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Wednesday, October 12, 2011

Russia initiated its transition path with shock therapy, as did Poland, which has produced the most successful of the Soviet bloc economic transitions. However, Russia’s initial economic conditions and implementation of reforms were very different from Poland’s. In Russia, the necessity of shock therapy came from the pressing need to overturn economic collapse by bringing in market forces and to strengthen the political power of then President Yeltsin.[1]
China's transformation was gradual. In 1978, the Chinese Communist Party leadership committed the nation to gradualist market-oriented reforms. There was an opening up of the economy to the outside world.[2]
In 1989, the first post-Communist Polish government undertook an economic transition rapidly through big bang or shock therapy policy. Known as the Balcerowicz Plan, after then Finance Minister Leszek Balcerowicz, Poland’s market transition was implemented in January 1990.[3]
During the 1992–1994 period of price liberalization, mass privatization, foreign trade liberalization, and the introduction of full convertibility of the ruble, Russia abolished the last vestiges of a planned economy.[4] In early 1992, small shops and restaurants privatized. There were two tracks: one for the insiders, one for the public at large. Each citizen was then issued a voucher worth his or her proportional share. Voucher program was announced on August 18, 1992 and 10,000 ruble vouchers, approximately $25 issued. Hundreds of voucher funds, essentially Ponzi pyramids, were created by 1994; half of them collapsed. 25 million shares lost through voucher funds. 37 million sold for cash and exchanged for food, etc.[5]
The State retained full ownership of some enterprises like electricity and owned large shares of others. Large shares did not mean a significant role in management. In addition to dramatic privatization schemes, Yeltsin rid the country of the Communist Party’s rule, the step that Gorbachev shied away from, and finished off the remnants of the command economic system.[6] In terms of international trade, there were market-determined consumer price restrictions on imports and currency conversion. In 1990, an outline of a strategy of step-by-step movement to market was made out in the G7 summit.[7]
On the other hand, the Polish plan called for instantaneous decontrol of most prices, devaluation and then pegging of the Polish currency (zloty) to the U.S. dollar, elimination of all foreign exchange controls and legalization of all types of private enterprise. The plan also called for privatization of State Owned Enterprises, but privatization was not entirely put into operation because a political backlash surfaced that slowed the program down.[8]
With the move to free markets after 1989, privatization of state farms followed and was almost complete by 1994, with leasing as the main method but with restrictions on foreign purchases of real estate still in place.[9] There was an increase in exports to the EU, led by manufactured goods such as chemicals, steel, and transportation equipment, which continued into 1991. There was also resistance to privatization due to fear of unemployment and a fear of foreign buyers, especially Germans, gaining control of the holding companies and thus of the assets of the economy as a whole at low prices. Polish privatization has by and large been reasonably gradual and varied. After the early drastic change and shock therapy, Poland has become the model of evolutionary gradualism in privatization.[10] [11]
The Chinese gradual transition started with the agricultural reforms introduced in 1978 which included the acknowledgement of property rights and of production teams’ adherence to the principle of “to each according to his work”. There was then a restoration of the right to private plots and respect for household boundaries. Furthermore, allowance of free-market rural bazaars followed and there were more state purchases of agricultural products together with price increases for these goods.[12]
In 1999 the private sector was recognized as legitimate in the constitution, and in 2000 an agreement was reached for China to join the World Trade Organization, which it did in 2001.[13]
With Dengist marketization came greater income inequality, but there were some countertrends. The overall Gini coefficient for urban income in 1981 was a highly egalitarian 0.16.  This inequality decreased during 1979–1984 when rural incomes rose sharply.[14] The striking development of the 1990s in China was that income inequality increased rapidly. In urban areas, the Gini coefficient rose from 0.23 in 1988 to 0.28 in 1995. Whereas, in rural areas it rose from 0.301 in 1988 to 0.340 in 1995, and overall nationally it rose from 0.338 in 1988 to 0.429 in 1995.[15]
Unemployment rates were low in China, although it has substantial disguised unemployment. Economic growth focused on local government-owned Township and Village Enterprises and on coastal Special Economic Zones where direct foreign investment was encouraged through loosened rules.[16] From 1980-1990, GDP growth was 10.1 percent and from 1990-1998 it increased to 11.1 percent. From 1980-1990, inflation was 10.1 percent and then it fell to 8.60 percent from 1990-2000.[17] [18]
For Russia, 10 years of negative economic growth resulted in the halving of GDP. At the same time, inequality doubled as measured by the gini coefficient. Severe economic instability and hyperinflation triggered massive capital flight, which ranged from $10 to $40 billion in 1992, according to various estimates, reached $80 billion by 1998, and continued at the rate of $20 billion per year through 2001. Shock therapy failed to produce viable entrepreneurs and was pronounced to be harmful because of the spiraling inflation.[19]
In 1993, China had the world’s highest economic growth rate and Poland had Europe’s highest. Taking all factors into consideration, Poland has been one of the most successful of the transition economies.
Poland’s transition experience demonstrates both the peril and the promise of a shock therapy approach. Output fell sharply and a considerable increase in unemployment followed, leveling off in late 1993 at around 16 percent. Furthermore, a rapid rise in price levels due to triple-digit inflation took place. Then it was down to about 1 percent by the early 2003. The Gini coefficient rose from .28 in 1989 to .34 in 1998.[20]
Unemployment continues to be a predicament, having crept back up above 10 percent after temporarily falling below that level in 1998.[21]
In 1993, Poland had the highest economic growth rate in all of Europe at around 4 percent. This occurred in the mid to late 1990s with even higher growth rates. However, Poland’s growth started from a very low base after the economy’s preliminary decline. It also slowed considerably after 2000 and it was a little less than 1 percent at the beginning of 2003. Poland’s growth in the 1990s was led by strong export performance because of complete currency convertibility at a credible rate. The majority of the growth happened in a speedily growing private sector based on native Polish entrepreneurship, in spite of the slowness of privatizing existing State Owned Enterprises.[22]

[1] The Economist, “Russia, the Sixth Wave” (December 5, 1992).
[2] Selden, The Political Economy of Chinese Development, p. 157. See also Kai-yuen Tsui, “Decomposition of China’s Regional Inequalities,” Journal of Comparative Economics 17 (1993): 600–627.
[3] Leszek Balcerowicz, Reforma Gospodardarcza. Propzycje, tendencie, kierunki dyskusji (Government Reforms:
Proposals, Tendencies, and Brief Discussion) (Warsaw: PWE, 1981), pp. 279–373.
[4] World Bank, From Plan to Market, pp. 36–37.
[5] M. Boycko,A. Shleifer, and R.Vishny, Privatizing Russia (Cambridge, Mass.: MITPress, 1995), pp. 86–87.
[6] Berkowitz, Daniel, and David N. De Jong. “Policy Reform and Growth in Post-Soviet Russia.” European
Economic Review 47 (2003): 337–352.
[7] Natalia Tabatchnaia-Tamirisa, “Trade Liberalization and Industry Protection in Russia during 1992–1995,”
Hitotsubashi Journal of Economics 38 (1997): 84. See also Simeon Djankov and Caroline Freund. “New Borders:
Evidence from the Former Soviet Union.” Weltwirtschaftiches Archiv 138 (2002): 493–508.
[8] Mark E. Schaffer, “The Polish State-Owned Enterprise Sector and the Recession in 1990,” Comparative
Economic Studies 34 (1992): 58–87.
[9] Ben Slay, “The Polish Economic Transition: Outcome and Lessons,” Communist and Post-Communist Studies
33 (2000): 65; OECD Economic Surveys: Poland, January 2000 (Paris: Organization for Economic Cooperation
and Development, 2000), pp. 50, 176; Darla Munroe, “Economic Efficiency in Polish Peasant Farming,”
Regional Studies 35 (2001): 461–480.
[10] Grzegorz Kolodko and D. Mario Nuti, “The Polish Alternative: Old Myths, Hard Facts and New Strategies
in the Successful Transformation of the Polish Economy,” Research for Action 33 (Helsinki: UNU/WIDER,
[11] Christine A. Bogdanowicz-
Bindert and Jan Czekaj, “Poland: A Privatisation Model That Works,” in S. Faulkner, J. McLoughin, and
S. Owsiak, eds., Polish Transition Ten Years On—Processes and Perspectives (Aldershot, U.K.: Ashgate, 1999),
pp. 78–118.
[12] Cao, Yuan Zheng, Gang Fen, and Wing Thye Woo. “Chinese Economic Reforms: Past Successes and Future
Challenges.” InWing ThyeWoo, Stephen Parker, and Jeffrey D. Sachs, eds., Economies in Transition: Comparing
Asia and Europe. Cambridge, Mass.: MIT Press, 1999: pp. 19–39.
[13] Naughton, Barry. “China’s Emergence and Prospects as a Trading Nation.” Brookings Papers on Economic
Activity (2) (1996): 273–344.
[14] Aizur Rahman Khan and Carl Riskin, Inequality and Poverty in China in the Age of Globalization [New York: Oxford University Press, 2001], p. 48). See also Long Gen Ying, “China’s Changing Regional Disparities during the Reform period,” Economic Geography 75 (1999): 59–70.
[15] Zhao Renwei, “Increasing Income Inequality and its Causes in China,” The Chinese Economy 33(4) (2000): 11.
Per capita GDP levels in 1966 are in U.S. dollars from Alvin Rabushka, The New China: Comparative
Economic Development in Mainland China, Taiwan, and Hong Kong (Boulder, Colo.: Westview Press, 1987),pp. 206, 217, and 226.
[16]  (Shujie Yao, “Economic Development and Poverty Reduction in China over 20 Years of Reform,” Economic Development and Cultural Change 48 [2000]: 451).
[17] GDP growth rates and CPI inflation rates for 1970–1980 and 1980–1990 are from Asian
Development Bank, Asian Development Outlook (Hong Kong: Oxford University Press, 1992), pp. 288 and 296.
GDP growth rates for 1990–1998 are from John Wong and Lee Ding, China’s Economy into the New Century:
Structural Issues and Problems (Singapore: World Scientific, 2002), p. 275.
[18] Inflation rates for 1990–2000 are
from The U.N. Human Development Report, 2002 (New York: Oxford University Press, 2002), pp. 190–191
[19] Evgeny Gavrilenkov, “Permanent Crisis in Russia: Selected Problems of Macroeconomic Performance,”
Hitotsubashi Journal of Economics 40 (1999): 53.
[20] OECD Economic Surveys: Poland [Paris: Organization for Economic Cooperation and Development,
1992], p. 86. Also, see Mark E. Schaffer, “The Polish State-Owned Enterprise Sector and the Recession in 1990,” Comparative
Economic Studies 34 (1992): 58–87.
[21]for unemployment in Poland for 1997–1999 from OECD Economic Surveys: Poland January 2000 (Paris: Organization for Economic Cooperation and Development, 2000), p. 31
[22] Marie Lavigne, The Economics of Transition:
From Socialist Economy to Market Economy, 2nd ed. (NewYork: St. Martin’s Press, 1999), pp. 284–286; for output
and inflation in all countries for 1997–1999 from World Economic Outlook 2000: Focus on Transition Economies
(Washington, D.C.: International Monetary Fund, 2000), pp. 203, 215.

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