What Russia Can Learn From China

China and Russia--two ex-communist giants struggling to transform huge centrally planned economies into market-driven societies. Yet China is growing at 13% annually, while the Russian economy is shrinking by 12% a year. China's currency is stable, while Russia's is plummeting. China's foreign investment is topping $30 billion, while Russia's flight capital is hitting $30 billion.

Why? In the great debate in Washington and Moscow over how much shock therapy to apply to Russia's economy, little intellectual weight is being given to China's experience on the road to capitalism. The Clinton Administration's Russian experts, led by Strobe Talbott, might benefit from a chat with Zhu Rongji, China's economic czar.

Zhu would probably give Talbott the following advice:

-- Go for growth, not shock therapy. Zhu would argue that Russia is floundering because it is attempting to privatize all its state-owned industries at once. Faced with enormous unemployment and social unrest, Moscow is printing rubles to keep what was the state sector afloat. But the resulting hyperinflation is sinking the economy anyway.

China, Zhu would say, is using another strategy. First, it opened its economy to foreign investors who built a huge export machine that now employs tens of millions of people who are moving over from declining state industries. Exports are also generating billions in revenues to support state companies without printing new renminbi.

After 15 years of export-led double-digit growth, Zhu would say that China now has the financial resources to go to stage two in 1994: Make all state enterprises market-driven. China is now getting Party functionaries out of day-to-day management and turning its industrial dinosaurs into joint-stock companies run by shareholders.

-- Control the money supply. Zhu would argue that economic reform is useless unless there is political control over the Central Bank. Russia's transition is in trouble because the reformers can't stop the printing of billions of rubles a month. The Central Bank is run by Viktor Gerashchenko, who supports the state, not the private, sector and supplies huge amounts of credit to keep it afloat. The result? Inflation running at about 20% a month and a ruble down from 100 to the dollar in 1992 to 1,700.

In China, Zhu, as head of the People's Bank of China, has clamped down hard on credit. Now he is building a U.S.-style banking system with a strong central bank, a network of commercial banks and a money market. China has $40 billion in foreign exchange reserves, the inflation rate is 12% a year, and the renminbi is worth 8.7 to the dollar.

-- Get the military on board. Zhu would argue that giving powerful elite groups, especially the military, a stake in the new market economy is essential. In Russia the nationalists have their own agenda--rebuilding the old Soviet empire.

For the past year, the military, the central bank, and parts of the government have used carrot and stick to persuade Georgia, Azerbaijan, Uzbekistan, Turkmenistan, and Belarus to move back under Russia's influence. Ukraine will probably be next. But empire building has its costs. Leading Russian reformer Yegor Gaidar quit the Yeltsin government recently because the central bank will have to print $1.4 billion worth of rubles for Belarus. That's the amount of loans that Russia is currently seeking from the International Monetary Fund. China's People's Liberation Army, in contrast, is busy running its own factories and exporting goods to the West.

Of course, one must take Zhu's advice in context. China is an authoritarian dictatorship while Russia has become a raucous democracy, making it harder for the reformers to move it toward a market economy. But move they must, and the Chinese model just may have more to offer them than either Washington or the IMF. Calling Zhu Rongji...

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