International Political Economics the International Essay

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Socialist states use a command and control management structure as a substitute for the profit motive. This structure is less efficient, so production levels cannot match those of capitalist states. Ultimately, the lack of productivity and the large number of distortions lead to economic collapse (Tesche, 1993).

Since the collapse of the Soviet Union, the pace and nature of economic reforms has differed greatly in the former Soviet states. These range from regions with a virtual continuation of communist dictatorship (Belarus, Transnistria) to full-scale embrace of the free market (Estonia in particular). Russia's economy has only opened somewhat, and only to small and medium sized enterprises (SMEs). For the most part, the major firms in the economy are controlled by powerful businessmen with close ties to government. Freedom of capital flows has improved slightly, but the Russian economy overall remains under significant government control. The economy has grown substantially since the breakup of the U.S.S.R., however, in large part due to oil and gas revenues. Outside of the major cities, however, the Russian economy is worse than it was during the Soviet days.

The Baltic states (Estonia, Latvia and Lithuania) have embraced the market economy. They have joined the European Union and leveraged their historic trade links along the Baltic (and in the case of Estonia a share cultural heritage with Finland) to attract capital inflows and make investments in the economy. The governments of these three countries have opened their economies significantly. Among the post-Soviet states, Estonia has by far the highest GDP per capita, and the only other nations to best Russia's total are Latvia and Lithuania (CIA World Factbook, 2009).

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The other former Soviet states have yet to embrace capitalism. Nations like Ukraine, Belarus and Moldova continue to have economic policies not far removed from those they held under Soviet rule. Each of these countries have varying degrees of political interference in their economies, but maintains a command and control structure with respect to major industries and has not freed their legal system from its constraints. The result is that these three former Soviet Eastern European nations lag Russia's economic performance.

On the other side of Russia, China is attempting to maintain a socialist state while building its economy. The Chinese economy is relatively free for SMEs, but major industries remain under tight command and control. The Chinese banking and financial systems in particular are controlled closely by the government, following in the Korean and Japanese models of economic growth.

In this respect, China has chosen that in the name of economic growth it will maintain the more totalitarian aspects of socialism while doing away with the social aspects. Peasants remain poor while tens of millions of urban Chinese join the ranks of the emergent middle class. At some point, however, China's government will need to decouple itself from the economy, putting the yuan in free float, removing government control of the banking system and allowing for growth in large enterprise regardless of government connections.

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