Globalization and the post-socialist transition: Russia and China Compared

Peter Rutland

Working Paper CSGP 07/6 Trent University, Peterborough, Ontario, Canada www.trentu.ca/globalpolitics

Abstract

During the 20th century the two socialist giants, Russia and China, each developed their own political and economic system that stood in stark contrast to the prevailing Western model of democratic capitalism. In the 1990s, both countries abandoned many elements of their model, a process that coincided with the onset of a new wave of globalization. This paper compares and contrasts the trajectories followed by Russia and China over the past 20 years. Russia and China started off in very different situations and they pursued radically different transition strategies. But they are both now converging on a similar model of state-led development in the face of common global challenges and opportunities.

At first glance, the contrasts between China and Russia seem stark. In the 1990s Russia embraced

democracy and an economic “big bang,” but China maintained most of the features of Leninist party rule while adopting gradualist economic reforms. China welcomed foreign investment, while Russia kept it at arm’s length. The Russian path led to initial and rapid failure: economic collapse followed by democratic collapse. The Chinese path produced 28 years of robust economic growth, and has turned China into a leading member of the international economic community. Many Western observers believe that the spread of capitalism will lead eventually to the spread of democracy, as it did in Taiwan, Thailand and South Korea.

However, by 2006 the Russia/China comparison has started to change. Now the picture is more

one of convergence than divergence. Since 2000 Russia has seen political recentralization under President Vladimir Putin. Democratic elements have been squeezed out of the political system, while the autonomy of the business “oligarchs” has been curtailed. In contrast to Russia, the Chinese economy is significantly more competitive and pluralist, but the Chinese Communist Party still rejects political liberalization. There has been some devolution of power, but this stops well short of liberal democracy.

Both countries now seem to be converging on a regulated market model in which elements of

market pluralism are embedded in post-communist institutions and practices. Both China and Russia present a common lesson for theorists of globalization: that the world is not “flat,” and that strong states can find a niche role in the new global economic order. INTRODUCTION

In the 1930s the Soviet Union opted for a capital intensive, heavy-industry led development model, one that required an authoritarian state to extract the necessary factors of production from society. The Soviets stuck with their model until it collapsed in the wake of abortive reform efforts between 1985 and 1991. China followed the Soviet example in the 1950s, with disastrous results. After decades of economic stagnation, in 1978 the Chinese leadership started on a new path of development combining state control with gradual marketization. By the 1990s, both countries’ search for a more effective development strategy was caught up in the broader process of international transformation known as globalization.

While Russia experienced rapid political liberalization under Mikhail Gorbachev, followed by

system collapse, China embarked on a managed transition that involved the step-by-step introduction of elements of capitalism while the Chinese Communist Party (CCP) retained a monopoly of political power. The Tiananmen Square crackdown in 1989 led some to believe that Communist China was being torn by the same profound contradictions that had sent the Soviet system into political oblivion. However, the Chinese political system remains intact, and expectations that the introduction of capitalism must inevitably lead to the introduction of democracy have eroded.1

China’s transition is generally considered a success, while Russia’s is generally considered a

failure. China has doubled its GDP every decade, and has lifted 400 million people out of absolute poverty. In key development indicators such as phone lines, internet usage, life expectancy to high-tech exports, it has closed the gap with Russia. (See Table 1) These economic achievements have translated into a 1 Andrew Nathan, “Authoritarian resilience,” Journal of Democracy, 14, 1, 2003, 6-17.

2

substantial rise in China’s global status. In contrast the Soviet state lost half its territory and population, and the Russian Federation has struggled to maintain its status as a great power. Although the implosion of the Soviet state was shocking enough to Chinese leaders, equally disturbing was the collapse of Russian society that occurred after the collapse of the Soviet state – economic recession, an upsurge in crime and lawlessness, a falling birth rate rise and rising death rate, and a decade-long war with terrorism in Chechnya. Russia saw its GDP fall by 40%, only recovering to the 1990 level in 2002.

* * * * * *

The first section of this paper examines the transition path followed by Russia and China since

1980, noting the main developments in the spheres of politics, economic reform, foreign trade, and social structure. The second section analyses the reasons for the differences between the trajectory of the two countries: initial conditions, leadership choices, the international context, and the learning capacity of the respective elites. Finally the paper outlines the principal features of the regulated market consensus towards which both countries have converged. Globalization and pluralism

By 2006, both Russia and China have become substantially integrated into the international

economic system. International trade accounts for one half of Russia’s GDP and 60% of China’s.2 China joined the WTO in 2001, and Russia is close to joining.3 Russian and Chinese companies are major players in international capital markets: raising loans, selling shares, and acquiring foreign companies.4 China’s economy has been growing at an average of 9.4% a year for some 28 years; Russia has grown by 6% a year since 1999.

To what extent has this embrace of globalization produced an increase in pluralism within these

two countries? On the political front, neither China nor Russia shows much evidence of substantial democratization. The Chinese political system remains a one-party state, and Russia has regressed from a shaky electoral democracy to an authoritarian presidential regime. This widening gulf between economic progress and political stagnation is a serious challenge to the liberal paradigm laid out in such influential works as Francis Fukuyama’s End of History and Thomas Friedman’s The World is Flat.5 It has been a long-standing tenet of liberalism, at least since the Enlightenment, that all good things go together, that the tide of Progress raises all boats.6 The past 200 years have proven that the most efficient form of economic organization is a market consisting of multiple autonomous producers and consumers. It seems reasonable to assume that the most efficient form of political organization may be one closely analogous to that of the market: liberal democracy. When Joseph Schumpeter made this argument about the congruence between market capitalism and representative democracy in 1942, it was more an act of faith than an empirical observation, since there were barely a dozen democracies in existence and they were fighting for their survival.7 But by the 1990s, the correlation between democracy and economic development was more

2 See Table 1. Russian trade was 17% of GDP in 1990. 3 Russia started negotiations to join in 1994, and has concluded bilateral agreements with just about all 145 member countries, most recently signing an agreement with the US in November 2006. 4 In 2003 China had four firms with more than $1 bn in foreign assets: China Ocean Shipping $8.5 bn, China National Petroleum Corp. $4.1 bn, China State Construction $3.4 bn, CNOOC $1.5 bn, China Minmetals Corportation $1.2 bn. Russia had three: Lukoil $7 bn, Norilsk Nickel $1.5 bn, Novoship $1.0 bn. UNCTAD, World Investment Report 2005 www.unctad.org 5 Francis Fukuyama, End of History and the Last Man (Harper, 1993); Thomas Friedman, The World is Flat. A Brief History of the 21st Century (Farrar, Strauss and Giroux, 2005). 6 This was also the view of “New Enlightenment” Chinese intellectuals in the 1980s. Wang Hui, China’s New Order (Harvard University Press, 2003), 156. 7 Joseph Schumpeter, Capitalism, Socialism and Democracy (Harper, 1942).

3

firmly established, and the case for congruence was the accepted wisdom in the West.8 There are still some skeptics in the West, such as Fareed Zakaria, who pointed to the danger of “illiberal democracy”: populist leaders who rise to power through elections but then violate the rights of targeted groups, such as ethnic minorities or the wealthy.9 The deepening of globalization over the past decade has intensified these debates. While democracy advocates see globalization as cementing the global spread of democracy, skeptics argue that globalization is generating a pluralism of levels and types of authority that challenge the traditional state from above and from below.10

Part A THE RUSSIAN AND CHINESE CASES COMPARED For most of the 1990s, Russia and China seemed to be headed down very different paths. 1) Politics Looking back, one sees a surprising pattern. In both Russia and China, the highest level of democratic debate occurred in the late 1980s, during the early experimental period when various reform paths were being debated by the national leadership. Over time, as the economic reforms eventually took over, the scope for political dissent actually shrank. This is the opposite of what one would expect from modernization theory.11

Russia emerged from the Soviet collapse with a more or less free press, a spectrum of independent

political parties and social movements, and an elected legislature and president. In stark contrast the Tiananmen square incident in June 1989 signaled that the Chinese Communist party (CCP) would not tolerate any more experiments with democratization.12 In the wake of the crackdown, oppositionists were jailed or driven from the country; reformists were purged from the ranks of the party leadership; and intellectuals lost their faith in the possibility of the “fifth modernization” – democracy.

However, Deng Xiaoping in his 1992 tour of the south made the historic decision to accelerate

economic reform – in a bid to build a new basis for CCP legitimacy, and thereby prevent a repeat of 1989. This danger was magnified by the dramatic implosion of the Soviet state at the end of 1991. The failure of the August 1991 coup attempt by Soviet hardliners was a blow to CCP leftists who thought that repression was a sufficient basis for rule. Subsequent political reforms have been limited to the spread of electoral competition at village level, introduced in 1988; a strengthening of the oversight role of national and local legislatures; and steps to bolster the rule of law and fight corruption.13 None of these measures have been allowed to infringe on the authority of the CCP. The CCP has undergone some organizational reforms to maintain its effectiveness post-Mao – a renewed commitment to collective leadership, plus some new norms such as retirement of aged cadres and professionalization of the party ranks.14 It has also reached out to co-opt new social groups into its ranks – most notably, the 2002 decision to allow private entrepreneurs

8 For the former: Adam Przeworski, Democracy and Development (Cambridge University Press, 2000); for the latter: John Mueller, Capitalism, the Market, and Ralph’s Pretty Good Grocery (Princeton University Press, 1999). 9 Fareed Zakaria, The Future of Freedom. Illiberal Democracy at Home and Abroad (Norton, 2003). This was an expansion of his article “The rise of illiberal democracy,” Foreign Affairs, November 1997, 76, 6. 10 Philip G. Cerny, “Globalization and the erosion of democracy,” European Journal of Political Research, 1999, 36, 5, 1-26. 11 Minxin Pei, “China: Can economic growth continue without political reform?,” Strategic Asia 2006, (National Bureau for Asian Research, 2006), 303-32. 12 Minxin Pei, China’s Trapped Transition, (Harvard University Press, 2006); Joseph Fewsmith, China Since Tiananmen. The Politics of Transition (Cambridge University Press, 2001). 13 Pei, ibid., ch. 2; Fewsmith, ibid. Even so, the Standing Committee of the National People’s Congress only rejected government-proposed bills three times in 28 years. A more positive statistic is that 21% of lawsuits filed against government officials succeeded in 2002. Pei, ibid., 60, 67. 14 Fewsmith, 8.

4

to become CCP members.15 Groups that are deemed threatening to the state have been suppressed – such as an effort to create the opposition China Democracy Party in 1998, or the mass demonstrations of Falun Gong in 1999.16

Ironically, the quality of Russian democracy arguably peaked in 1990-91, the last year of the Soviet Union, when there was an aggressive free press, considerable political mobilization, and unpredictable elections.17 During the years of President Boris Yeltsin (1991-99) elections were regularly held, and the results generally reflected the will of the voters, although the mass media were heavily biased in favor of the president.18 But in 1992-96 politics settled down into an ugly standoff between a reformist president and an opposition-dominated parliament. After 1996 the level of competition steadily eroded from election to election. The situation has further deteriorated under Vladimir Putin, who was elected president in March 2000.19 Elections are still held on schedule, but state control over the media (especially TV) and the restrictions on organized political opposition have been stepped up. After the 2003 parliamentary elections Putin established secure control over the legislative branch, and in 2004 he abolished popular elections for regional governors, one of the few remaining elements of electoral contestation (about one third of incumbent governors had lost their re-election bids).

The most well-known democracy index is that compiled by Freedom House since 1972, grading

the level of political rights (PR) and civil liberties (CL) on a 1-7 scale, with 1-2 being “free” and 6-7 “unfree.” Freedom House regarded the new Russian Republic as “partly free,” ranking it 3 for PR and 4 for CL from 1993 through 1997. Russia’s grade slipped to 4/5 in 1999 and 5/5 in 2000-2003. In 2004 Russia was relegated to the category “unfree”, with a 6 for PR and 5 for CL.20

There has been much less variation in the political climate in China, especially since 1989.

Freedom House scored China a 7/7 from 1972 through 1977, when it jumped to 6/6. In 1989 it slipped back into 7/7 and stayed there until 1998, when it rose to 6 for civil liberties and 7 for political rights. Freedom House has kept that score for China through 2005, arguing in its most recent report that “the country remains an authoritarian state under the complete control of the Chinese Communist Party.”21 Among the few positive remarks in that report is recognition of the 2002 decision to allow private entrepreneurs to join the CCP; the observation that “security forces are generally under civilian control;” and that “The gradual implementation of reforms over the past several decades has freed millions of Chinese from CCP control of their day-to-day lives.” Although some interventions in personal life continue, such as the one-child policy, the registration system has been eased, though not entirely eliminated. (Persons without a residence permit are denied health and education benefits.) Likewise in Russia personal daily life is quite free, and the registration system was legally abolished. In both countries there has been extensive privatization of urban housing, giving individuals exposure to and a stake in the new market economy.

NGOs have flourished in both Russia and China, some with international links.22 More than 200

foreign NGOs work in China investing an estimated $200 mn a year, but not until a new law was introduced in 2005 were they allowed to legally register.23 However, NGOs which are seen as politically-motivated have been the target of state crackdowns. In Russia, even under Yeltsin some groups were 15 Bruce Dickinson, “Threats to party supremacy,” Journal of Democracy, 14, 1, 2003, 25-35. 20% of entrepreneurs are members, but the CCP has branches in less than 1% of the 1.5 million private enterprises. 16 Dangerous Meditation: China’s Campaign Against Falun Gong (Human Rights Watch, 2002). 17 Lilia Shevtsova, Yeltsin’s Russia: Myths and Reality (Brookings Institution, 1999). 18 Richard Rose and Neil Munro, Elections Without Order: Russia’s Challenge to Vladimir Putin (Cambridge University Press, 2002). 19 Lilia Shevtsova, Putin’s Russia, (Carnegie Endowment for International Peace, 2nd ed. 2005). 20 Robert W. Orttung, “Russia,” Nations in Transit 2005 (Freedom House, 2005), at http://www.freedomhouse.org. That puts Russia’s political system below that of Afghanistan, Bahrain or Burkina Faso. 21 Freedom House, China Country Report, 2005, http://www.freedomhouse.org 22 Sarah Henderson, Building Democracy in Contemporary Russia. Western Support for Grassroots Organizations (Cornell University Press, 2003). 23 Tang Yuankai, “More room for foreign NGOs,” Bejing Review, 20 October 2005.

5

harassed, and Western observers were alarmed by the 1997 law on religious organizations which forced all congregations founded during the previous 15 years to re-register. The Putin administration got more serious about curtailing such groups’ activities after Georgia’s “rose revolution” in 2003 and the “orange revolution” in Ukraine the next year, both of which were actively assisted by Western-funded NGOs.24 A new more restrictive law requiring all foreign-based NGOs to reregister came into effect in Russia in April 2006.25

2) Economic reform Russia launched price and trade liberalization in 1992, accompanied by a program of mass privatization of state-owned factories and farms. The government was unable to control monetary and fiscal deficits, which meant that high inflation and macroeconomic instability prevailed until stabilization was finally achieved in 1999. By 1995 70% of the nation’s assets had been shifted into legally private corporations.26 The privatization program was hijacked by a small group of well-connected insiders (and a few outsiders), leaving the Russian public feeling cheated and the Russian treasury depleted (both in terms of assets and current taxes). The chaos and uncertainty engendered by the privatization process made it difficult for Russians to invest, while foreign investors were largely shut out. The Russian government wanted to keep the “crown jewels” of the economy – oil, gas and metals – in Russian hands. Foreign companies that did come in to these key sectors were usually burned by opaque property rights, unreliable courts and the vagaries of the licensing process.

Putin has both consolidated and rolled back the reforms since taking office. On one hand he has created a more robust legal infrastructure, increased taxation, and oversaw seven years of economic growth averaging 6% a year. On the other hand he has strengthened state control over key industries. Although the basic structures of a market economy had emerged by 1999, free entry was still limited, oligopolistic rents were high, and the incentives to efficiency and investment were low.

Beijing’s reforms were middle-up rather than top down in nature – the center encouraged and

tolerated initiative from below, and local entrepreneurs and politicians responded to the challenge. There was a spirit of pragmatic exploration rather than top-down declarations. The operative metaphor in China was “feeling the stones as you cross the river,”27 while in Russia one of the reformers’ favorite sayings was that “you cannot cross a chasm in two jumps.”28

China started in 1978 with the freeing of peasant farmers from plan controls through the

introduction of the household responsibility system. This boosted output and also started freeing labor for factory work. This was followed by granting permission for local state authorities to set up profit-seeking town and village enterprises (TVEs). State owned enterprises (SOEs) were likewise freed to become more entrepreneurial, including leasing units to managers. The seventh five year plan that began in 1986 encouraged coastal regions to engage in manufacturing assembly for foreign markets. Between 1978 and 2003, China recorded an annual growth rate of 9.4%, while per capita income rose from $150 in 1978 to $1,700 in 2005.29 China maintained the state sector with its social guarantees, initially through budget subsidies and then through soft credits via the four state-controlled banks. Over time the rapid growth of the private sector meant that the state sector’s share of the industrial labor force fell from 80% to 29%

24 Graeme Herd, “Colorful revolutions and the CIS,” Problems of Post-Communism, 52, 2, March 2005. 25 Anastasia Kornya, “NGOs fail the test,” Vedomosti, 29 June 2006. 26 Andrew Barnes, Owning Russia. The Struggle Over Factories, Farms and Power (Cornell University Press, 2006). 27 Fewsmith, op. cit., 83. 28 George Taber, “Rx for Russia: Shock therapy,” Time Magazine, 27 January 1992. Taber writes that the well-known advisor Jeffrey Sachs “frequently cites the old Russian maxim that you cannot cross a chasm in two jumps.” The maxim seems to have originated, in English at least, a century ago with British Prime Minister David Lloyd George. 29 Pei, op. cit, forthcoming 2006.

6

1978-2000.30 The OECD concludes that “the changes in government polices have created a largely market-oriented economy in which the private sector plays a key role.”31 Small and medium SOEs began to be privatized in 1994 – though the government avoided that term, instead talking of restructuring and asset transfers. In 1997 a major program of restructuring SOEs was launched, leading to wage arrears and layoffs. The government softened the blow by introducing severance pay at 60% of the previous wage for three years. Overall, the state planners showed caution and flexibility in introducing these reforms. For example, price controls on grain were lifted in 1993, but restored in 1995 after the move triggered shortages and price gouging. In 2001 controls were once again eased in grain consuming regions.32 They have also tried to stimulate development in interior provinces, and to guarantee free education through ninth grade in all regions.

While the Chinese state kept firm control of the banking system, in Russia the lifting of controls

led to the sprouting of 1,500 private banks in the early 1990s, most of them “pocket banks” attached to individual firms. Many banks collapsed in the August 1998 financial collapse, enabling the state-owned Sberbank to strengthen its dominant role as the depository of personal savings. The Chinese reforms began in the countryside, but in Russia the organization of farm production was largely untouched by the whole reform sequence, with private farms still accounting for less than 5% of food production.

Russia in 1992 launched a massive top-down privatization of firms through the formal creation of

legally independent corporations. In this they were following Western advice, which stressed the importance of creating clear property rights in a rule of law system. China pursued a very different path: no mass privatization, but the evolution of a hybrid model of SOEs and TVEs behaving as profit-seeking entities with unclear property rights. These Chinese enterprises were also deeply embedded in strong local and even family networks.33 One important step was the 1998 decision ordering the CCP and army to divest themselves of businesses.

In practice, the Russian approach failed to generate the transparent and secure property rights that

the reformers claimed as their goal. There were hundreds of cases of organized crime groups seizing control of enterprises by force, and loopholes in the 1998 bankruptcy law provided a legal channel for such expropriations, aided by compliant local courts. Putin’s expropriation of the leading private oil company Yukos in 2003-5 and Shell’s forced sale of its majority stake in Sakhalin II in December 2006 are two striking examples of the political contingency of property rights.

So in practice the weakness of property rights is something that unites rather than divides the

Russian and Chinese cases. And in neither Russia nor China has the state given up control over key strategic sectors such as telecommunications or power generation.34 Small steps have been taken in both countries to create competition in these sectors and create a modern regulatory framework, but in practice political dirigisme is still decisive.

Regional and social inequalities sharply increased in both countries as a result of the reforms. In

Russia the Gini coefficient rose from 0.29 in 1992 to 0.40 in 1997, where it stayed through 2004, while in China it went from 0.28 to around 0.45 1978-2000.35 In Russia the boom regions were Moscow (where the oligarch headquarters were located) and a handful of oil and gas producing regions, notably Tyumen. In China it was the coastal provinces that saw the most successful TVEs and export plants. A key part of the Chinese reform was the switch in 1994 from tax-sharing between federal and provincial authorities to a flat-rate contribution, above which the region could keep additional revenues. In return for this devolution, Deng got strong support from regional leaders for his reform efforts.36 In both countries the tax-gathering 30 Pei, op. cit, 2006, 3. SOE share of industrial output fell from 78% to 41%. 31 OECD, Economic Survey of China 2005 (OECD, 2005). 32 Pei, op. cit, 2006, 97-102. 33 Shu-Yun Ma, “Understanding China’s reform,” World Politics, 52, 4, 2000, 586-603. 34 Margaret Pearson, “Institutions and norms of the emerging regulatory state. The business of governing business in China,” World Politics, 57, 2, 2005, 296-322. 35 Rosstat, www.gks.ru; Pei, op. cit, 2006. 36 Fewsmith, op. cit, p. 46.

7

capacity of the central state shrank and then recovered in the course of the reforms. In China central government revenues fell from 31% of GDP in 1978 to 10.7% in 1995, rebounding to 17.1% in 2001.37 Similarly, Russian federal revenues fell to 9.2% of GDP in 1998, recovering to 17.1% in 2001.38

3) External integration Both countries relied on external integration as a key driver of their economic transition. China’s trade tripled in every decade, raising its share in world trade from 0.8% in 1978 to 7.7% in 2005. But because of the 1990s slump Russia’s share of world trade fell from 3.4% in 1990 to 1.5% in 2000 and 1.8% in 2005.39 China’s economic regeneration was led by an explosion of manufacturing assembly plants in coastal locations, importing components and raw materials and exporting manufactured goods to foreign markets. 40 China’s key resource was its seemingly limitless supply of cheap labor. Russia had neither the labor reserves; nor the ports close to global shipping routes; nor the entrepreneurial spirit; nor the political will; to embrace this kind of export manufacturing-led growth path.

The Chinese strategy required a prominent role for foreign capital, while Russia was much less enthusiastic about foreign direct investment (FDI).41 On the other hand, Russia threw open the doors to portfolio investors, while China kept them at arm’s length. China attracted an average of $12 bn FDI 1985-95, and in 2004 pulled in $60 bn.42 Russia averaged $1.3 bn FDI 1985-95 and $11.7 bn in 2004. (And in Russia this was balanced by an annual outflow of $869 mn in 1985-95 and $9.6 bn in 2004). By 2006 China had accumulated a net stock of $207 billion FDI (15% of all capital), while Russia had only $17 billion. While most Western observers see this influx of FDI as an unqualified good thing, some skeptics suggest it points to weaknesses in the Chinese economy, such as dependence on foreign expertise and inability to channel domestic savings into productive investment.43

To facilitate this inflow of capital China created Special Economic Zones with favorable tax and

regulatory conditions. This process was greatly facilitated by the existence of Chinese capitalist exclaves in Hong Kong and Taiwan, part of the 50 million-strong Chinese diaspora whose annual income is equal to two-thirds of China’s gross domestic product.44 Though foreign investors were encouraged, they were typically forced into joint ventures with their own stake capped at 50%.

Despite this opening to foreign trade and investment, the Chinese preserved tight controls on

capital flows. The renminbi is convertible on current account but not on capital account, and has been pegged to the dollar since 1995, at a rate equal to about 25% of PPP. (In July 2005 the peg was switched to a basket of currencies.) Thanks to these controls, China has maintained its cheap labor advantage, and has prevented the speculative capital inflows and outflows that have devastated other developing economies. They even managed to ride out the 1997 Asian financial crisis largely unscathed. The under-valuation of the renminbi has attracted growing criticism from the US, concerned at its ballooning trade deficit with China, and from China’s low-wage competitors who have lost business to their under-priced rival. But for

37 Dali Yang, “State capacity on the rebound,” Journal of Democracy, 14, 1, 2003, 43-50. 38 OECD, Economic Survey: Russian Federation 2004 (OECD, 2004). 39 Martin Wolf, “China should risk bolder trials,” Financial Times, 6 June 2006; Giorgio Navaretti, “Patterns of trade and protection,” World Bank, May 2004; WTO, “World Trade 2005,” 11 April 2006. 40 Shang-jin Wei, ed., The Globalization of the Chinese Economy (Edward Elgar, 2002); Peter Nolan, Transforming China: Globalization, Transition, and Development (Cambridge University Press, 2004); Nicholas Lardy, Integrating China into the Global Economy (Brookings Institution, 2001). 41 Mary Gallagher, “Reform and openness: Why Chinese economic reforms have delayed democracy,” World Politics, (April 2002), 54, 3, 338-372. 42 UNCTAD, World Investment Report 2005 www.unctad.org 43 Yasheng Huang, Selling China: Foreign Direct Investment During the Reform Era (Cambridge UP 2003). 44 Brunson McKinley, “Migration is here to stay, so get used to it,” International Herald Tribune, 24 June 2005.

8

practical purposes the asymmetrical US-China trade relationship has served both sides well for the past two decades.

In contrast Russian reformers largely followed Western advice to pursue external liberalization – in part because IMF credits were conditional on such policies.45 Russia lifted many capital controls in 1992-94 and allowed the ruble to float, trying to use the exchange rate as the nominal anchor of the stabilization program. Dollars flooded in, forming a parallel currency for most of the 1990s. Most of the proceeds from Russia’s oil and metals export boom were hidden in offshore accounts, while some $40 bn of speculative capital flooded into the country – mainly to cover the government’s yawning fiscal deficit. This reckless borrowing led to the August 1998 financial crash, which was triggered by the slump in the price of oil following the 1997 Asian crisis. August 1998 saw a 75% devaluation of the ruble, an effective default on foreign loans, and the destruction of the assets of most of the financial oligarchs. The crisis ironically cleared the decks for an economic recovery by making Russian food and manufactures more competitive with imports. More importantly, it enabled a renaissance of state power by fatally weakening the oligarchs financially and politically. 4) Winners and losers In Russia the radical reforms of the early 1990s took place during a massive breakdown of economic and political institutions, with GDP contracting by 40% 1989-96 and inflation of 1400% in 1992. The general breakdown in law and order also contributed to the pool of reform losers: millions of people lost their savings through the collapse of fraudulent banks and “pyramid” investment schemes in 1992-95. In contrast the Chinese reforms took place in an economy that was rapidly rising. The Chinese talked about “growing out of the plan,” while Russia was effectively “falling” out of the plan.46 In Russia the losers from economic reform clearly outnumbered the winners – but in China the proportions were reversed, at least until the mid-1990s.47 This made it easier for the state to protect the potential and actual losers in China than in Russia. On top of which the CCP continued to function and the pre-reform state structures continued to operate. The Russian state’s capacity to raise taxes was eroding so rapidly that efforts to protect reform losers were fruitless. In both countries the broad sociological portrait of the losers looks similar: the elderly, the unskilled, peasants in remote villages. However, formerly privileged sectors of Russian society were also hit hard – the intelligentsia, state-sector employees such as teachers and doctors, and the workers and researchers of the defense industry complex. Such groups were not so dramatically affected by the Chinese reforms. Increased participation in international trade and production chains seems to increase inequality within the participating countries, both by region and by social class. It also stimulates labor migration, both within the country in question and across international borders. (Russia hosts an estimated 10 million migrant workers, mostly from the former Soviet republics.) These dynamic changes are likely to cause social tension and protests and increased demands on the government for services from law and order to housing and education.

Turning to the winners, the picture in the two countries looks rather more similar. Broadly speaking, the young and the entrepreneurial did well, and current and former party and state officials (and their children) tend to dominate the ranks of the new capitalist class in both countries. In Russia there was a more extreme concentration of wealth in the hands of the new oligarchs than in China. The more uncontrolled nature of the privatization; the weakness of law enforcement agencies; and the resource-base of the economy, all left more scope for the rapid accumulation of vast fortunes. By 2006 Forbes magazine

45 Randall Stone, Lending Credibility (Cornell University Press, 2004). 46 Barry Naughton, Growing Out of the Plan: Chinese Economic Reform, 1978-1993 (Cambridge University Press, 1995). 47 Wang argues that reform was beneficial to all social groups between 1978 and 1993, but with rising inequality it has become more of a zero-sum game since then. Shaoguang Wang, “The problem of state weakness,” Journal of Democracy, 14, 1, 36-42, 40.

9

was reporting 33 dollar billionaires in Russia, but “only” eight in China.48 Estimating the oligarch’s fortunes was made possible by the appearance of a vibrant but volatile stock market in which shares of the companies were floated.

In contrast to the Russian oligarchs, Chinese tycoons stay in the political shadows, colluding with

regional political bosses but avoiding anything like a direct challenge to the national state.49 Pearson argues that “although China’s business elite is a clearly defined group, it lacks horizontal ties that bind the members of the group together and facilitate collective consciousness and collective action.”50 Clearly, the political invisibility of the tycoons is connected to the lack of democracy and the continuation of CCP rule. It may also have roots in the Confucian culture of disdain for merchants, and has a parallel in the historical role of the Chinese merchant diaspora, who form a rich and influential but politically vulnerable minority in south-east Asia. 5) The degree of pluralism To what extent has the spread of market relations translated into a dispersal of political and economic power? In both countries, the traditions of one-party rule have created a culture inimical to pluralism, in which politics is seen as a “winner take all” game. The key liberal argument for pluralism is that you cannot always be sure of being a winner, so it is better to share power and grant rights to all political actors. But in neither country has the political elite accepted this idea. Both countries have preserved one-party systems based on clientilistic networks in which particularism rather than pluralism is the structuring principle of political life.

Gilboy writes that “China’s unreformed political system suppresses independent social organization and horizontal networking and instead reinforces vertical relationships.”51 Gilboy sees this as a barrier to China’s long-term economic development, since it fragments China’s domestic markets and hinders the emergence of nationally-competitive firms. It also makes the economic more dependent on imports of foreign technology and expertise.

In Russia, the rapid privatization of a highly-centralized economy saw many state monopolies

handed over to private owners. Successful entrepreneurs created conglomerates which absorbed their rivals and pursued vertical integration in their chosen sector. By 2001, according to a World Bank study of industrial concentration, the country’s 23 largest firms accounted for 30% of Russia’s GDP, and these firms were effectively controlled by a mere 37 individuals.52 Some firms were not broken up, but were privatized as state-controlled monopolies – most notably Gazprom (natural gas), UES (electricity), the Russian Railways, and Transneft (oil pipelines). In addition to the national oligarchs, many regional markets were controlled by local monopolists. There was some evidence to support the pluralism hypothesis at regional level – in that provinces dependent on a single wealthy firm were less likely to have competitive electoral politics than regions with several competing economic elites.53 The former is more common than the latter. Likewise in China devolution tended to produce “feudal lord economies,” controlled by a unified local elite who erected barriers against competition from other regions.54 Since 1998 the government recentralized

48 India has 23 billionaires. Forbes, April 2006, at http://www.forbes.com/billionaires/ 49 For example they are absent from the national legislature, in contrast to the Russian case – Margaret Pearson, China’s New Business Elite: The Political Consequences of Economic Reform (University of California Press, 1997), 111. Bruce Dickson, Red Capitalists in China: The Party, Private Entrepreneurs, and Prospects for Political Change (Cambridge University Press, 2003) 50 Pearson, ibid., 139. 51 George Gilboy, “The myth behind China’s miracle,” Foreign Affairs, 83, 4, July 2004, 33-48. 52 World Bank, From Transition to Development, April 2004, www.worldbank.org.ru. 53 Kelly McMann Economic Autonomy and Democracy. Hybrid Regimes in Russia and Kyrgyzstan (Cambridge University Press, 2006); Kathryn Stoner-Weiss, Local Heroes: The Political Economy of Russian Regional Governance (Princeton University Press, 2002). 54 Fewsmith, op. cit, 40.

10

administration through the creation of regulatory agencies not answerable to local authorities. This has been partly successful, though it has served more to strengthen provincial rather than federal authorities.55

The sudden appearance of the Russian oligarchs took everyone by surprise. Many in the West welcomed their appearance as a sign that capitalism and pluralism were taking root in Russian soil. However, their ability to acquire and retain their assets rested on their close relations with the political establishment. And the dramatic rise in the political power of the Russian oligarchs was followed by an equally dramatic decline. Their power peaked in 1996, when they helped Yeltsin win reelection by providing cash and favorable media coverage. But then they slipped into internecine conflict when it came to dividing the spoils in the remaining rounds of privatization. The oligarchs did not have a mechanism for resolving disputes among themselves, other than appeal to Boris Yeltsin. Moreover Yeltsin’s final term as president was due end in March 2000, and there was no procedure in place for picking a successor. The oligarchs were severely weakened by the 1998 financial crash, but still played an important role in the 1999 parliamentary election, bankrolling a variety of opposition parties. Yeltsin resigned and appointed Prime Minister Vladimir Putin as “acting president” in December 1999. After Putin won election in March 2000 he started an energetic campaign to strip the oligarchs of their political influence. Putin’s power rested on his command of the “repressive apparatus;” the broader “administrative resources” of the presidential administration; and his surprisingly deep base of popular support. His first step in 2000 was to deprive the oligarchs of the two TV channels that they controlled. In 2003 the most politically active oligarch, oil magnate Mikhail Khodorkovsky, was jailed on tax fraud charges, clearing the stage for a sweeping victory for the pro-government United Russia party in the December 2003 parliamentary elections. The assets of Khodorkovsky’s Yukos company were then renationalized. By 2006 60% of the oil and gas sector was back in state hands. Officials from Putin’s presidential staff were appointed to head the boards of these SOEs, and by 2005 it was clear that a new system of state corporatism was taking shape, spearheaded by a team of ex-KGB officials handpicked by Putin. The post-Soviet state bureaucracy had asserted its dominance over the newly-minted capitalist oligarchs. The peak of pluralism in Russia was probably 1997-99, when Yeltsin’s administrative capacity was at a nadir and the succession question left the future of the Russian polity wide open. The economy had been sufficiently liberalized to enable the oligarchs to enrich themselves, but not so much as to expose them to effective competition (from foreign companies, for example). At that time Joel Hellman published an influential article in which he argued that the oligarchs’ newly-acquired wealth gave them the ability to stop the reform process half way – such that the second stage that would usher in competitive market capitalism may never materialize.56 Hellman failed to foresee the possibility of a resurgence of state control (as did the oligarchs themselves). Most Western observers assume that the state corporatism that Putin has put into place is bad for market competition, bad for democracy, and bad for Russia, in that it may not be able to sustain long-term economic development. Grass-roots pluralism is present in both Russia and China, but is sporadic and disorganized. In Russia, the state discourages the formation of new groups and has succeeded in incorporating the most powerful interest groups into peak organizations that are loyal to the state – as is the case for labor unions and employers’ associations.57 There are occasional mass protests in response to government actions, such as the pensioners’ demonstrations against monetization of social benefits in spring 2005, or environmentalist protests in the spring of 2006 that successfully stopped a plan to build an oil export pipeline along the shore of Lake Baikal. The most successful independent groups have been those organized around single issues, such as the Soldiers’ Mothers movement, or the groups of defrauded investors. 55 Andrew Mertha, “China’s soft centralization,” China Quarterly, 184, December 2005, 791-810. 56 Joel Hellman, “Winners take all. The politics of partial reform in post-communist transitions,” World Politics, 50, 1, January 1998, 203-34. Pei (2006) uses Hellman’s partial reform trap to explain the existence of stagnation in China. 57 Peter Rutland, “Business and civil society in Russia,” in Al Evans, Laura Henry and Lisa Sunstrom (eds.), Russian Civil Society: A Critical Assessment (ME Sharpe, 2006), 73-94.

11

In China, organized dissent is not allowed, but the reforms stimulated a broad range of locally-specific protests in the 1980s from workers affected by wage arrears and the depredations of corrupt officials.58 Protests stepped up after a restructuring campaign was launched for SOEs in 1997, leading to many lay-offs. At the same time there was a mounting wave of disputes in rural regions against local authorities engaging in land seizures and levying illegal taxes.59 87,000 violent protests were reported in 2005, and in June 2006 the government responded with a $42 billion rural assistance program.60

Corruption is a debilitating problem for both countries, a drag on efficiency and a turn-off for

foreign investors.61 Its practice is so commonplace at both high and low levels that bribery and clientilism seem to be the glue holding the political system together.62 The phenomenon is somewhat different in the two countries: Chinese guanxi are more reciprocal and sociologically embedded than Russia’s blat, although both translate as “connections.”63 The character of corruption in Chinia shifted after 1992 as marketization took root and the role of guanxi diminished.64 Leaders in both Moscow and Beijing say that battling corruption is a top priority, and there are occasional exemplary arrests, but these actions barely make a dent in the problem. Anti-corruption campaigns threaten the unity of the elite, since they may trigger bitter factional battles that further undermine the elite’s legitimacy in the eyes of the public. 6) Future prospects: stability or instability? According to conventional Western assumptions about the congruence of political and economic liberalism, the current situation in Russia and China is unsustainable. In both countries, the economic system is significantly more market-driven and hence pluralist than the political system. “The market’s irresistible force is meeting the party’s immovable object. At some point, one of them must surely give.”65 Liberals assume that a breakthrough to democracy is still possible and necessary in both countries. Pessimists expect the state to take more steps to rein in the market – jailing businessmen, nationalizing private companies, erecting protectionist barriers.

Moves by the CCP to broaden the political elite to include businessmen have exposed the contradictions within a regime that embraces capitalism while maintaining Marxism-Leninism as its official creed. The dismantling of the Maoist-era social safety nets, and the never-ending battles with corruption, also raise doubts about the long-term viability of the Chinese model. The country is highly vulnerable to cyclical and exogenous shocks – the bursting of the property bubble; the collapse of the pyramid of bad loans to loss-making SOEs; a slump in demand for China’s manufacturing exports; health

58 Timothy Weston, “The Iron Man weeps,” ch. 3 in Hays and Rosen, op. cit.; Elizabeth Perry and Mark Selden (eds.), Chinese Society. Change, Conflict and Resistance (Routledge, 2000). 59 Patricia Thornton, “Comrades and collectives in arms,” ch. 4 in Hays and Rosen, op. cit. 60 Edward Cody, “This time, officials respond to farmers’ protest with pledge to review land deal,” Washington Post, 28 June 2006. 61 Transparency International’s Corruption Perceptions Index, based on surveys of international businessmen, rates Russia 126th out of 159 countries surveyed in 2005, with a score of 2.4 out of 10, while China is seen as less corrupt, ranked 78th with 3.2. The situation is unchanged since 1998, when Russia ranked 52nd (out of 85) with 2.4, and China 76th with 3.5. www.transparency.org 62 Pei, op cit., 2006, ch. 4; Yan Sun, Corruption and Market in Contemporary China (Cornell University Press, 2004. 63 Alena Ledeneva, “Informal practices in changing societies. Comparing Chinese Guanxi and Russian blat,” University of London School of Slavonic and East European Studies, Working Paper no. 45, September 2003. 64 Sun, op. cit. Sun’s data suggest that the number of cases did not substantially increase in the 1990s, although the author herself does not highlight this point. Table 1.2 shows the number of economic crimes fell from 65,000 in 1992 to 35,000 in 1999, and Table 1.8 shows the number officials investigated rose from 150,000 1992 to 175,000 2001. 65 Martin Wolf, “An autocracy of bureaucrats can only crush China’s growth,” Financial Times, 31 May 2006.

12

crises and ecological disasters.66 This all leads Pei to conclude that without democratic reform, economic growth will stagnate and regime will be face a series of mounting internal challenges, 67 though his pessimism is not shared by all China watchers.68 The international climate that was so favorable for China’s export led growth cannot continue indefinitely. At some point the US will stop buying on credit, and even before that India and Vietnam may undercut China’s low-wage advantage.

In a world replete with failed and failing states, the Chinese state still looks fairly effective. It is

still able to identity problems and deal with them, to complete massive projects such as the Three River Gorges dam or the building of pipelines from Kazakhstan. Even their ability to create a system to effectively censor the Internet is something of a technological and political achievement.69 Corruption is indeed a severe problem – but the state has recognized the seriousness of the situation, and has shown the ability to arrest thousands of top officials, even including a Beijing mayor and two governors.70 Russia has been less decisive in this regard. Putin’s anti-corruption campaigns have taken down top private businessmen and some police generals, but it was not until 2006 that a sitting governor was arrested.

There are also plausible crisis scenarios in Russia’s near future. The main source of uncertainty is

the fact that in Putin’s second and final term (according to the constitution) will expire in 2008. Will the constitution be amended to give him a third term, or will he follow Yeltsin’s example and leave office after picking a chosen successor? There are opposition parties in Russia, and there are private businessmen with the resources to turn them into electoral winners if the state would give them access to the television airwaves. It is very possible to imagine that divisions within the Kremlin elite might lead to a breakdown in the tight media controls that Putin has put in place, and a reemergence of the sort of electoral pluralism that was a real threat to the Kremlin’s power as recently as the 1999 parliamentary election.

Part B THE SOURCES OF DIFFERENCE In explaining the differing trajectories of transition, four issues will be discussed:

1) initial conditions (i.e. structure) 2) leadership choices (i.e. agency) 3) the impact of globalization 4) the leaders’ learning capacity

1) Initial conditions Looking at the initial situation in Russia and China in 1980, few outsiders would have predicted the extent to which capitalism would penetrate those countries by 2000. And it would have been equally hard to suggest which country would be more successful under capitalism. Did Russia’s higher level of development make it easier to embrace capitalism, or did that mean that the leaders were shielded from the need for radical change? 66 Gordon Change, The Coming Collapse of China (Random House, 2001). 67 Pei, op cit, forthcoming 2006. 68 Andrew Nathan, “Present at the stagnation,” review in Foreign Affairs, 85, 4, July 2006, 177-82. 69 Pei, op. cit., 2006, 84-88. 70 Yan Sun provides a list of 21 such officials 1986-2004 – op. cit, 49.

13

i) Similarities Prior to 1914, “there were really only two countries of any economic significance that were not on gold, China and Russia.”71

Both Russia and China are large autonomous countries with strong state traditions. They both turned their backs on the global capitalist system in the 20th century, and adopted communist systems. Prior to that, they had emerged historically as land empires in the center of Eurasia. This left them with a deep legacy of a strong central state with a distinct identity and legitimacy. Correspondingly they had weak traditions of civil society. The state acted as a gatekeeper for their interactions with the outside world, which was hostile and threatening. Both had been subject to military defeats in the 19th -early 20th century and loss of territory, and had emerged bloodied but victorious from WW2. Both Russia and China have distinct cultures, tracing their roots and maintaining their identities outside of European culture. However, Russia’s interactions with Europe were much more intense, so Russia is a hybrid with strong European elements, unlike China.

Their size and political independence gives them a self-identity as front-rank powers, rule-makers rather than rule-takers in the international system. China’s 1.3 billion people dwarfs Russia’s 147 million – but Russia is still much larger than the next biggest European state (Germany, with 82 million).

Both countries currently see themselves – and have long seen themselves – as economically

backward compared to the West (since the early 19th century in the case of China, since the 16th century in the case of Russia). “Modernization” is a term both countries’ leaders still use when discussing their goals.

ii) Differences a) Development level. At the start of the transition process the Soviet Union was at a much higher

level of development than China. It was an urban, educated society: only 15% of the Soviet workforce were peasants compared to 80% in China. The average living standard was around $5,000 PPP, ten times the Chinese level. The USSR had some world-class industries (nuclear power, aviation, weaponry). But China had a huge pool of under-utilized labor in the villages, which could be tapped to dramatically increase productivity. 72

b) Resource endowment. Russia is the world’s no. 2 oil producer and no. 1 natural gas producer.

It is a major exporter of a range of ferrous, non-ferrous and precious metals, and since 2004 has once again become a grain exporter. China in contrast has an acute shortage of arable land and of many natural resources, being a net oil importer since 1993. Russia’s economic development is increasingly shaped by its dependence on oil and gas, which account for 60% of export earnings.

c) Superpower status. During the Cold War the Soviet Union was recognized as a global

superpower, a military and political threat to the United States, while China was on the margins of the international system. In the post-Cold War world, Russia is seen as a declining power and China as a rising power. This difference undoubtedly weighs heavily on the minds of the respective leaders, though it is hard to predict in what direction it pushes their behavior.

d) Ethnic diversity. The Soviet Union was a multi-national empire where Russians only made up

only 53% of the population, while China is 90% Han. This is the main factor explaining why the Soviet Union collapsed while China is still intact. Even in today’s Russian Federation, ethnic Russians only make up 80% of the population. Still, the Chinese state faces ethnic challenges in Xinjiang and Tibet – not to forget Taiwan. These plus the existence of strong regional identities among the Han Chinese mean that preserving the integrity of the state is just as much of a concern to Chinese leaders as to those in Russia. 71 Jeffry Frieden, “Is globalization here to stay?,” Transcript of an IMF Center Book Forum, 29 March 2006. www.imf.org 72 Jeffrey Sachs and Wing Thye Woo, “Structural factors in the economic reforms of China, Eastern Europe, and the former Soviet Union,” Economic Policy, n. 18, 1994, pp. 102-145.

14

e) Regime longevity. The Soviet Union was a mature regime, and it looked and felt its age. It had

been in existence for 68 years when Gorbachev came to power in 1985, and he represented the sixth generation of political leadership. In contrast Deng Xiaoping, born in 1904, represented only the second generation of CCP leadership, and he had been present at the inception of the party. One might suppose that this proximity to the revolutionary founding would have made Chinese leaders more ideologically inflexible. It turned out to be just the opposite way: their connection to the revolution gave them the legitimacy and confidence to adapt CCP policies in light of changing global realities. 2) Leadership choices

i) Pace and sequencing. It is often said that the key difference between Russia and China was the sequencing of reform. Gorbachev’s big mistake was to opt for political liberalization first and economic reform second. Clearly, the Chinese leadership cannot be accused of making this mistake. The economic reforms launched in 1978 did lead to pressure for political change, especially when the economy stumbled in 1985. But the 1989 crackdown showed that the leaders were not willing to allow liberalization to get beyond the party’s control.

In Gorbachev’s defense, it can be argued that economic reform without political reform had been tried in the past by a succession of Soviet leaders since the 1950s – and was attempted again by Gorbachev in 1985-87. It was the failure of these earlier economic reforms in the face of bureaucratic intransigence that forced Gorbachev to embrace political reform.

Western scholars had predicted that political liberalization would cause problems for economic

reform in the socialist bloc. Subsequent events proved them right – but they got the political mechanism wrong. In an influential 1991 book Adam Przeworksi argued that democratization in Eastern Europe would empower the workers, who would mobilize to protect their state-guaranteed jobs.73 Thus political reform would enable the interest groups created by the socialist economy to block radical economic reform.

As it turned out, this did not happen. In Eastern Europe, the workers were swept up in the

nationalist project of getting out from under Soviet influence by joining the West – which meant embracing economic reform.74 In Russia, the political turmoil that the country experienced in 1989-93 – mainly driven by nationalist unrest in some of the non-Russian republics – was so severe that the workers were politically neutralized and were unable to prevent Yeltsin’s embrace of liberal market reforms. What happened next was equally unexpected: the emergence of a small group of powerful oligarchs, who helped to keep Yeltsin in power, while blocking a second wave of reforms.

Second, there is the contrast in pace. The conventional wisdom is that China followed a gradual

path while Russia embraced shock therapy in 1992. The Chinese were burned by a century of failed efforts at radical change and were thus philosophically committed to incrementalism.75 Yeltsin was forced to embrace of radical change by the crisis conditions he faced in the fall of 1991.76 It also reflected his advisors’ conviction that the only way to break with central planning was to enforce hard budget constraints and market-clearing prices as part of an integrated package. The reformers also made a Przeworksi-type argument about a political window of opportunity: that Yeltsin had to capitalize on his power in early 1992 before anti-reform forces rallied and used the democratic process to unseat him. 73 Adam Przeworksi, Democracy and the Market: Political and Economic Reforms in Eastern Europe and Latin America (Cambridge University Press, 1991). 74 Hilary Appel, Building a New Capitalist Order (University of Pittsburg Press, 2004); Mitchell Orenstein, Out of the Red: Building Capitalism and Democracy in Post-Communist Europe (University of Michigan Press, 2001). 75 Fewsmith, op. cit,.80-83. 76 Yegor Gaidar, Days of Defeat and Victory (University of Washington Press, 1999).

15

Generally speaking, this picture of contrasts regarding the pace of transition is correct. However,

as Pei points out, China’s introduction of the household responsibility system amounted to a “big bang” in China’s countryside.77 And in Russia, shock therapy advocates complained from the very beginning that the “big bang” never really happened, because Yeltsin delayed certain key aspects of reform – such as control of the money supply and budget deficits, or liberalization of energy prices.78

ii) The preservation of political power.

In retrospect, it is neither the sequencing nor the pace of reform that is the crux of the problem.

The key question is more basic – the need to maintain political power and state capacity. Putting economic reform first allowed the Chinese state to maintain the political capacity to manage the process, correcting for mistakes and imbalances as they arose. In a more negative light, Pei argues that it gave the political elite the resources they needed to maintain their repressive system of rule.79 In contrast, Gorbachev threw out the very tools with which he hoped to promote economic reform. Gorbachev’s reforms disrupted the organization cohesion of the Communist Party apparatus and directly undermined its ideological legitimacy.80 His reforms destroyed the party and then the Soviet state itself.

Both Gorbachev and Yeltsin failed to ensure the cohesion of the ruling elite. On the contrary, in

their personal pursuit of power they used divide-and-rule strategies that fragmented political institutions. Gorbachev deliberately split the party into reformers and conservatives, and then went outside the party to try to weaken the conservatives, using the media, Western support, and finally popular elections. In a parallel fashion, from his power-base as head of the Russian Republic in 1990-91Yeltsin used the federal structure of the Soviet Union as a lever to weaken Gorbachev’s Soviet government. After 1991, Yeltsin found himself in a political fight with the Russian Congress of People’s Deputies over his economic reforms. As part of that battle, Yeltsin appealed for support from regional political bosses – and by devolving power into their hands he weakened the authority of the central state. Even within his own presidential administration, Yeltsin’s political style revolved around setting rival claims against each other – liberal reformers versus defense industrialists, a succession of favored confidantes, etc.81

Chinese leaders seem to have managed to avoid such divisions – despite, or perhaps because of, the fact that the CCP leadership was historically much more ridden by factionalism than its Soviet counterpart. The Chinese learned their lesson from the Cultural Revolution – and from the Soviet break-up. Despite deep disagreements over policy (such as over Tiananmen82) they have managed to preserve a united front in the public arena. They have also undergone two relatively smooth transitions in the top leader position (from Deng Xiaoping to Jiang Zemin in 1997, and then to Hu Jintao in 2002) without experiencing a political crisis.83 This is something Russia has not managed even once in its entire 1,000 year history. All the Soviet leaders died in office except for Nikita Khrushchev, removed in a palace coup in 1964, and Mikhail Gorbachev, who lost his job because the country of which he was president ceased to exist. Yeltsin’s nomination of Putin as his successor in December 1999 is the only case in Russian history that comes close to an institutionally smooth transition, and even that was accompanied by the outbreak of war in Chechnya. Similarly, neither Gorbachev nor Yeltsin was able to develop an effective “mass line” and maintain the trust of the people. Popular sympathy for Gorbachev quickly evaporated in 1985 because of 77 Pei 2006, 26. 78 Anders Aslund, How Russia Became a Market Economy (Brookings Institution, 1995). 79 Pei, op. cit, 2006, 19. 80 Stephen Solnick, “The breakdown of hierarchies in the Soviet Union and China: A neo-institutional perspective,” World Politics, 48, 2, January 1996; Shiping Hua, “The Deng reforms and the Gorbachev reforms revisited,” Problems in Post-Communist Politics, 53, 3, May 2006, 3-16. 81 Shevtsova, op. cit., 1999. 82 Liang Zhang, Andrew Nathan and Perry Link (eds.), The Tiananmen Papers (Public Affairs, 2001). 83 Nathan 2003, op. cit.

16

his ill-conceived efforts to curb alcohol use. His support further eroded as his reforms caused a breakdown of the planning system and widespread economic chaos. Likewise although Yeltsin won popular election as president in June 1991, his 1992 market reforms proved very unpopular (partial confirmation of the Przeworski thesis). 3) Leaders’ learning capacity The Chinese leadership has outshone their Russian counterparts in their ability to learn from their own mistakes and from the mistakes of others. Deng and many of his colleagues had worked in the Soviet Union and were clearly open to drawing lessons from the Soviet experience, while Soviet leaders (including Gorbachev) knew little of the outside world and did not show much interest in learning from others. The Cultural Revolution provided a powerful incentive for China’s leaders to think through policies in order to forge an elite consensus and avoid chaos. (Given that it was driven by mass participation, it also sowed some doubts about the wisdom of democracy among the intelligentsia.84} In contrast Stalin’s purges had occurred more than 30 years earlier, were not discussed publicly or privately, and were effectively a closed book for the Soviet leaders and for most of the Soviet people.

More than global economic trends, the most important international factor influencing Chinese decision-making was undoubtedly the dramatic collapse of the Soviet Union and the East European socialist regimes. Christopher Marsh makes the important point that the Russians failed to learn from China, while the Chinese did learn from the fate of the Soviet Union.85 Chinese leaders scrutinized developments in the Soviet Union very closely, and adjusted their policies accordingly. They concluded not only that they must be willing to use repression, but also that reforms were needed to bolster the regime’s legitimacy in the eyes of the people – by boosting living standards, and by nurturing nationalism to shore up the waning Marxist ideology. Marxism would however be maintained as an instrument for ensuring the unity of the ruling elite.

Russian leaders were interested in learning from the West – not the East. The one lesson they took

from China was that mass repression (the “Chinese variant”) was morally unacceptable. Even the leaders of the August 1991 coup proved unwilling to directly order the use of force. Otherwise, Russian elites regarded China as economically and politically backward, and were not inclined to study and draw lessons from their reform experience. Both Gorbachev and Yeltsin put a priority on developing good relations with the West, and to some extent were measuring themselves against Western norms. This was not just a moral choice on their part, it also reflected Russia’s national interests in maintaining a security dialog with the West (to extricate themselves from Afghanistan and then central Europe) and an economic dialog (to roll over Soviet debts, which ran up to $50 billion by 1991). China was free of such dependencies.

The Chinese ability to learn from the Soviet experience is validation of the argument that the laws

of social science are fundamentally different from the laws of natural science. Human beings can learn from the experience of others, which is not true of inanimate objects. China is disproving the hypothesis that globalization, or even capitalism, must lead to the end of communist-based political regimes. 4) The impact of globalization How was the transition form socialism affected by the spread of globalization? The relationship is complex. Some argue that globalization weakened the Soviet and Chinese states, forcing them to embrace reform. Some even suggest that globalization caused the Soviet collapse. The Soviet elite were exposed to international norms during the diplomatic détente of the 1970s, and because Gorbachev had internalized Western values he decided to launch his economic reforms. Others dispute this account, arguing that 84 Hui, op. cit. 2006, 159. 85 Christopher Marsh, Unparalleled Reforms. China’s Rise, Russia’s Fall and the Interdependence of Transition (Lexington Books, 2005).

17

Gorbachev was still operating within a Leninist mind-set. And it hard to use the international norms argument to explain the actions of the Chinese leadership.

In general, it is wrong to think that globalization caused the collapse of state socialism. The regime crisis in China and Russia preceded the onset of the current wave of globalization. Deng’s reforms were launched in 1978 and Gorbachev’s in 1985: before the internet, and before the floodgates of international capital flows were opened. However, the socialist transition fed into the whirlpool of globalization, and was in turn accelerated and affected by it.

Certainly the revolution in transport, communications and financing facilitated the demand for

manufacturing exports from China and the investments to make this production boom a reality. And the end of the cold war meant that the political barriers to such economic integration had fallen away. But Russia gained little from the international economic climate of the 1990s. Its main import was bad economic advice, and the premature liberalization of its currency that led to the 1998 crash. Not until the commodities boom that saw the oil price rise from $12 a barrel in 1997 to $60 in 2005, did Russia enjoy a clear benefit from global integration.

It is usually assumed that globalization weakens the state by forcing governments to liberalize

economic controls, reduce tariffs and taxes, and hold down wages in order to attract international investment and trade. At the same time, the trade and investment boom empowers new players such as home-grown capitalists who may challenge the authority of the state from within. But globalization may also strengthen the state in other respects. Integration generates growth, and if the government is able to capture some of this growth through taxation, then the state may be able to benefit from globalization. This has been the case with the small states of Western Europe, where deep integration has coincided with increased state capacity, especially in the area of human capital. Also, the government is the gatekeeper for the country’s economy as it adapts to integration. It is the government that must negotiate and enforce trade and investment agreements, such as the licensing of mineral deposits or protection of intellectual property rights. In this respect, the international community can be an ally of the central government as it seeks to implement rule of law and impose these agreements on recalcitrant regional political authorities, often in unholy alliance with local businesses.

The global spread of democracy in the 1990s paradoxically made political liberalization less likely in China. First, there were the negative examples of democracy producing state collapse and even civil war in the former Soviet Union and Yugoslavia. Second, democratization was associated with a boost in US power, that began with the 1991 Gulf War and continued through the 2003 Iraq war. Third, the democratization of Taiwan after 1997 emboldened the Taiwanese leadership and increased the possibility of an independence declaration, a step that would trigger armed conflict.

The differing trajectories of Russia and China underline the point that the impact of globalization on individual states is unpredictable. Despite the common pressures brought by global economic competition, leadership choices and the contingencies of historical evolution still play a decisive role.

18

Part C THE “REGULATED MARKET” CONSENSUS China and Russia started off in different circumstances, and set off on different routes in their transition away from state socialism. However, they now seem to be converging on a new common pattern of a neo-authoritarian model of a semi-market economy under the shelter of an authoritarian state 86 (This is sometimes called, the “Beijing consensus”87.) What are the elements of this new “regulated market” model?

1) The leaders are committed to preserving the integrity of state sovereignty and national identity. This means preventing foreign leaders and institutions from forcing political or economic decisions on the government of Russia or China. Participation must not require a trade -off of national sovereignty. Critics argue that this insistence on sovereignty is merely a façade to justify the leaders’ grip on power. Defenders would say it is a principled stance, based on a concern for the welfare of their people, whose histories have shown the dire consequences of allowing foreigners to infringe on the country’s territory.

Nationalism is part of the leaders’ rhetoric, but they do not want to allow it to get out of control,

lest it ignite a destabilizing mass movement, and/or threaten relations with important trading partners.88 Still, it seems clear that nationalism has been strengthened in both Russia and China as they opened up to international market forces, contrary to the argument that globalization necessarily produces “the continuing fragmentation of identities and institutions.”89

2) The leaders are focused on economic growth as a major goal – something that is good for

national security and good for boosting the popular legitimacy of the regime – at a time when other ideological justifications are eroding. Growth also expands the opportunities for personal enrichment by political cadres – while regrettably taking their attention away from human development issues.

3) The market mechanism is the most effective tool for economic growth, both domestically and

internationally. International trade is a win-win situation for all participants.90 The country must find the most appropriate place in the international division of labor, by accepting the logic of comparative advantage. In China, that means exploiting the country’s pool of cheap labor, through export-oriented manufacturing. In Russia, it means selling off the country’s mineral resources. But in each case, the leaders want to move up the food chain by developing more capital and technology-intensive industries. China has outpaced Russia in accepting the logic of globalization. Bejiing is even more committed to lowering trade barriers than the old US ally Japan.91

4) The market has its limits, which must be policed by the state (see point #1). Market forces that

erode state legitimacy and capacity, that unleash uncontrollable social protests, must be corrected. The state must step in to provide public goods, from investment in infrastructure to compensation for the reform 86 See Wei-Wei Zhang, “The allure of the Chinese model,” International Herald Tribune, 1 November 2006; and the debate between Professor Wu Shuqing and Cheng Enfu, “Washington Consensus and Beijing Consensus,” People’s Daily, 18 June 2005 (online). Harley Balzer uses a more neutral term,“managed pluralism,” to describe the Russian-Chinese convergence, “China in comparative perspective,” ch. 12 in Peter Hays Gries and Stanley Rosen (eds.), State and Society in 21st-century China (Routledge, 2004). 87The term “Beijing consensus” was coined by Goldman Sachs advisor Joshua Cooper Ramo, in his article “The Beijing consensus,” Foreign Policy Center, UK, May 2004. http://fpc.org.uk/fsblob/244.pdf Ramo focuses on China’s embrace of the neo-liberal paradigm, and he arguably overlooks the distinctive political features of China’s policies which are outlined in this section. 88 Peter Hays Gries, “Popular nationalism and state legitimation in China,” in Gries and Rosen, ibid., ch. 9. 89 Cerny, op. cit., 20. 90 China’s Peaceful Development Road, State Council Information Office, 22 December 2005. http://www.chinadaily.com.cn/english/doc/2005-12/22/content_505678.htm 91 William H. Overholt, RAND Corporation, “China and globalization,” testimony to the U.S.-China Economic and Security Review Commission, 19 May 2005. http://www.rand.org/pubs/testimonies/CT244/

19

losers, to the creation of a regulatory framework. The political elite is uncomfortable with the idea of economic actors beyond their control. So the political economy that emerges is one characterized by the hybridity of political and economic power. This may be less efficient than a separation of politics from economics, but it has the advantage (for the leaders) of ensuring the indispensability of the political class.

5) Liberal democracy is inappropriate or unnecessary, and open public contestation between rival members of the ruling political elite is to be kept to a minimum. The Chinese leadership unequivocally rejects the liberal-democratic paradigm: as Andrew Nathan puts it, “The argument that democratization, freedom, and human rights would lead to a truer kind of stability—as convincing as it may be to the democrats of the world—holds no appeal for these men.”92 They even have the audacity to issue a report critical of human rights in the US in response to the State Department’s report on China’s human rights record.93 The Russian position is more nuanced: the leadership officially embraces democratic values, and they are enshrined in the 1993 Constitution. But Russian practice diverges markedly from democratic theory. 94 In partial recognition of this, Kremlin ideologists have floated notions of “managed democracy” and “sovereign democracy” to try to bridge the gap between Russian practice and Western ideas. 95

6) The new middle class that the economic boom has produced serves as a social basis for the

regulated market regimes. This is contrary to the expectations of Western liberals, who traditionally saw the middle class as the trusted standard bearers for democracy. Fewsmith writes that the basis of the post-1989 social contract in China is “economic prosperity in exchange for political quiescence.” (p. 103) Ed Freidman argues that “The new middle class in urban China tends to imagine democracy as a system that would empower the majority who are the rural poor.”96 The Chinese middle class were also frightened by the chaos that followed the Soviet collapse and were thus more willing to support a technocratic authoritarian leadership.97

In Russia, professionals were traumatized by the economic shocks of the 1990s and welcomed the

stability brought by Putin’s firm hand, as is evidenced by opinion surveys and election results. In both countries the middle classes have embraced consumerism and “bourgeois individualism” with a vengeance, fusing it with politics in what Wang Hui has called “consumer nationalism.”

92 Nathan, 2003, op. cit, 16. 93 “The Human Rights Record of the United States in 2004,” issued by the State Council of the People's Republic of China, People’s Daily, 3 March 2005. http://english.people.com.cn/200503/03/eng20050303_175406.html 94 Andrew Wilson, Virtual Politics. Faking Democracy in the Post-Soviet World (Yale, 2005). 95 Nikolai Petrov. “The full cycle of political evolution in Russia,” PONARS memo # 413, December 2006, Center for Strategic and International Studies. For a defense of “sovereign democracy,” see Vladislav Surkov, “Nationalization of the future,” Ekspert, 20 November 2006. 96 Ed Friedman, The Rise of China and its Impact on the World, International Political Science Association, Fukouka Japan, July 2006. 97 Gongqin Xiao, “The rise of the technocrats,” Journal of Democracy, 14, 1, 2003, 60-65.

20

CONCLUSION Does this “regulated market” approach really exist as a coherent paradigm, intellectually and practically? Or is it a contradictory mixture of ideas and policies, a temporary coincidence of diverse trends that will pull apart within a few years?

The previous wave of authoritarian developmentalism of the 1960s-80s, from Brazil to East Asia, fell apart in the 1990s. The context of that previous wave was quite different. There was a real anti-capitalist threat, both internationally (global communism) and domestically (powerful labor unions). So the state needed to defend the market from its adversaries. When those adversaries were weakened by the end of the Cold War, the rationale for authoritarianism dissolved. But the regulated market model is rooted in a different world order, that of globalization, which is not likely to vanish any time soon.

The regulated market seems to represent a viable organizational response to the exigencies of life

in the post-Cold War world for these two large, ex-socialist powers. The globalized world is not flat, its topography includes peaks and valleys, and quite a few surprises. Table 1 Development Indicators, 2004 China Russia Life expectancy (years) 71.4 65.2 Fertility (births per woman) 1.8 1.3 Infant mortality (per 1000 births) 26.0 16.8 GNI per capita ($) 1,500 3,400 Agriculture as % of GNI 13.1 5.0 Inflation (%) 6.9 18.1 Gross domestic capital formation as % of GNI 38.7 21.1 Phone lines (per 1000 population) 499 508 Internet users (per 1000 population) 72.5 111.2 High tech as % of manufacturing exports 29.8 9.1 Trade as % of GNI 59.8 48.1 Foreign direct investment (net inflow, $ bn) 54.9 12.5 Foreign debt as % of GNI 14.5 45.7

Source: World Development Indicators, April 2006. www.worldbank.org

21