Russia and China in the Global Economy

Abstract

In mid-December 2004, Baikal Finanz, a previously unheard-of Russian firm with no offices and no known officers, won a nontransparent auction to buy Yuganskneftegaz, the major oil production asset of Yukos, Russia's most efficient oil company. The same week Lenovo, a computer firm established twenty years earlier as a venture of the Chinese Academy of Sciences, purchased IBM's personal computer division. Most people looking at Russia and China when Mao died in 1976 assumed that Russia1 was better positioned to become a major player in global technology industries. The Soviet Union was participating in the Apollo Soyuz joint space missions and enjoying the benefits of detente and stability (not yet visible stagnation) under Brezhnev. The USSR was a superpower with many of the requisites for development. In literacy levels and numbers of scientific, technical, and other specialists with advanced education, Russia was far ahead of China's overwhelmingly peasant society just emerging from the chaos of the Cultural Revolution and accompanying isolation.Since Mao's death China has generated high economic growth rates for three decades, fostering internationally competitive industries and lifting a significant number of people out of poverty. Beginning in the late 1980s, Russia experienced severe economic dislocations, and economic growth resumed only after a fall in living standards and the 1998 financial crisis. Most of the growth in Russia since August 1998 is attributable to the ruble devaluation and increased oil prices, raising questions about its sustainability. Despite windfall oil revenues, Russia's growth rate since Vladimir Putin became president has been among the lowest in former USSR countries.Growth based on industry has helped China overtake Russia on a range of human capital and development indicators. Internet and cell phone use among China's urban population is now roughly equivalent to that of Russia's city dwellers. Spending for education and reserach and development as a proportion of national budgets is at least equal. China is an important global player in a growing number of technology industries and in the international economic system, things Russian leaders merely talk about.What accounts for an outcome that contradicts most people's expectations? My argument emphasizes differing approaches to integration with the international economy. China has embraced economic globalization and integration on a scale surpassing many other Asian countries, while Russia remains wary and peripheral. Russia's economy is open, but selling natural resources and arms generates few linkages leading to higher value-added production. Russia's economic integration is thin. China's integration is thick, involving participation in technology chains and participation in entire product cycles. China vastly overperforms in producing value-added products given its level of development; Russia markedly underperforms relative to the industrial base, educational system, and research and development potential inherited from the Soviet era. China joined the WTO in 2001; Russia has been a year or two away from membership since 1993.These differences increasingly influence politics: China's thick integration has fostered regional, sectoral, and institutional interests that defended and expanded the policies of reform and openness; Russia's thin integration generates few countervailing forces to contest renewed administrative domination of the economy.Conventional Wisdom Explanations for China's RisePrevailing explanations for China's economic success emphasize initial conditions and/or specific policies. Initial advantages include an abundant supply of low-cost labor not covered by the welfare system; the decision to begin reforms with agriculture; shorter duration of communist rule; less complete Communist Party penetration of society; qualitative differences in leadership; and communities of co-ethnics willing to provide investment capital. …