[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

In the end, the shock therapy approach won out in policy circles, especially in
the West. The U.S. Treasury and the IMF pushed for rapid privatization and liberalization.
They argued not only for eliminating trade barriers but also for opening
up capital markets. Doing so, they asserted, would demonstrate to outside investors
that Russia was a business-friendly place in which to invest. To be sure, they said
that the institutional infrastructure was important, but they believed that this
infrastructure would develop in time.
Not all the countries followed their advice. Poland and Slovenia, once their hyperinflation
was contained, took a more gradualist strategy. China charted its own innovative
course of development and transition, but it too was based on gradualism.
The decade-long decline of Russia and most of the other countries that followed the
shock therapy approach laid bare the weaknesses in this strategy, as compared to
that followed by China and Poland.
A Comparison of Transition Strategies Consider some of the key
differences between transition strategies in Russia and China:
• China placed more emphasis on creating jobs and enterprises than on restructuring
enterprises. In China, local townships and villages took their
savings and created millions of new enterprises. These new businesses
represented a new institutional form: they were not really private, but
neither were they like the old government-run, state-owned enterprises.
• China put more emphasis on competition than on privatization. In a sense,
the new township and village enterprises were publicly owned, but each
had to compete against the other; thus the reforms promoted efficiency.
Local control and competition helped solve the governance problem. The old
state enterprises had suffered from a lack of effective oversight.
Government bureaucrats in Moscow or Beijing simply could not keep
tabs on what was going on in remote provinces. By contrast, those living
in the townships and villages could see clearly whether jobs were being
created and their incomes were rising, and how they were faring relative
to neighbors. This transparency put enormous pressure on managers.
• The gradualist approach built on existing institutions, the communes
(townships and village authorities) that previously had been responsible for
agriculture. But early on in the reforms, China introduced what it called
the individual responsibility system, in which land was effectively turned
over to the farmers and they reaped the benefit of their own hard work—
a standard application of the conventional theory of incentives. The communes
then turned their attention from agriculture to industrialization.
Because the new enterprises were put in the villages and townships, there
was much less social disruption than would have occurred had the industrialization
been centered in urban areas. The contrast with Russia could
not have been greater. There, the erosion of social capital—a sense of “community”
and of law and order—had enormous consequences. The entire
process of reform was conducted in ways that seemed unfair to the average
Russian. While a few oligarchs became billionaires, the government did
not pay workers and retirees what was their due. Inflation had wiped out
812 ∂ CHAPTER 36 DEVELOPMENT AND TRANSITION