State condition, foreign influence and alternative models of market reforms in China, Russia and Eastern Europe

Abstract

China, Russia and Eastern Europe can be considered the principal examples of a massive globalization in the last two decades. All expanded their use of market forces but in terms of growth rates only China is an obvious success story; Russia is a failure, while Eastern Europe's record is lackluster. The diverse experience of these countries indicates that whether globalization succeeds or fails is a function of the condition of the state. With a strong state, China was able to undertake a gradual pattern of reforms that allowed firms to thrive. Because in Russia the state almost collapsed, reforms followed a chaotic model, throwing firms into a two-decade period of no growth. With less severe but still major state crises, Eastern Europeans followed a radical approach which locked firms into a massive downturn followed by weak growth thereafter. These economic outcomes validate the theoretical argument in favor of gradual reforms advanced by the so-called evolutionary (Austrian) economics of Joseph Schumpeter. Each of the three models of reform produced a different final type of economic system. In China a ‘corporatist structure’ with an activist but impartial state has emerged. In Russia we find ‘industrial feudalism’ with regional fiefdoms sharing power with the state, while Eastern Europe established ‘imported capitalism’, with the majority of industry and banking sold to foreigners. Foreign investors were assisted by their states in gaining access to state assets in these countries. Where these foreign states encountered weak states, as in Eastern Europe, the bulk of capital was transferred to the respective foreign buyers. But this was not the case in China, where the state agency has actually strengthened. In Russia, foreign states proved no match in asset acquisitions for the so-called oligarchs that emerged as a substitute for the largely defunct local state. It follows from these experiences that successful globalization does not involve markets replacing states. Instead, such globalization requires that the expansion of markets has to be paralleled by the expansion of states.

Keywords:

• globalization
• state
• privatization
• China
• Eastern Europe
• Russia

Acknowledgments

This article evolved from my 2008 seminar presentation during a semester-long stay as a Toyota Fellow at the Graduate School of International Relations at the Seoul National University, Korea. I greatly benefited from the School's seminar that was led by Taeho Bark as well as from the comments by Leon Podkaminer, Vienna Institute of International Economy, Vienna, Austria; Daniel Baker, University of Washington, Seattle, USA; and Liu Haiyue, Sichuan Normal University, Chengdu, China.