions is still mostly run by the state. In the nineteenth and early twentieth century, China (and Japan too) experienced a similar dual economy, as do many developing countries today.

But the command economy soon began interacting with the new private sector, and the countryside with the cities, the country primarily supplying cheap labor to the economic centres on the coast. An estimated 150 million migrant workers from China’s poor regions are employed in factories along the coast, making China the workshop for the world.

The old and the new have become intertwined in other ways, too. Private entrepreneurs have started wearing a ‘red hats’, pretending their businesses are collective, thus eligible for state support and access to credits. Effectively, this is informal privatisation. Millions of CPC members started their own businesses long before the communist party began to accept business people as members in 2002. Their membership of the CPC pre-dated their engagement in private business. As members of the CPC, they pushed the party to become more business-friendly and to accept their personal transitions, first informally, then formally. This benefited not only these party members and their business ventures, but the local economy. These private companies generated wealth and employment opportunities. Gradually, the party changed its rules, first by tolerating violations, later officially. This is just one example of how the power structures have been changing from within; how private business has been influencing Chinese politics for more than two decades.

Since businesspeople can operate from within the system, they have no desire to topple it. Instead, they are using it and changing it incrementally. “Most of China’s formal institutional reforms have been in reaction to endogenous pressures”, Kelley Tsai, a professor of economics at Johns Hopkins University wrote in her excellent book Capitalism Without Democracy. This is one reason why we should not expect China’s new class of business-owners to fight for political change.

The way in which the monopoly party, the state and private entrepreneurs have intertwined has of course led to widespread corruption. But the habit of Russian bureaucrats of extorting money from businesses is no different in this regard.

China fostered an emerging petty-capitalist economy, while keeping its state sector alive. Russia gave her industry away, including the crown jewels – whatever their state of disrepair, she had no others. The Russian government trusted, as only true believers could, that the “secret hand of the market” would take care of the economy.

To this day, many Chinese institutions stick to their ‘communist mask,’ while their Russian counterparts wear a democratic hat. However, if we define ‘democracy’ broadly, not as the right to elect political leaders but as the means of influencing policy making, China should be considered as democratic as Russia.

Russia’s future

Maybe Russia did not have any choice. In 1991 society was politicised and divided, her elites impatient, and the power structures were ready to fight for the status quo. With few exceptions, Russia’s political leaders lacked any basic understanding of the market economy. Their destruction of the command economy`s infrastructure was applauded by the West, who at the time believed religiously in ‘the market.’ They argued that Soviet factories decreased the value of the resources they used; it was more profitable to export steel than to give it to a Soviet car-manufacturer. This was true, as long as one operated with world market prices. Still, those Soviet auto plants produced some cars and kept people employed.

China kept similar plants running, and limited the import of vehicles that would have competed with the Chinese product. In some sectors, she still does; in many others, China has taken advantage of that protection to become a serious competitor, and often to beat the world market.

Early on, President Putin appeared to understand that the market economy could not work without stable institutions, including a judicial system. To have reintroduced a monopolistic party of power and reinforced the secret services as he has will not solve the problems of Russia’s rusting infrastructure and Potemkin-style democracy.

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