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 1985-91• 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 Perestroika1985-86• 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

1986-89• Glasnost – allows debate and free expression of opinions; massive

political changes• Radicalisation of economic reforms: decentralisation, more

independence for companies, foreign trade liberalisation

1989-91• 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 Disaster China’s Isolation

Problems facing ChinaCultural 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 1978-92• Introduced Gaige

Kaifang – Socialist reform with Chinese Characteristics

• Four Modernizations- Agriculture, Industry, Technology, Defense

Implementation of Gaige Kaifang1978-84• Produce surpluses in agriculture and let farmers sell leftovers for

profit• Attract foreign investment and technology, promote exports1984-88• Creation of a two-track pricing system• Establishment of a central bank1988-91• Reforms successful in spurring demand and production, which led

to inflation• State resorted to stimulative monetary and investment policies to

boost the economy1991-92• 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 Thought

Convergence 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 6th largest economy

• Large influx of Petrodollars

• Low personal income tax

• More Military spending

• Conflicts with former Soviet republics

China Today

• World’s 2nd 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 20-40 years