The Move to Privatization
China 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


Public auctions were run by the bank



There was still a distrust of Capitalist institutions
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
Annual Inflation Percentage
1000
900
800
700
Percentage
600
Russia
500
China
400
USA
300
200
100
0
1980
-100
1985
1990
1995
2000
2005
Annual Real GDP Growth (Percentages)
15
10
5
China
Russia
USA
0
-5
-10
1985
1986
1990
1993
1996
1999
2000
2001
2002
2003
2004
Foreign Direct Investment (Billions of US 2000 Dollars)
700
600
500
400
China
300
Russia
USA
200
100
0
-100
1985
1986
1990
1993
1996
1999
2000
2001
State Owned Manufactuing firms in Russia
250000
200000
150000
Number of Privatized Manufacturing firms by
year
Private share of employment
100000
50000
0
1992
1993
1994
1995
1996
http://www.worldbank.org/ecspf/PSDYearbook/russia.html
Private share of employment in Percentage
40
35
30
25
20
Private share of employment
15
10
5
0
1992
1993
1994
1995
http://www.worldbank.org/ecspf/PSDYearbook/russia.html
1996
Ownership Structure 1978 to 1994
COE = collective
SOE = State owned
IOE = Individual
OOE = Other owned
http://www.ilo.org/public/english/employm
ent/ent/papers/emd24.htm
Percent GDP Growth
60%
50%
40%
State Owned
30%
Collective Owned
Private Owned
20%
10%
0%
1991
1992
1993
1994
1995
1996
1997
1998
John Sun - Privatization: P. R. China 2005
1999
2000
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???