RESEARCH Business Economy

INTERNATIONAL AFFAIRS
Competition key to China's progress, Russia's stagnation, scholar says

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

8/1/2001

CHAMPAIGN, Ill. — While Russia struggles with ebbing production and growing poverty, China, with a less educated workforce and more primitive technology, surges forward. What accounts for these surprising results?

Competition, says Stephen L. Parente. The transition of Russian industry from state to private ownership has failed to generate the competitive forces that are at the root of the economic takeoff of China, according to the University of Illinois economist.

"Privatizations in Russia have resulted in the replacement of state monopolies by private monopolies," Parente writes in a current paper. "Whereas the government had some control over the behavior of the state monopolies, it now has very little power to intervene in the operations of the private monopolies."

Parente's research indicates that unrestricted use of already available technology is a necessary precondition to undergo rapid economic growth. His book, "Barriers to Riches," co-written with economist Edward C. Prescott, reports that differences in the level of education, rates of personal savings and access to new technology do not account for the wide disparity in living standards between western and third-world nations.

In Russia under capitalism, nearly all the suffocating barriers of the former socialist state have been retained. Trade organizations from socialism were kept intact. The parties involved in privatizing many industries were directors of the former state enterprises and their superiors at the state ministries.

Protecting these monopoly rights has been a major preoccupation of the Russian government. "This is done by different effective tax rates paid by companies in the same industry, preferential access to land and government procurements, different energy prices paid by companies in the same industry, differential enforcement of legal and bureaucratic codes, and differential access to government control export-infrastructure."

As a consequence, the productivity of Russian industry has dropped to about 20 percent of its full potential, the economist calculated.

Authorities in China, by contrast, have shown a willingness to break up existing monopolies and force factory workers to accept new practices. "The plan of China’s communist leaders going back to 1958 was to make regions of China self-sufficient. For this reason, production was spread out among a large number of small factories located throughout the country."

By nimbly using existing technology and competing on prices, Chinese businesses have outperformed bigger, better capitalized Russian enterprises. Parente and economist José-Víctor Ríos-Rull of the University of Pennsylvania analyze the two economies in their working paper, "The Success and Failure of Reforms in Transition Economies."