Monday, August 28, 2006

Can China succeed where Russia failed?

Over the weekend, the Enterprise Bankruptcy Law was approved by the Standing Committee of China's National Peoples Congress. I'm not an expert on Chinese politics, but I'm told that actual votes by the Chinese congress are a formality. By the time it gets to that point, a consensus has already been reached.

Anyway, the bill basically creates a western-style bankruptcy code, where creditors have the first shot at any asset recovery in a bankruptcy proceeding. Currently, employees must be paid their salaries before creditors have any rights to recovery.

This is just another in a long line of slow reforms by the Chinese Communist government. As I was reading the article in the Journal about the new bankruptcy law, I got to thinking about the disaster that is Russia. When Mikhail Gorbachev began implementing Perestroika, I'm sure he and some of his more optimistic economic advisors imagined some kind of free-market/socialist hybrid, taking the best from both worlds. Of course, it took only about 5 years of "reforms" for the entire government to collapse. I remember reading papers and books written in the mid 1990's about why Perestoika was doomed to fail from the beginning, in large part because once you start reforms, the government's dictatorial hold on society cracks. The power vacuum causes the government to implode. The result is what Russia is today: a society ruled by oligarchs and an economy in dismal shape. Such a system is closer to the czarist days than anything else.

But then there's China. Their economy has grown at least an 8% rate every year since 2001. Their government appears stable. While resistance to various reforms has certainly cropped up, it seems as though the government has the will to continue reforms.

I'd argue they are already much further along than Russia ever was. Maybe they've learned from the Russian experience. Maybe they have a clearer goal. And maybe they won't pull it off and China will devolve into the same kind of fractured society that Russia is now.

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