Russia was once a poor country under a tsarist aristocracy. By European standards, the society was under-developed and backward. The tsarist empire was built on serfdom. A ruthless form of feudalism was in vogue. The Bolshevik revolution in 1917 ended this exploitative feudal system. The Communist regime in the aftermath of the revolution gave a complete new shape to the Russian State and society. The state provided equality of opportunity for all Russians under the centrally-planned economic system. In 1948, China followed Russia’s path.
The Communist revolution happened under the leadership of Mao Zedong. His goal was to free the Chinese from the shackles of feudalism, mass poverty, illiteracy, poor health and brutal exploitation of the teeming millions. Both Russia and China have a long tryst with Communism ~ state control, centralised planning, import-substitution and stout opposition to market economy and free trade. But under the socialist system, citizens had access to universal education and healthcare free of cost.
Therefore, inequality in terms of income and wealth was minimal. But as the transition led to market led-reforms and trade liberalization, economic inequality became pronounced in both countries. How did this happen? China accepted market reforms and opened up to the world in 1978. Twelve years later, in 1991, Russia did the same. It dismantled its state-controlled economic system that was in place since 1917. The Soviet era came to an end. Both countries adopted massive privatization to initiate competition, strengthen the market system to ensure efficiency and global competiveness.
But the process of transition in these two countries was different. China’s transition process was gradual. But Russia adopted a ‘big-bang’ transition. In China the wave of reforms was gentle. It set up special economic zones in the coastal regions to facilitate export. China switched over from a policy of importsubstitution to one that was oriented towards export. Gradually, in China, the wave of market-led reforms moved to provincial regions, from the coast to the hinterland. But now something has gone wrong.
Growing economic inequality in the present world has affected both Russia and China. These two nations, appreciated the world over for their successful mission towards an egalitarian society during the socialist regime, are now the victims of severe income disparity. An unequal world is the root-cause of social unrest and disharmony. There are many factors responsible for this growing rich-poor divide in China and Russia.
The major reasons are unbridled privatization of public assets, rise in asset prices, changes in policies and regulation, restructuring institutions favouring private wealth accumulation. The transition from state controlled economy to a market-led economy paved the way for a massive rise in private wealth within a very short period.
A large portion of public wealth was transferred to the private sector. Private wealth in China amounted to just over 110 per cent of national income in 1978 when reforms were initiated. This proportion reached 490 per cent by 2015. But Russia’s concentration of private wealth rose from 120 in 1990 to 370 per cent in 2015. In Russia public assets were transferred to the private sector through a voucher privatization strategy.
The net public wealth, as a proportion of national income, plummeted from 300 per cent in 1990 to 70 per cent by 2015. But China adopted a gradual process of privatization of public assets. Therefore, the value of public wealth as a percentage of national income in China fell from just 250 per cent of the national income in 1978 to 230 per cent in 2015. Inequality in Russia and China have been caused by both economic and political factors.
Extraction-based economy in Russia has pushed up the income of those employed in the oil and natural gas sector. Regions in Russia endowed with mineral resources are enjoying higher incomes. Wage incomes are highly unequal in both countries. This income disparity is caused by financialization of the economy. The wages of the financial sector are much higher than other sectors of the economy. Half of all corporate profits are now being realized in the financial sector.
The distinguished economist, Thomas Picketty, argues that the main reason for rising inequality is the growing concentration of private wealth in both China and Russia. Privatization of public assets has benefited the top-end wealth holders. Inequality in these countries lies in the distribution of labour income. Managers and supermanagers are awarding themselves with a very high level of compensation package, while the average wage of workers has been stagnant. Thus wealth is possessed by a few in both countries, much of the accrued private wealth has been created by high income that in turn has been accrued from wealth that comprises non-capital assets held in untaxed overseas accounts.
It has been revealed that Russians hold as much personal wealth in offshore accounts than the amount of wealth invested in Russia. The Global Wealth Report calculates that Chinese funds deposited in offshore accounts rose by $ 172 billion during the period from 2014 to 2017. ‘Business firm-government’ relationship has taken a new shape of ‘give and take’ of the bounties of rent from the snowballing private wealth.
But the course of income inequality in post-transition China and Russia has been a bit different because of the varying strategies of privatisation. This accounts for the difference between the pace of growth and extent of economic inequality in both countries since transition. Income concentration is markedly higher in Russia. The market-oriented reforms have led to higher growth in both countries. But the benefits of growth have not been shared in equal proportion among the people.
China has successfully improved the living standards of the poorest. In Russia the bottom 50 per cent of the population experienced a decline in income between 1989 and 2016. The growing inequality threatens to trigger social unrest.
Governments in both countries must adopt a more inclusive development policy. Higher public investment on education, healthcare, doing away with the shadow economy, strengthening institutions to curb corruption, shifting to progressive tax regime, creating opportunities by imparting skills among the youth are among the reforms that are imperative. Inequality is burgeoning in both countries. This must be addressed before China and Russia are roiled by social unrest.
(The writer is a former Fulbright Visiting Scholar in the USA and presently Associate Professor, Ananda Chandra College, Jalpaiguri in West Bengal.)