7 Globalisation in Russia, and comparing Russias and Chinas responses to globalisation

CASE STUDIES:

CHAPTER

Economic outcomes

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

Economic issue

v
Role of markets

Examine the impact of the globalisation process on economic growth and the quality of life, levels of development, rates of inflation and external stability. Assess the potential impact on the environment of continuing world economic development.

Economic skills

Comparison with China Environment Distribution of income and wealth Exchange rate Trade and protection

Description of the economy Economic system

Assess the impact of development strategies used 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 this economy is using to promote economic growth and development.

Impact of globalisation on the Russian economy

Globalisation Economic growth

Prior learning

Quality Define globalisation. of life 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.

Development strategies Unemployment

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Figure 7.1 Moscow, Russias capital

Case study A: The impact of globalisation on the Russian economy

Economic reform in Russia
planned socialist economy a central government controls everything from production planning and prices to distribution of goods and services

Russia is one nation that has been most affected by the spread of globalisation in the last 20 years. The Russian economy went on a unique journey, unlike any other economy in human history. It went from being a planned socialist economy to a capitalist economy. Throughout the 1990s Russia went through a period of unprecedented economic change. During that time its economic growth declined by over 30 per cent and unemployment 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 that have caused Russias economy to make this great change.

Overview of Russias economy 19892005

markets places where freely acting individuals engage in the voluntary exchange of goods and services for mutual benefit

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. This meant that the central government controlled everything from production planning and prices to distribution of goods and services. The government owned all the factors or means of production such as land, labour and capital and allocated these resources. Prices and markets did not allocate resources; the governments five-year plans allocated

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resources. Over a long time the Russian people had lost FINLAND ARCTIC OCEAN faith in the government allocation system because it wasnt working. The BELORUSSIA economy grew stagnant and consumer goods were not UKRAINE Moscow produced in enough quantity to meet peoples needs and wants. RUSSIAN FEDERATION Countries in Eastern Europe such as Hungary, KAZAKITSTAN Poland and Romania that were closely aligned with the UZBEKISTAN USSR had planned IRAN CHINA JAPAN TURKMENISTAN economies as well. After the MONGOLIA collapse of the USSR in 1991, Russian reformers were Figure 7.2 Russia confronted with the task of trying to create a democratic state based on effective laws and reliable administration. At the same time they were building a modern capitalist economy. The collapse of Communism in Eastern Europe in the late 1980s and the dissolution of the Soviet Union at the end of 1991 disrupted the close economic relations Russia had previously enjoyed with neighbouring Communist nations and other Soviet republics such as the Ukraine and Georgia. Political turmoil and uncertainty inside the Russian government also contributed to the nations economic difficulties. Compared with most of the former planned economies of Eastern Europe, Russia experienced an unusually severe and 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 Federation implemented 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 and market forces. Major components of the reforms included establishing privately owned industrial and commercial ventures, with foreign as well as Russian investment, and the 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 to purchase shares in firms being privatised, which often were sold at auction. Because the economy had collapsed and many people had little money, these vouchers often were sold for cash by people for a fraction of their true worth. Entrepreneurs who were often little more than robber barons with access to cash and contacts in the former government or public service often bought these vouchers for next to nothing and finished 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.

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stock exchanges markets for the sale and purchase of second-hand shares and securities; modern stock markets are not necessarily located in a particular building, but consist of traders who are linked by computer terminals; companies can use the stock market to sell new shares and raise money for investment there is also a market in gilt-edged securities as part of the stock exchange regulation government intervention in markets economic efficiency when the costs of production are minimised

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?

market economy a system where resources are owned by households: markets allocate resources through the price mechanism; and income depends upon the value of resources owned by an individual

The Soviet centrally planned system, which existed in Russia from the 1920s, turned out to be ineffective. The goal of the radical reforms was to create a new economy based on competition of enterprises, incentives for employees and freedom from regulation and the control of bureaucratic state administrative authorities. The success of Western industrial countries had shown that under certain favourable conditions the market system is able to provide a very high degree of economic efficiency. The Soviet economic system with its state monopoly of the means of production, severe regulation of all aspects of economic activity and its equality of income distribution failed to provide economic efficiency or improved standards of living. For example, because all the factors of production were centrally planned, bakers would receive their allocation of flour and other ingredients 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. In addition, the price of the bread was controlled, so that it did not match supply or demand. The low level of efficiency of Russias economy greatly affected the nations 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 wait their turn for many months or even years. In supermarkets often only empty shelves could be seen; the shops sold goods in exchange for special tokens that very often proved 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 was the liberalisation of prices for consumer goods and services and the centralised system of resource distribution was abolished. The prices of goods and services were to be determined by market forces, not set by the government. Then mass privatisation of government enterprises was started. The reforms encouraged personal initiative and individual ownership of businesses.

What were the effects of moving towards a market economy?

Economic growth

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

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Russias ten times. By 2002, the Chinese combined gross domestic product exceeded Russias five times. After the currency crisis in 1998, the volume of gross domestic product per head in Russia decreased by up to US$3500. But the period 19992005 was favourable for 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 sectors of 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 cent per year. The volume of industrial production in the first part of 2005 was 5.0 per cent higher than the same period in 2004. Production of manufactured goods went up in all industries. The fastest growth rates were in the fuel industry, machine building, metallurgy, metalworking, building materials production, power industry, and the food products industry.
Table 7.1 The main indicators of growth (annual percentage change). 1991 1998 Gross domestic product Production of manufactured goods Real income of population 5.8 7.1 6.9 1999 2000 2001 2002 2003 2004

5.4 11.0 -12.5

9.0 11.9 11.9

5.0 4.9 8.5

4.3 3.7 8.9

7.3 6.4 13.0

7.1 5.0 12.0

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.

Review your learning

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.

Peoples 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. Real income 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 in 2002 the income increased by 32 per cent compared to that in 1999. In the first part of 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 2002 the number of people with income below subsistence level decreased from 33.5 per cent to 25.0 per cent of aggregate population or approximately 36 million people.
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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 67 years to 59 years during the 1990s. In 2005 a mans life expectancy was 61 years and a womans was 74 years. Increased unemployment and lower incomes all increased the suicide 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 in imports, especially for consumer goods. If world oil prices fall, then trade will suffer. Foreign trade with countries belonging to the Commonwealth of Independent States (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 Russias 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 per cent of Russias exports. Rising world commodity prices from 2003 to 2005 have contributed to an increased trade balance, current account surpluses and international reserves of US$144 billion. From 2004 to 2005 commodity exports grew by 41 per cent.
Investment

foreign direct investment (FDI) overseas investment into a country by foreigners, recorded as a credit in the balance of payments

The market reforms of 1991 negatively affected the investment policy of various enterprises and institutions. As investments are the bases for production and development, the investment fall severely damaged the economy. Investment growth in fixed capital took place only in 1999 (and only by 1 per cent). From 1993 to 1998 fixed capital investment fell by 65 per cent compared with 1991. From 1999 to 2002 investment 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 Far East various breakdowns and emergency situations take place more often than in the Central regions of Russia. While there has been a major increase in foreign direct investment into Russia since the reforms began, many of these ventures are joint ventures, between Russian and foreign firms. Favourable conditions for overseas companies to work in Russia have not yet been created. Among the major factors preventing foreign business from investing in Russia are the 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 belongs to the 20 per cent of the richest people in Russia was 32.7 per cent in 1990, rising to 51.3 per cent in 2002. The proportion of income that belongs to the 20 per cent of the poorest people in Russia was 9.8 in 1990, declining to only 4.9 per cent in 2002. There also exists a large income differentiation in Russias regions. Moscow residents have the highest incomes. In 2001 average annual income per capita in Moscow was 5.5 per cent higher than the subsistence level, but in some regions average income is lower than the subsistence level. For example, in one republic the average annual 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.
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Review your learning

1 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 quality of 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 fixed capital to protect the environment started increasing only in 2000. Due to its large decrease in the previous years, investment in environmental protection amounted to only 74 per cent of the 1990 level in 2001. The formation of toxic production waste increased by 83.3 million tons in 1995 and 139.2 million tons in 2001. The level of investment in new equipment for the purification of polluted water was 50 per cent less in 1997 compared to 1980. In 1995, 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 its limited funds. In the case of one natural resource forests there is wasteful and reckless destruction, 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 Reforestation (thousands of hectares) Number of forest fires (thousands) Burnt and damaged forest (millions of cubic metres) 1 831 18.3 23.5 1995 1 454 26.0 8.5 1997 1 092 31.3 21.8 1999 964 36.6 21.9 2000 973 22.4 39.6 2001 960 23.7 16.5

Exchange rate

There has been a major decline in the value of the Russian rouble, since it became convertible and affected by world financial markets. This has had a major effect on
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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 result of incorrect finance and credit policies of the Russian government the rouble experienced a sharp depreciation. In the period 20002002 the exchange rate of the rouble 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 4.64 1996 5.56 1997 5.96 1998 20.7 1999 27.0 2000 28.2 2001 30.1 2002 31.8 2003 29.5 2004 29.0 2005 28.1

Inflation
hyper-inflation very high rates of inflation that can cause major economic problems and political instability

Inflation in the early period of transition at the beginning of the 1990s was in excess of 1000 per cent per annum. During the first stage of the reforms (19911994), together with the roubles 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 Russias central bank loans. In reality that meant more paper 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 people tried to invest money somewhere in order not to lose it. Various financial and investment 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 various countries 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. One thousand roubles became one rouble of the new currency. It turned out that, after denomination, consumer prices rose 78 times compared with 19891990 and, for certain goods and services, much more. For example, the price of a single trip in the Moscow underground increased from 5 kopeks to 3 roubles, a 6000 per cent increase. State pensions during the same period increased but not more than 33.5 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 other industrialised 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 84.4 1999 36.5 2000 20.2 2001 18.6 2002 15.1 2003 13.7 2004 10.9 2005 13.6

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Unemployment

From an economy that had virtually zero unemployment, unemployment increased with the opening of the Russian economy. The countrys transition to a market economy caused the problem of unemployment. In 2000 the total number of unemployed was 9.8 per cent of the labour force. In recent years, there has been a slight decrease in the number of unemployed due to the higher levels of economic growth and, according to the International Labour Organisation, the unemployment rate was 7.9 per cent in the middle 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 left or were fired from military service, and refugees from former Soviet Union republics. Unemployment is an acute problem for Russia as many unemployed people turn to alcohol 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).

hidden unemployed people who are not looking for work because they are discouraged job seekers

Review your learning

1 Demonstrate the impact of globalisation on the environment in Russia. 2 Assess the impact of globalisation on the levels of inflation and unemployment and 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 Russias economy, peoples living conditions have improved, financial stability has increased and inflation rates have gone down (though growth of consumer prices went somewhat ahead of forecast indices). The situation is now relatively stable in the foreign currency market; state debt servicing is on target. Gold and currency reserves of the Bank of Russia increased during the last five years 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 business and go on holidays to other countries, and invite visitors from all over the world. The consumer market has flourished. Goods that were not available before can be bought easily 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 acquire residential and non-residential buildings as their private property. The government supports people starting their own business, if they have the knowledge, abilities and startup capital. People can now criticise the government; hold demonstrations and strikes, read books of formerly prohibited authors like Alexander Solzhenitsyn. Nonetheless, the economic backwardness of Russia remains. The economy has not reached the pre-reform levels for GDP and other macroeconomic indicators. According to the Russian government forecasts, GDP will attain the level of 1991 only around the end of 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.
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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 and enterprising, the most skilful specialists in some spheres and those who managed to accumulate capital at the beginning of privatisation (even if that meant sometimes breaking 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 growth and 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 agricultural sector. A new Labour Code has been adopted that sets out the rights of employees. The government has adopted a Tax Code that has created a more favourable business climate. The government took full responsibility for carrying out social programs to increase and speed up the payment of pensions, allowances, and salaries to employees engaged in the public sector. In the mid-1990s, such payments were often delayed from six months to a year. The government has worked out a program of social and economic reform to modernise and increase efficiency in the economy. For this extensive modernisation of the economy, the government intends to create and guarantee a favourable investment and business climate, to have predictable and stable macroeconomic policy and to structurally reorganise the economy. The government has paid particular attention to changing the tax system to reduce tax avoidance and evasion. It included tax reforms to lower 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 the government budget are the value added tax (VAT) (39.5 per cent), which is similar to the GST, 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 the governments revenue. In addition the governments program has provided measures to support the poorer sections of the population, reduce unemployment, reform public health care and modernise education. Pensions and payments to public servants increased 50 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 these reforms the government has still been able to have a budget surplus equal to 10.6 per cent of GDP and pay off their debts, ahead of time, to the IMF.

macroeconomic policy a policy that influences the aggregate (total or entire) supply and demand in the economy

What are the challenges facing Russia now?

The success of President Putins policies can be shown by economic growth and a rising standard of living. According to regular public opinion polls, the Presidents policies to deal with crime, corruption and poverty are supported by the people. Some examples 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
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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 success has 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 prices may slow the economy down and create budget shortfalls. Inflation and relatively high unemployment still remain problems. A decade after the collapse of the Soviet Union in 1991, Russia is still struggling to establish a modern market economy and achieve strong economic growth. This is in contrast to its trading partners in Central Europe, which were able to overcome the initial production declines that accompanied the launch of market reforms within three to five years.

Apply your learning

1 Define economic growth. 2 Define economic development. 3 Outline one economic strategy that has been used by Russia to improve its level of economic growth. 4 Demonstrate the impact of globalisation on trade in Russia.

An economic investigation on the impact of globalisation on Russias financial market

In August 1998, the Russian economy underwent a catastrophic collapse. At the centre of the collapse was the devaluation of the rouble. On 17 August, the government abandoned the (fixed) exchange rate target and floated the rouble. This caused a flight of 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 also announced that it was postponing the payment of external debts, and had decided to impose capital controls (restrictions on the movement of money in and out of the country). 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 to the IMF and World Bank. Almost overnight, investors, governments, international banks and financiers and international institutions lost confidence in the Russian economy. Many international banks and investors lost fortunes on their investments in Russian 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 Russias large budget debt the inability of Russias public and private sectors to pay its debts especially its short-term dollar liabilities
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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 the situation, 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 that the 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 Russias debts. During 1998 tax revenues were about US$1 billion a month. Central government 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 and proposals and carried them out.

The future
The semi-market economy also explains why, despite some predictions of a possible 10 per cent decline in Russias GDP in 1999, there seems to be greater confidence amongst both debtors and creditors. The economy seems to have avoided collapse. The faade of budgetary restraint may well pay off in the future. While industrial unrest is still 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.

Review your learning

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 financial instability in other economies. 4 Suggest ways in which the Russian government might improve taxation compliance. Are any of these suggestions feasible for the Australian government to achieve the same result? 5 List the advantages and disadvantages of an economic system based on barter.

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Extend your learning

1 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 to the editor to express your views on the matter. 3 Examine the claim that economic reforms have weakened the base of the economic 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. Table 7.5 Strategies to promote economic development
Strategy Provide external assistance Internal strategies Labour market reform Policies to promote development Grants of loans, which may be soft or hard, tied or untied Control of population growth through financial incentives such as tax relief and culture change, legislation to enforce limits to family size Improve quality of labour Raise minimum school-leaving age Provide free and compulsory education Import highly skilled teachers Facilitate overseas training Provide vocational training Provide adult literacy programs

Encourage entrepreneurial Focus on enterprise level training behaviour Government provision of management training Establish pilot business schemes Government assistance such as tax relief and subsidies Overseas exchange programs for entrepreneurs Improvements in technology Use of intermediate technology that is more labour intensive Government-initiated programs Research and development aimed at intermediate technology Technical advice and model enterprises Reduce foreign debt to sustainable levels by rescheduling loan repayments Sell government owned infrastructure to pay off public debt Agree 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 debt relief programs Minimise corruption to maximise the positive impact of future loans on the level of economic development Encourage domestic savings as a source of funds for investment Provide tax relief for savings or reinvested profits or both Implement a consumption tax to allow tax relief on savings Undertake prudential supervision of the domestic financial market Minimise public sector spending to increase the availability of investment funds to domestic industry

Control foreign debt

Increase domestic savings

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Extend your learning

Undertake research (including revision of previous chapters) to answer the following questions. 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 Russias and Chinas levels of foreign debt.

Case study B: A comparison of globalisation and strategies to promote economic development in Russia and China
Russia and China can be used for an excellent comparative case study on the concepts and areas of the HSC syllabus. Most economists believe that the collapse of the Soviet Union ushered in the era now called globalisation. In particular, within a few short years in the early 1990s what became known as the Washington consensus or the golden straitjacket provided the blueprint or model for strategies to promote economic growth and RUSSIAN FEDERATION development by responding to the drivers of globalisation. This consensus included providing greater access for MONGOLIA technology transfer NORTH KOREA liberalising capital, financial Beijing and product markets SOUTH reducing the role of KOREA government through privatisation and CHINA deregulation linking political and social freedom to economic freedom joining international organisations and following a multilateral negotiations VIETNAM BURMA pathway THAILAND LAOS floating the currency and opening capital markets believing in speedy

PAKISTAN

NEPAL INDIA

Figure 7.3 China

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introduction of market policies encouraging foreign investment. It is useful when assessing these strategies and exploring how they have been applied 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. Chinas success from 1990 to 2005, especially from 1995 onwards, stands in contrast to Russias abject failure. Between 1992 and 2004 China grew at an average of 10 per cent, in the same period Russia declined at an average rate of 5.6 per cent. From a starting point where Russias income exceeded that of China, by 2000 Chinas income had risen to match Russias. Chinas transition has entailed the largest reduction in poverty: from 358 million 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 Russias transition has entailed one of the largest increases in poverty in history not due to war or famine. Table 7.6 shows how Chinas and Russias strategies in opening their economies to the global market were totally different. The most dominant factor in the progress of both economies since 1989 has been the impact of globalisation on the operation of their economies as they followed different strategies. We can see from Table 7.6 that China has been much more successful in developing strategies to promote economic development.
Table 7.6 Comparing Chinas and Russias strategies for growth and development Strategy for growth and development Sectors chosen for initial privatisation and liberalisation Chinas Strategy Reform began in agriculture/movement from commune system to individual responsibility; partial privatisation covered hundreds of millions of workers, with a successful trial in one province followed by other provinces. Result: millions of new enterprises created in townships and villages. Creation of special economic zones with limited market reform. Two-tier price system to develop role of price signal in emerging market, firms produced under old quotas using old prices, products produced in excess of plan sold at developing market prices.The market was allowed to grope for the undistorted price. Pegged its currency to the US dollar; this stabilised the money supply and was a factor in maintaining low inflation, created certainty in exporting and importing; represented a problem in the Asian currency crises as Chinas currency was overvalued, but the currency was seen as undervalued in 200405. China was cautious in opening product and financial markets. Retained capital controls, joined multilateral agencies slowly. Its WTO Russias Strategy Privatisation of all sectors at once. Neglect of agriculture, little trial and application; extreme speed of privatisation, shock therapy approach. Do it all at once.

Use of price signals

Full privatisation and implementation of market prices. Immediate adoption of market price systems. Firms respond by making complex barter arrangements that distort market prices. Concentration of ownership creates monopoly pricing systems. Fully floating exchange rates led to rapid movements in the rouble and the currency crisis of 199798. Initially the floating exchange rate encouraged investment but sudden movements made investing risky and problematic. Short-term nature of investment exacerbated. Immediate product and financial liberalisation, tariff reduction, immediate ascension to economic agreements.

Exchange rates

Product and financial markets

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membership has implications for further privatisation. Poverty and inequality Rapid rise in income has reduced absolute poverty but non-rural sector growth has meant that 300 million Chinese have much higher incomes than the other one billion. Greatest increase in income in history.

Development of robber baron economy leading to concentration of product and financial markets. 1989 only 2 per cent of Russians in poverty; 1998 23.8 per cent, 2000 50 per cent of children living in poverty while there is a Mercedes traffic jam in Moscow. Dramatic increase in income inequality. Introduction of market led to the greatest development of inequality in human history. Democratic multi-party state, free and open elections, transparency and free media, freedoms and rights, crack down on robber barons, loss of faith by the community in the free market, rise of old Communist movement. Much more open, and has the potential to provide capital for innovation, and infrastructure, but the recent arrest of a key industrialist and concerns about stability negate improvements in Russias situation.

Freedom, democracy, One-party state, ruled by Communist party, lack accountability of transparency, parts of economy still centrally controlled, concerns over equality and corruption, concern over existing command economy controls and uncompetitiveness of older state enterprises. Massive pollution. Banking sector Open economy but the financial sector is not. Government maintain some controls. One of the problems in the Chinese economy is the underdeveloped banking sector and poor corporate regulation sector. Non-performing (bad) loans 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. Concentration on agriculture, manufacturing and construction. Attractive to investors seeking to use low-cost labour, joint venture strategies and large market. Huge investment by overseas Chinese e.g. from Taiwan. Massive increase in employment funded by foreign investment. China competes and has become a massive manufacturing power funded by foreign investments.

Export strategy

The dismantling of Russias governmentowned industries and the imposition of direct market prices led to a collapse of manufacturing that has only recently been reversed. Russia is a major commodities exporter; its investment has been in extraction industries, for example, oil which has generated little employment but pushed economic growth up.

Review your learning

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

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Cambridge Economics HSC Topic I The Global Economy

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Extend your learning

Create a data file to compare and contrast the Chinese, Russian and one other economy other than Australia by completing Table 7.7. Suggested third economies include Brazil, Argentina, South Korea and Ireland.
Table 7.7 A data file comparing three economies Economic indicator 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 Russia China Your choice of a third economy

Apply your learning

Write an extended response on the following topic: Outline a range of development strategies being used to promote growth and development in an economy other than Australia and examine the impact of globalisation on this economy.

Learning more about globalisation in Russia and comparing Russias and Chinas responses to globalisation
Electronic
Other good sources of information for these countries can be found at the Greenacre Educational Publications website at <http://homepages.ihug.com.au/~gep/economics.htm>.

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