#9
Interview: Building capitalism: Part 2
By Martin Hutchinson
Business and Economics Editor

WASHINGTON, Jan. 11 (UPI) -- Having served as an economic adviser to the Russian, Ukrainian, and Kyrgyz governments during the 1990s, the Swedish-born Anders Aslund expects many of the former Soviet and Eastern European economies to grow stronger, with particularly high hopes for Ukraine. Currently senior associate at the Carnegie Endowment for International Peace, Aslund's "Building Capitalism" (Cambridge University Press) discusses the restructuring process in Eastern Europe and the former Soviet Union. Following is the second and final part of his interview, discussing the economic prospects of countries which remain communist.

Q: China's obviously gone quite a long way towards the free market, Vietnam has played at moving in this direction.

A: Well, it doesn't tell us too much, at least that's the optimistic view. You have to remember that there were fundamental differences between China and the former Soviet Union -- the Chinese state was strong enough to undertake reforms, whereas the Soviet state was not -- Gorbachev could not get anything done without democratization, and when he tried to democratize the state collapsed. Another difference is the economic structure. The Soviet Union had 30 percent-50 percent of gross domestic product that was value subtracting and had to go, while China had an industry of maybe 10 percent of GDP, about half of which was bad. So China could resolve that problem because it was still a primarily agricultural economy. There's also the matter of scale; many of the Soviet factories and collective farms were gigantic, whereas the Chinese ones were much more modest.

Q: Do you believe Chinese economic statistics?

A: No. It's easy to compare; if you look at the annual reports of the World Bank and you compare China and India, you'll see that China always has the higher growth rate and yet, at purchasing power parity, the economies are more or less in the same place. China obviously has wrong statistics, with growth rates exaggerated by 2 percent-3 percent per annum.

Q: Yes, and there's the bad debts in the banks as well -- there's a 2 percent-3 percent per annum exaggeration and another 2 percent-3 percent of GDP per annum over a 10-year period that's gone into bad debts that they aren't about to sort out.

A: What you would look for in China, is, did they solve any of their problems? There's no alternative to the Party, the bad state sector is not decreasing, in fact it's growing, their bad debts, which indeed are a major problem, are not showing a decline.

Q: They're up to about 70 percent of GDP, as far as one can tell, and are getting fairly close to the total deposits in the economy, which would presumably produce a huge liquidity crisis if the two numbers crossed.

A: And if you take examples of what you shouldn't do in order to produce economic stability, then you get Chinese policy. Certain regions have been developed, certain parts of the economy have been liberalized and not others, and this has given certain people fairly high incomes and left the rest in poverty. It's a bit like the former Yugoslav system, with poverty and socialism down in Macedonia and Kosovo and relative wealth and liberalization in Slovenia and Croatia.

Q: And the Yugoslav model ended badly, so therefore presumably at some stage you're looking at a Chinese economic crisis, which is my view and that of Gordon Chang in "The Coming Collapse of China" although he said that entry into the World Trade Organization would precipitate it, and I'm not sure I believe the mechanism.

A: It's too important to be governed by an international organization.

Q: They'll just ignore the WTO rules, surely.

A: Yes. So I would expect there to be major difficulties, but I don't know China very well, I emphasize. But I don't see them disarming the problem, by education for example, which was the major shortfall in the former Soviet Union where huge mistakes were made in the first couple of years because nobody knew what to do.

The real conclusion, when you compare China and Russia is that Russia has made an enormous investment in becoming a democracy, and China still has all those costs ahead of it. While China has the advantage of being more or less ethnically homogenous, the social strains are still there, and of course China is at least as corrupt as Russia, if not more corrupt. Corporate governance for example, the difficulties of which in Russia are freely discussed, in China is completely impossible, since almost all large companies have a government majority shareholding.

Q: Yes, surely the Chinese stock market has to be a complete casino, with steel companies for example doing Initial Public Offerings on 28 times earnings.

A: While in Russia you have a P/E of 5 on average, even after stock prices have doubled in the last two years. Indeed, my worry for Russia is that you'll have too much money coming in again, as you had in 1997-98 -- they just can't handle it. Large "easy money" portfolio investment in particular is very demoralizing.

Q: That's counter-intuitive, isn't it, that the stock market boom is the biggest threat to the economy?

A: Of course.