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CHAPTER7Globalisationin Russia, and comparingRussia’s and China’s

responses to globalisation

CASE STUDIES:

107

Economic outcomes v Apply appropriate terminology, concepts and theories in contemporary andhypothetical economic contexts. Analyse the impact of global markets on global economies.

Economic issue v Examine the impact of the globalisation process on economic growth and thequality of life, levels of development, rates of inflation and external stability. Assess the potential impact on the environmentof continuing world economic development.

Economic skills v Assess the impact of development strategiesused in a range of contemporary situations.Undertake a case study on the impact of globalisation on an economy other than Australia, along with the strategies that thiseconomy is using to promote economicgrowth and development.

Prior learning v Define globalisation.Revise the meaning of the phrase ‘centrally planned economy’ (Preliminary Topic I).Explain how markets work to allocate resources.Review the meaning of free trade, quality-of-life indicators, transition economies,financial markets, environmental consequences.

Description ofthe economy

Economicsystem

Exchangerate

Role ofmarkets

Globalisation

Trade andprotection

Unemployment

Developmentstrategies

Qualityof life

Environment

Comparisonwith China

Economicgrowth

Distributionof incomeand wealth

Impactof globalisationon the Russian

economy

Cambridge University Press © Horsley, Esterbauer, Kirkby, Layman, Mules, Skehan 2006



Case study A: The impact of globalisationon the Russian economyEconomic reform in Russia

Russia is one nation that has been most affected by the spread of globalisation in the last20 years. The Russian economy went on a unique journey, unlike any other economy inhuman history. It went from being a planned socialist economy to a capitalist economy.

Throughout the 1990s Russia went through a period of unprecedented economicchange. During that time its economic growth declined by over 30 per cent andunemployment and poverty increased. Since 2000 new hope has emerged and the

economy and its people have moved from economic recession to economic growth.The following case study tells this story and the policies and global developments thathave caused Russia’s economy to make this great change.

Overview of Russia’s economy 1989–2005

After the Russian Revolution in 1917, the Union of Soviet Socialist Republics (USSR), a federation of many countries including Russia, had a planned socialist economy. Thismeant that the central government controlled everything from production planning andprices to distribution of goods and services. The government owned all the factors ormeans of production such as land, labour and capital and allocated these resources. Pricesand markets did not allocate resources; the government’s ‘five-year plans’ allocated

Cambridge Economics HSC Topic I The Global Economy108

planned socialisteconomya central governmentcontrols everythingfrom productionplanning and prices todistribution of goodsand services

marketsplaces where freelyacting individualsengage in thevoluntary exchange of goods and services formutual benefit

Figure 7.1 Moscow, Russia’s capital




resources. Over a long time

the Russian people had lostfaith in the governmentallocation system because it wasn’t working. Theeconomy grew stagnant andconsumer goods were notproduced in enoughquantity to meet people’sneeds and wants.

Countries in EasternEurope such as Hungary,Poland and Romania that

were closely aligned with theUSSR had plannedeconomies as well. After thecollapse of the USSR in1991, Russian reformers wereconfronted with the task of trying to create a democratic state based on effective laws andreliable administration. At the same time they were building a modern capitalisteconomy.

The collapse of Communism in Eastern Europe in the late 1980s and the dissolutionof the Soviet Union at the end of 1991 disrupted the close economic relations Russia hadpreviously enjoyed with neighbouring Communist nations and other Soviet republicssuch as the Ukraine and Georgia. Political turmoil and uncertainty inside the Russian

government also contributed to the nation’s economic difficulties. Compared with most of the former planned economies of Eastern Europe, Russia experienced an unusually severeand protracted drop in officially reported economic output.

Transition from socialist to capitalist economy

In 1991, after the collapse of the USSR, the government of the Russian Federationimplemented a series of radical reforms designed to transform the Russian economy from one that was centrally planned and controlled to one based on free enterprise andmarket forces. Major components of the reforms included establishing privately ownedindustrial and commercial ventures, with foreign as well as Russian investment, andthe privatisation of state-owned enterprises.

Because all the companies in the Russian economy were owned by the government,the govenment decided to give all the workers and citizens special shares in the form of vouchers. These vouchers were issued to each Russian citizen and were to be used topurchase shares in firms being privatised, which often were sold at auction. Because theeconomy had collapsed and many people had little money, these vouchers often weresold for cash by people for a fraction of their true worth. Entrepreneurs who were oftenlittle more than ‘robber barons’ with access to cash and contacts in the formergovernment or public service often bought these vouchers for next to nothing andfinished up owning huge firms. For example, Roman Abramovic, the Russian billionaire who owns English football clubs, bought a major oil company for a thousandth of its worth and became one of the richest men in the world overnight.

7 Case studies: Russia and globalisation 109

FINLAND

BELORUSSIA

UKRAINE Moscow

RUSSIAN FEDERATION

CHINA MONGOLIA

KAZAKITSTAN

IRANUZBEKISTAN

TURKMENISTAN JAPAN

ARCTIC OCEAN

Figure 7.2 Russia




market economya system whereresources are ownedby households:markets allocateresources through theprice mechanism; andincome depends uponthe value of resourcesowned by anindividual

regulationgovernmentintervention in markets

economic efficiencywhen the costs of production areminimised

A commodity and stock exchange system also was set up in Russia to trade shares

in the newly privatised companies.


Review your learning

1 Distinguish between a centrally planned and a capitalist economy.

2 Explain how Roman Abramovic used vouchers to become a billionaire.

Why did Russia move towards a market system?

The Soviet centrally planned system, which existed in Russia from the 1920s, turned outto be ineffective. The goal of the radical reforms was to create a new economy based oncompetition of enterprises, incentives for employees and freedom from regulation and

the control of bureaucratic state administrative authorities. The success of Westernindustrial countries had shown that under certain favourable conditions the marketsystem is able to provide a very high degree of economic efficiency. The Soviet economicsystem with its state monopoly of the means of production, severe regulation of all aspectsof economic activity and its equality of income distribution failed to provide economicefficiency or improved standards of living . For example, because all the factors of production were centrally planned, bakers would receive their allocation of flour and otheringredients from the government. But this meant that much bread had to be made to a certain recipe since all the factors of production were centrally allocated. Thus there was a bureaucracy that determined the recipe of bread throughout the Soviet Union. Inaddition, the price of the bread was controlled, so that it did not match supply ordemand.

The low level of efficiency of Russia’s economy greatly affected the nation’s living conditions. By the end of 1991 the consumer goods market could not function any more and a market-based distribution of goods was introduced. For example, people who wanted to buy a television set, a washing machine, a car or a carpet had to waittheir turn for many months or even years. In supermarkets often only empty shelvescould be seen; the shops sold goods in exchange for special tokens that very oftenproved to be useless. People from provincial towns had to go to the capital (Moscow)to buy foodstuffs, like sausages or butter.

Under those severe conditions economic reforms began. The first step taken wasthe liberalisation of prices for consumer goods and services and the centralised systemof resource distribution was abolished. The prices of goods and services were to bedetermined by market forces, not set by the government. Then mass privatisation of

government enterprises was started. The reforms encouraged personal initiative andindividual ownership of businesses.

What were the effects of movingtowards a market economy?Economic growth

Moving towards a market economy was very difficult for Russia. Market reforms werecarried out with mistakes and sometimes without considering the consequences of thepolicies. In the period 1991 to 1996 the volume of gross domestic product in Russia declined by almost 50 per cent. The USA’s combined gross domestic product exceeds

stock exchanges

markets for the saleand purchase of second-hand sharesand securities; modernstock markets are notnecessarily located in aparticular building, butconsist of traders whoare linked bycomputer terminals;companies can use thestock market to sellnew shares and raisemoney for investment

– there is also a market

in gilt-edged securitiesas part of the stockexchange




Russia’s ten times. By 2002, the Chinese combined gross domestic product exceeded

Russia’s five times. After the currency crisis in 1998, the volume of gross domestic productper head in Russia decreased by up to US$3500. But the period 1999–2005 was favourablefor sustainable economic growth and the benefits of the reforms started to appear.

Table 7.1 shows that production fell throughout the 1990s in all the major sectorsof the economy. Between 1999 and 2004, GDP growth averaged 6.3 per cent per year,industrial production increased by 7.2 per cent per year, and real income by 7 per centper year. The volume of industrial production in the first part of 2005 was 5.0 per centhigher than the same period in 2004. Production of manufactured goods went up in allindustries. The fastest growth rates were in the fuel industry, machine building,metallurgy, metalworking, building materials production, power industry, and the foodproducts industry.


Table 7.1 The main indicators of growth (annual percentage change).

1991– 1999 2000 2001 2002 2003 2004

1998

Gross domestic –5.8 5.4 9.0 5.0 4.3 7.3 7.1

product

Production of –7.1 11.0 11.9 4.9 3.7 6.4 5.0

manufactured goods

Real income of –6.9 -12.5 11.9 8.5 8.9 13.0 12.0

population

In spite of the success achieved, the level of economic development is still low.GDP per capita in 2003 was US$2500, several times less than that of the indicators of the advanced and even some developing countries. This has led to a low standard of living and a high level of unemployment.


1 Explain the link between the liberalisation of prices and improved business initiative.

2 Look back at Table 7.1.

a Describe the trend in GDP from 1991 to 2004 in the Russian economy.

b Demonstrate the link between GDP, production and real income.

People’s quality of life and standard of living

During the years of the economic reforms in Russia, the real income of the population was constantly decreasing. The greatest decline took place in August 1998. Realincome of the population in 1999 was only 46 per cent of the 1991 level. Since 2000,due to economic growth, the real income of the population started going up and in2002 the income increased by 32 per cent compared to that in 1999. In the first partof 2003 the growth of income was 13.6 per cent compared to the first part of 2002.But the number of poor people in Russia decreased very slowly. From 1992 to 2002the number of people with income below subsistence level decreased from 33.5 per centto 25.0 per cent of aggregate population or approximately 36 million people.




Due to low income, many people do not eat enough and that has had bad effects on

their health and lifespan. The average life expectancy of a Russian man declined from 67years to 59 years during the 1990s. In 2005 a man’s life expectancy was 61 years and a woman’s was 74 years. Increased unemployment and lower incomes all increased thesuicide rate. Russia now has the second-highest suicide rate in the world after Lithuania.

Trade

Russia relies very heavily on oil for export earnings. While world oil prices are high,Russia should have trade surpluses, although there has been a steady increase inimports, especially for consumer goods. If world oil prices fall, then trade will suffer.

Foreign trade with countries belonging to the Commonwealth of IndependentStates (previously part of the former Soviet Union) fell by 27.5 per cent but it increased with other foreign countries in the last 10 years. More than 50 per cent of Russia’s

exports now go to the countries of the European Union. This shows that Russia is willing to participate in world trade more actively. Raw materials make up over 90 percent of Russia’s exports. Rising world commodity prices from 2003 to 2005 havecontributed to an increased trade balance, current account surpluses and internationalreserves of US$144 billion. From 2004 to 2005 commodity exports grew by 41 per cent.

Investment

The market reforms of 1991 negatively affected the investment policy of variousenterprises and institutions. As investments are the bases for production anddevelopment, the investment fall severely damaged the economy. Investment growth infixed capital took place only in 1999 (and only by 1 per cent). From 1993 to 1998fixed capital investment fell by 65 per cent compared with 1991. From 1999 to 2002investment increased but amounted to only 63 per cent of the 1991 level. But in 2003

investment rose by 13 per cent and increased a further 10 per cent in 2004.Investment was the lowest in the remote regions. This is why in Siberia and the FarEast various breakdowns and emergency situations take place more often than in theCentral regions of Russia.

While there has been a major increase in foreign direct investment into Russia sincethe reforms began, many of these ventures are joint ventures, between Russian and foreignfirms. Favourable conditions for overseas companies to work in Russia have not yet beencreated. Among the major factors preventing foreign business from investing in Russia arethe bureaucracy of local officials, legal instability, criminal rackets and unsafe living.

Distribution of income and wealth

Poverty has increased in Russia with the opening of the economy to a market system. The

number of people with income below the subsistence level has increased. Inequality of income distribution has also been on the increase. The proportion of income that belongsto the 20 per cent of the richest people in Russia was 32.7 per cent in 1990, rising to 51.3per cent in 2002. The proportion of income that belongs to the 20 per cent of the poorestpeople in Russia was 9.8 in 1990, declining to only 4.9 per cent in 2002.

There also exists a large income differentiation in Russia’s regions. Moscow residents have the highest incomes. In 2001 average annual income per capita inMoscow was 5.5 per cent higher than the subsistence level, but in some regions averageincome is lower than the subsistence level. For example, in one republic the averageannual income of the population amounted to only 86.6 per cent of subsistence level.Poverty in agricultural areas is much higher than in the towns.


foreign directinvestment (FDI)overseas investmentinto a country byforeigners, recorded asa credit in the balanceof payments





Review your learning1 Describe the changes in real income and poverty in Russia from 1991 to 2003.

2 Outline the impact of the trend in real income and poverty in Russia on qualityof life.

Extend your learning

1 Undertake Internet research to find out about the Gini coefficient in Russia.

2 How has it changed over time?

3 Assess the impact of globalisation on the distribution of income and wealth in

the Russian economy.

Environment

Environmental protection requires great effort and expense but investment in fixedcapital to protect the environment started increasing only in 2000. Due to its largedecrease in the previous years, investment in environmental protection amounted toonly 74 per cent of the 1990 level in 2001.

The formation of toxic production waste increased by 83.3 million tons in 1995and 139.2 million tons in 2001. The level of investment in new equipment for thepurification of polluted water was 50 per cent less in 1997 compared to 1980. In1995, 48.6 per cent of wastes were recycled but in 2001 only 36.5 per cent of wastes

were recycled. The government has spent less on the environment because of itslimited funds.

In the case of one natural resource – forests – there is wasteful and recklessdestruction, for example. Russia suffers from a great number of forest fires every year(see Table 7.2). Only 10 per cent of all fires are caused by natural or one-off factors.The majority of the fires are caused by businesess, organisations and people.

Table 7.2 Preservation and protection of forests

1990 1995 1997 1999 2000 2001

Reforestation (thousands 1 831 1 454 1 092 964 973 960

of hectares)

Number of forest fires 18.3 26.0 31.3 36.6 22.4 23.7

(thousands)

Burnt and damaged forest 23.5 8.5 21.8 21.9 39.6 16.5

(millions of cubic metres)

Exchange rate

There has been a major decline in the value of the Russian rouble, since it becameconvertible and affected by world financial markets. This has had a major effect on




hyper-inflationvery high rates of inflation that can causemajor economicproblems and politicalinstability


inflation and employment, and meant the Russian government had to call on the

International Monetary Fund (IMF) and World Bank for support. In 1998 as resultof incorrect finance and credit policies of the Russian government the roubleexperienced a sharp depreciation. In the period 2000–2002 the exchange rate of therouble stabilised and it has appreciated since then due to rising world oil prices.

Table 7.3 Official Russian exchange rate (rouble to US$1)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

4.64 5.56 5.96 20.7 27.0 28.2 30.1 31.8 29.5 29.0 28.1

Inflation

Inflation in the early period of transition at the beginning of the 1990’s was in excessof 1000 per cent per annum. During the first stage of the reforms (1991–1994),together with the rouble’s exchange rate fall, hyper-inflation started. In those early years Russia had an enormous budget deficit (about 20 per cent of GDP a year), which was covered only by Russia’s central bank loans. In reality that meant morepaper money was printed, resulting in inflation. The scale of the inflation can be judged by the growth of consumer prices: in 1991 they rose 260 per cent; in 1992,2600 per cent; in 1993, 940 per cent; and in 1994, 320 per cent.

In the conditions of high inflation, money lost its value very quickly and peopletried to invest money somewhere in order not to lose it. Various financial andinvestment companies were set up. They promised very large interest for their bank deposits, or income from securities in roubles and hard currency (US$). In several

months founders of many of these companies disappeared with their funds to variouscountries of the world and more than 30 million people lost their savings.

On 1 January 1998 a ‘denomination’ of the rouble was carried out. The old roubles were replaced with new roubles that had one-thousandth of their previous value. Onethousand roubles became one rouble of the new currency. It turned out that, afterdenomination, consumer prices rose 7–8 times compared with 1989–1990 and, forcertain goods and services, much more. For example, the price of a single trip in theMoscow underground increased from 5 kopeks to 3 roubles, a 6000 per cent increase.State pensions during the same period increased but not more than 3–3.5 times.

From 1999 improvements in the economy and a slowdown in the rates of inflation started to occur. While this rate has slowed it is still higher than most otherindustrialised countries and is expected to remain relatively higher in the near future,

as Table 7.4 shows.

Table 7.4 Annual inflation rate (per cent)

1998 1999 2000 2001 2002 2003 2004 2005

84.4 36.5 20.2 18.6 15.1 13.7 10.9 13.6




hidden unemployedpeople who are notlooking for workbecause they are

discouraged jobseekers


Unemployment

From an economy that had virtually zero unemployment, unemployment increased withthe opening of the Russian economy. The country’s transition to a market economy caused the problem of unemployment. In 2000 the total number of unemployed was 9.8per cent of the labour force. In recent years, there has been a slight decrease in the numberof unemployed due to the higher levels of economic growth and, according to theInternational Labour Organisation, the unemployment rate was 7.9 per cent in themiddle of 2005.

The groups most affected by unemployment in Russia at the present time are mainly low-qualified people, women, young people (people under 30 years of age), those who leftor were fired from military service, and refugees from former Soviet Union republics.Unemployment is an acute problem for Russia as many unemployed people turn toalcohol or crime. The government has now established job placement agencies in towns

and regions. These play an important part in finding employment for the residents.There are also many hidden unemployed , people who officially own their own

business but earn little income or are underemployed (only working a few hours a week).


1 Demonstrate the impact of globalisation on the environment in Russia.

2 Assess the impact of globalisation on the levels of inflation and unemploymentand on the levels of the current account, foreign debt and exchange rate in Russia.

What has been the overall impact of

globalisation on the Russian economy?In the last five years there has been growth in Russia’s economy, people’s living conditionshave improved, financial stability has increased and inflation rates have gone down(though growth of consumer prices went somewhat ahead of forecast indices). Thesituation is now relatively stable in the foreign currency market; state debt servicing is ontarget. Gold and currency reserves of the Bank of Russia increased during the last fiveyears and amounted to US$143.6 billion in the middle of 2005.

Russia has become a free and open country. People can freely start a private businessand go on holidays to other countries, and invite visitors from all over the world. Theconsumer market has flourished. Goods that were not available before can be boughteasily today. These goods include CDs, computers, foreign cars, mobile telephones,microwave ovens and so on. But many people do not have enough money to buy these

expensive items. Russians can now freely buy and sell foreign currency, and acquireresidential and non-residential buildings as their private property. The governmentsupports people starting their own business, if they have the knowledge, abilities and start-up capital. People can now criticise the government; hold demonstrations and strikes, readbooks of formerly prohibited authors like Alexander Solzhenitsyn.

Nonetheless, the economic backwardness of Russia remains. The economy has notreached the pre-reform levels for GDP and other macroeconomic indicators. According tothe Russian government forecasts, GDP will attain the level of 1991 only around the endof 2005. Economic backwardness creates a low standard of living. During the years of reforms crime and corruption worsened. Unemployment, prostitution, drug addiction,alcoholism and the number of suicides due to social and economic reasons all increased.




Who has gained and lost the most from

the globalisation changes in Russia?Business people, politicians of high rank, the people who are full of initiative andenterprising, the most skilful specialists in some spheres and those who managed toaccumulate capital at the beginning of privatisation (even if that meant sometimesbreaking the existing laws) have gained the most. Pensioners, students, teachers, doctors, women and people with few skills and qualifications have been disadvantaged most.Public service workers earn poor salaries compared to people who sell in the markets.

What is government doing to assist growthand improve the living standards of the people?

The government has adopted a Land Code that allows people to own land privately.This is very important for further development of a market economy in the agriculturalsector. A new Labour Code has been adopted that sets out the rights of employees. Thegovernment has adopted a Tax Code that has created a more favourable businessclimate. The government took full responsibility for carrying out social programs toincrease and speed up the payment of pensions, allowances, and salaries to employeesengaged in the public sector. In the mid-1990s, such payments were often delayedfrom six months to a year.

The government has worked out a program of social and economic reform tomodernise and increase efficiency in the economy. For this extensive modernisation of theeconomy, the government intends to create and guarantee a favourable investment andbusiness climate, to have predictable and stable macroeconomic policy and tostructurally reorganise the economy. The government has paid particular attention tochanging the tax system to reduce tax avoidance and evasion. It included tax reforms tolower the tax burden, protect private property and maintain the public sector, completing financial, credit, and trade and protection policies. The main sources of revenue for thegovernment budget are the value added tax (VAT) (39.5 per cent), which is similar to theGST, customs duty (31.7 per cent), payments associated with the use of natural resources(16.0 per cent) and the tax on business profits (7.6 per cent). Unlike Australia, income tax is at a flat rate of 13 per cent for everyone and comprises a very small part of thegovernment’s revenue. In addition the government’s program has provided measures tosupport the poorer sections of the population, reduce unemployment, reform publichealth care and modernise education. Pensions and payments to public servants increased50 per cent in 2005, bringing their incomes more in line with those of people working in

the private sector of the economy. This was designed to achieve an increase in the quality of life of the population and to decrease the level of social inequality. Despite thesereforms the government has still been able to have a budget surplus equal to 10.6 per centof GDP and pay off their debts, ahead of time, to the IMF.

What are the challenges facing Russia now?

The success of President Putin’s policies can be shown by economic growth and a rising standard of living. According to regular public opinion polls, the President’spolicies to deal with crime, corruption and poverty are supported by the people. Someexamples of the success achieved by Putin in the global economy can be assessed by the fact that Russia takes part in the sittings of the heads of the eight leading


macroeconomicpolicya policy that influencesthe aggregate (total orentire) supply anddemand in theeconomy





Apply your learning1 Define ‘economic growth’.

2 Define ‘economic development’.

3 Outline one economic strategy that has been used by Russia to improve its levelof economic growth.

4 Demonstrate the impact of globalisation on trade in Russia.

countries, G8, as an equal partner. Russia is planning to enter the World Trade

Organization, and become part of the OECD.There are still many challenges facing Russia. Much of its recent economic successhas been due to rising world oil prices (its major export). This has provided tax revenue to the government and also spurred spending and growth. Declining oil pricesmay slow the economy down and create budget shortfalls. Inflation and relatively highunemployment still remain problems.

A decade after the collapse of the Soviet Union in 1991, Russia is still struggling toestablish a modern market economy and achieve strong economic growth. This is incontrast to its trading partners in Central Europe, which were able to overcome the initialproduction declines that accompanied the launch of market reforms within three to fiveyears.

An economic investigation on the impact of

globalisation on Russia’s financial marketIn August 1998, the Russian economy underwent a catastrophic collapse. At the centreof the collapse was the devaluation of the rouble. On 17 August, the governmentabandoned the (fixed) exchange rate target and floated the rouble. This caused a flightof finance (investment) out of the rouble and Russia. The rouble lost most of its value,and this depreciation led to severe inflationary pressures. The government alsoannounced that it was postponing the payment of external debts, and had decided toimpose capital controls (restrictions on the movement of money in and out of thecountry). The government defaulted on US$40 billion of rouble bonds.

By February 1999 Russia was unable to pay the US$4.8 billion that was due tothe IMF and World Bank. Almost overnight, investors, governments, internationalbanks and financiers and international institutions lost confidence in the Russian

economy. Many international banks and investors lost fortunes on their investments inRussian industry, shares and currency. A new recession was seen as inevitable in Russia.The financial instability that followed on world markets• threatened international confidence in the world financial system• led to Latin American financial instability as investors also withdrew funds there• led to calls for the reform of the IMF and the system for managing international

financial crises.The reasons for the financial crisis in Russia were seen by many observers to result from• Russia’s large budget debt• the inability of Russia’s public and private sectors to pay its debts – especially its

short-term dollar liabilities




• the inability of the Russian government to collect enough tax revenues to pay for

public services and its work force.In September 1998, a new government under Yevgeny Primakov managed to ease thesituation, enter into discussions with the IMF, and as a result, maintain stability.

How the crisis was overcome

There was wide consensus by international investors, governments and the IMF thatthe crisis in Russia reflected the fundamental weakness of the Russian government.The central government and the central bank did not have the capacity to repay Russia’s debts. During 1998 tax revenues were about US$1 billion a month. Centralgovernment expenditure at the same time was US$1.5 billion per month.The solutions proposed were for the government• to increase taxes• to make sure people paid their taxes – and in cash• to reduce government spending • to reform the corrupt banking system• to reform market prices for energy and housing • to implement various structural reforms• to overcome the ‘mafia’ – to strengthen the rule of law and reduce the power of

the robber barons who had purchased sections of the privatised Russian economy for a fraction of their true value.

Gradually further loans were made to Russia as it complied with these policies andproposals — and carried them out.

The future

The semi-market economy also explains why, despite some predictions of a possible10 per cent decline in Russia’s GDP in 1999, there seems to be greater confidenceamongst both debtors and creditors. The economy seems to have avoided collapse. Thefaçade of budgetary restraint may well pay off in the future. While industrial unrest isstill a problem (recent strikes by teachers and miners) there is less open defiance of government regulations, and the curbing of illegal trade in vodka promises to deliver a healthier, and maybe wealthier, work force.



1 Identify possible causes of a currency collapse. Which factors were most

responsible for the collapse of the rouble?2 Use demand and supply (of roubles) diagrams to illustrate the devaluation of the

rouble.

3 Explain the link between the collapse of the Russian economy and financialinstability in other economies.

4 Suggest ways in which the Russian government might improve taxationcompliance. Are any of these suggestions feasible for the Australian governmentto achieve the same result?

5 List the advantages and disadvantages of an economic system based on barter.





Extend your learning1 Visit the ‘Russia Today’ home page on the Internet:

<http://www.russiatoday.com>.

2 Find an article dealing with financial reforms in Russia and compose a letter tothe editor to express your views on the matter.

3 Examine the claim that economic reforms have weakened the base of theeconomic system, and that there should be a return to greater centralist control.

Development strategies in their response to globalisation

As you have seen in earlier chapters, there are various strategies that countries can

follow in order to encourage economic development. Table 7.5 summarises them.

Strategy Policies to promote development

Provide external assistance Grants of loans, which may be soft or hard, tied or untied

Internal strategies Control of population growth through financial incentives such as tax relief and culturechange, legislation to enforce limits to family size

Labour market reform Improve quality of labourRaise minimum school-leaving ageProvide free and compulsory educationImport highly skilled teachers

Facilitate overseas trainingProvide vocational trainingProvide adult literacy programs

Encourage entrepreneurial Focus on enterprise level trainingbehaviour Government provision of management training

Establish pilot business schemesGovernment assistance such as tax relief and subsidiesOverseas exchange programs for entrepreneurs

Improvements in Use of intermediate technology that is more labour intensivetechnology Government-initiated programs

Research and development aimed at intermediate technologyTechnical advice and model enterprises

Control foreign debt Reduce foreign debt to sustainable levels by rescheduling loan repayments

Sell government owned infrastructure to pay off public debtAgree to environmental protection in trade barrier reductions in exchange for debt relief Lobby international organisations such as the World Bank, IMF and G8 to assist in debtrelief programsMinimise corruption to maximise the positive impact of future loans on the level of economic development

Increase domestic savings Encourage domestic savings as a source of funds for investmentProvide tax relief for savings or reinvested profits or bothImplement a consumption tax to allow tax relief on savingsUndertake prudential supervision of the domestic financial marketMinimise public sector spending to increase the availability of investment funds todomestic industry

Table 7.5 Strategies to promote economic development




Case study B: A comparisonof globalisation and strategiesto promote economic developmentin Russia and ChinaRussia and China can be used for an excellent comparative case study on the conceptsand areas of the HSC syllabus. Most economists believe that the collapse of the SovietUnion ushered in the era now called globalisation. In particular, within a few shortyears in the early 1990s what became known as the Washington consensus or the

‘golden straitjacket’ provided theblueprint or model for strategiesto promote economic growth anddevelopment by responding to thedrivers of globalisation.

This consensus included


Extend your learningUndertake research (including revision of previous chapters) to answer the followingquestions.1 Distinguish between soft and hard loans.

2 Assess the implications of tied loans compared with untied loans.

3 Compare and contrast the population control policies of China and India.

4 Investigate the minimum school-leaving age in Russia and China.

5 Compare and contrast Russia’s and China’s levels of foreign debt.

• providing greater access fortechnology transfer

• liberalising capital, financialand product markets

• reducing the role of government through

privatisation andderegulation• linking political and social

freedom to economicfreedom

• joining internationalorganisations and following a multilateral negotiationspathway

• floating the currency andopening capital markets

• believing in speedy

RUSSIAN FEDERATION

CHINA

MONGOLIA

Beijing

PAKISTAN

INDIA

BURMA LAOS

VIETNAM

NORTHKOREA

SOUTHKOREA

NORTHKOREA

NEPAL

THAILAND

Figure 7.3 China




Strategy for growth China’s Strategy Russia’s Strategy

and development

Sectors chosen for Reform began in agriculture/movement from Privatisation of all sectors at once. Neglect of

initial privatisation commune system to individual responsibility; agriculture, little trial and application;and liberalisation partial privatisation covered hundreds of millions extreme speed of privatisation, shock therapyof workers, with a successful trial in one province approach. Do it all at once.followed by other provinces. Result: millions of new enterprises created in townships and villages.Creation of special economic zones withlimited market reform.

Use of price signals Two-tier price system to develop role of price Full privatisation and implementation of

signal in emerging market, firms produced under market prices. Immediate adoption of market

old quotas using old prices, products produced price systems. Firms respond by making

in excess of plan sold at developing market complex barter arrangements that distort

prices.The market was allowed to grope for the market prices. Concentration of ownership

undistorted price. creates monopoly pricing systems.

Exchange rates Pegged its currency to the US dollar; this Fully floating exchange rates led to rapid

stabilised the money supply and was a factor in movements in the rouble and the currency

maintaining low inflation, created certainty in crisis of 1997–98. Initially the floating

exporting and importing; represented a problem exchange rate encouraged investment but

in the Asian currency crises as China’s currency sudden movements made investing risky and

was overvalued, but the currency was seen as problematic. Short-term nature of investment

undervalued in 2004–05. exacerbated.

Product and China was cautious in opening product and Immediate product and financial

financial markets financial markets. Retained capital controls, liberalisation, tariff reduction, immediate

joined multilateral agencies slowly. Its WTO ascension to economic agreements.

Table 7.6 Comparing China’s and Russia’s strategies for growth and development


introduction of market policies

• encouraging foreign investment.It is useful when assessing these strategies and exploring how they have beenapplied in the Russian case study to also examine the relative performance of China and how it managed the impact of globalisation and opening its economy. China’ssuccess from 1990 to 2005, especially from 1995 onwards, stands in contrast toRussia’s abject failure.

Between 1992 and 2004 China grew at an average of 10 per cent, in the sameperiod Russia declined at an average rate of 5.6 per cent. From a starting point whereRussia’s income exceeded that of China, by 2000 China’s income had risen to matchRussia’s. China’s transition has entailed the largest reduction in poverty: from 358million people living in poverty in 1990 to 208 million by 2000 (at the poverty standard of US$1 income per day). In the same period Russia’s transition has entailedone of the largest increases in poverty in history not due to war or famine.

Table 7.6 shows how China’s and Russia’s strategies in opening their economies tothe global market were totally different.

The most dominant factor in the progress of both economies since 1989 has beenthe impact of globalisation on the operation of their economies as they followeddifferent strategies. We can see from Table 7.6 that China has been much moresuccessful in developing strategies to promote economic development.






Undertake a class debate on the topic: ‘When it comes to economic growth anddevelopment, slow and steady wins the race’.

membership has implications for further Development of ‘robber baron’ economy

privatisation. leading to concentration of product and

financial markets.

Poverty and Rapid rise in income has reduced absolute 1989 only 2 per cent of Russians in poverty;

inequality poverty but non-rural sector growth has meant 1998 23.8 per cent, 2000 50 per cent of

that 300 million Chinese have much higher children living in poverty while there is a

incomes than the other one billion. Greatest Mercedes traffic jam in Moscow. Dramatic

increase in income in history. increase in income inequality. Introduction of

market led to the greatest development of

inequality in human history.

Freedom, democracy, One-party state, ruled by Communist party, lack Democratic multi-party state, free and open

accountability of transparency, parts of economy still centrally elections, transparency and free media,

controlled, concerns over equality and freedoms and rights, crack down on ‘robbercorruption, concern over existing command barons’, loss of faith by the community in the

economy controls and uncompetitiveness of free market, rise of old Communist

older state enterprises. Massive pollution. movement.

Banking sector Open economy but the financial sector is not. Much more open, and has the potential to

Government maintain some controls. One of the provide capital for innovation, and

problems in the Chinese economy is the under- infrastructure, but the recent arrest of a key

developed banking sector and poor corporate industrialist and concerns about stability

regulation sector. Non-performing (bad) loans negate improvements in Russia’s situation.

from state enterprises estimated to be 40 per cent

of state capital. As is typical of China the

government plans to float two banks to trial an

international approach and new regulations.

Export strategy Concentration on agriculture, manufacturing The dismantling of Russia’s government-

and construction. Attractive to investors seeking owned industries and the imposition of direct

to use low-cost labour, joint venture strategies market prices led to a collapse of manu-

and large market. Huge investment by overseas facturing that has only recently been

Chinese e.g. from Taiwan. Massive increase in reversed. Russia is a major commodities

employment funded by foreign investment. exporter; its investment has been in

extraction industries, for example, oil which

China competes and has become a massive has generated little employment but pushed

manufacturing power funded by foreign economic growth up.

investments.





Extend your learningCreate a data file to compare and contrast the Chinese, Russian and one othereconomy other than Australia by completing Table 7.7. Suggested third economiesinclude Brazil, Argentina, South Korea and Ireland.

Table 7.7 A data file comparing three economies

Economic indicator Russia China Your choice of a

third economy

Level of development

Population size and growth rate

Economic growth rate and trend

Inflation

Unemployment

Gini coefficient

Environmental quality

Per cent GDP spent on military

Trade balance

Major exports

Major imports

Trade dependency ratio

Level of foreign investment

Level of foreign debt

Apply your learningWrite an extended response on the following topic: ‘Outline a range of developmentstrategies being used to promote growth and development in an economy other thanAustralia and examine the impact of globalisation on this economy’.

Learning more about globalisation inRussia and comparing Russia’s and China’sresponses to globalisationElectronic

Other good sources of information for these countries can be found at the GreenacreEducational Publications website at<http://homepages.ihug.com.au/~gep/economics.htm>.

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