On the Role of Government in Transition: The Experiences of China and Russia Compared
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On the Role of Government in Transition: The Experiences of China and Russia Compared JEFFREY B MILLER1 & STOYAN TENEV2 1
Department of Economics, University of Delaware, Newark, Delaware 19716, USA. E-mail: [email protected] 2 The International Finance Corporation, The World Bank Group, Washington, DC, USA. E-mail: [email protected]
The different economic performance of transitioning Asia versus Central and Eastern Europe and the FSU (CEEFSU) has been arguably the most salient fact of transition. Particularly remarkable has been the contrast between China and Russia. This paper argues that the contrasting experiences of China and Russia can in part be explained by the different roles that governments have played in the transition process of these countries. China gave priority to administrative reform, aligned bureaucratic incentives at all levels with growth and development objectives, and enhanced enterprise and local autonomy while preserving the capacity of the centre to exercise control. This approach transformed government bodies into real owners of the reform process and led to privatisation over time that was largely welfare enhancing. Russia, on the contrary gave priority to economic over state restructuring. Major reforms including mass privatisation were implemented in an environment of a weak state, which did not have the capacity to protect its ownership rights and coordinate reforms. As a result, privatisation was a wasteful process associated with asset stripping and consequently with lack of legitimacy of newly established property rights. These contrasting experiences carry broader lessons for the role of the government in large-scale complex reforms. Comparative Economic Studies (2007) 49, 543–571. doi:10.1057/palgrave.ces.8100230
Keywords: Institutional change, economic transition, China, Russia, role of government, administrative reform, incentives JEL Classifications: P210, P260, H110
JB Miller and S Tenev The Role of Government
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INTRODUCTION The different economic performance of transitioning Asia versus Central and Eastern Europe and the FSU (CEEFSU) has been arguably the most salient fact of transition. While CEEFSU economies went through deep transformational recession, growth in Asia has accelerated.1 Particularly remarkable has been the contrast between China and Russia. Several types of explanations have been offered in the literature on this phenomenon. Differences in initial conditions have played an important role. China and other Asian transition economies did not go through simultaneous political and economic transitions; they had large agricultural sectors, lower level of development, less initial macroeconomic distortions and were less integrated into the CMEA (de Melo et al., 2001). These differences affected the growth path during transition. A second set of explanations focus on differences in policies. China (and also transitioning Asia) chose a gradual, dual-track reform style in contrast to the big bang approach to liberalisation an
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