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Transformation - consequence of the Russian Revolution in 1917

Explain the key features of post Communist ‘transformation' since 1989. Compare and contrast the experience of two or more countries as examples.


As a consequence of the Russian Revolution in 1917, the Soviet Union was created and there was a revolution across Europe. Most of the Communist states in Europe particularly the East, were established in the aftermath of the Second World War and by the early 1980s, communist governments ruled a vast number of the world's population, Tangiev 2007. Nonetheless, as a result of internal challenges economically, foreign entanglements, and demands for change, the Soviet Union itself was ever more unstable. In the late 1980s, Eastern Europe grew increasingly unstable as people demanded for a revolution and in 1991, the Soviet Union collapsed. The founders of the communist ideology envisaged communism as the ultimate evolutionary stage of society at which time the state would have faded away. Workers were to rise up to tear down capitalism and replace it with socialism, a transitional period during which the state is to gain control over all means of production on behalf of the proletariat (waged people), which sequentially creates a classless society in which absolute collective ownership has been attained and the state no longer plays a role, Brus 1988.

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Communist governments have historically been characterized by state ownership of productive resources in a planned economy and sweeping campaigns of economic restructuring such as nationalization of industry, land reform and they promote collective ownership of the means of production and distribution as a result of this it is correct to say communist countries of Eastern and Central Europe had similar characteristics. Russia and Belarus have a common history under the Soviet Union characterized by a non- existent stock market, imbalanced labour market, legal constraint for private businesses and are now at various stages of transformation as well as different methods of transformation strategy such as the shock therapy employed by Russia and the strategy employed by Belarus from a socialist economy to an internationally competitive market economy. A reduction of employment and work relations in the transition of Russia and Belarus was significant with emphasis on gender (UNICEF 1999). According to ILO, the early years of transition had an uneven percentage of job loss between female (13%) and male (9%) employees. In the transition process, do loans from international development agencies like World Bank and the IMF weaken national capacity? Are the administrators of these loans held accountable? In Belarus for instance, the Soviet-type of statistical methodology which determines GDP in terms of general industrial output is in use, this in turn does not give a true and fair view of the growth affairs of the state, still loans are given. This paper gives account with detail of both post communist states as they emancipate from their common negative backgrounds in employee relations, centralised authority in labour process (Meurs 1998), ineffective consultation of workers and gender inequality (Pine 1996) into an internationally competitive market economy effective and efficient for long-term social, political and economic development.

The most fundamental similarity according to Kuzio (2001) is that many post communist states took over weak states and institutions. As a result of transition, state-owned enterprises in these states began to avoid social functions as they faced new demands for profitability. These now-privatized operations came under pressure to turn a profit, which meant that they could no longer maintain large, underutilized work forces and social assets that did not help the bottom line. Whereas under communism there had been a rationale for providing housing to employees, under market capitalism workers could find somewhere to live on their own. Tying up capital in unprofitable housing projects suddenly stopped making business sense, (Orenstein 2008).

Consequently, the introduction of liberal economic policies in early 1990s caused a decline in GDP of both countries this in turn caused a reduction in investment and employment (Dunford 1998). From the perspective of economic collapse, labour markets and administration of work in these states have been overhauled and continue to undergo changes at different rates (Pollert 1999). In Russia, unofficial employment and job insecurity interwoven with a weakened employee representation was constant. Rainnie et.al 1999, depicted the transition as one from a low work intensity, illegal income generating activities in order to combat poverty. The workers in Belarus are underemployed and weakened employee representation is observed frequently in Belarus, as result of this, standards in workers' rights and areas of social responsibility are disregarded.

The economic reforms in particular are aimed at enabling the market mechanism play a dominant role so that decisions could be maximized by independent entrepreneurs. Belarus a post communist state in Europe is yet to imbibe the true principles of democratic and free states and has been tagged the last dictatorship in Europe or a still communist state. The strategy and benefits of transition in Belarus are invincible, the regimes activities has led to various reactions in the international community. For example human rights abuses, political repression, public corruption and abuse of assets were some of the reasons given by the US government to sanction Belarus. The effect of this is that its work and business climate discourages foreign multinationals from expanding their operations in to the country and for those multinationals that eventually enter the market, they eventually exit. For instance, the Ford plant closed because of problems with the Belarusian government.

In contrast to Belarus, Russia adopted the shock therapy transformation strategy based on the line of reasoning for “as many reforms as possible should be undertaken when just possible” (Lian et al, 1998). In this strategy, efforts were made to radically stimulate the economy toward economic freedom and economic development through privatisation which is the legal transfer of government owned resources to private interests, for instance in the mid 1990s, the privatisation incentives aided Russia's oil production output. A healthy private sector is indispensible in a market economy because it influences correlation between demand and supply for improved production and consumption decisions. In Belarus, privatisation has been repressed by political elements and exists in theory and not in practice.

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A huge distinction in the implementation of economic development policies exists between Belarus and Russia; this can be seen in the approach to demonopolisation of state owned monopolistic enterprises and the exposure to domestic and foreign competition (Bennet et al, 2007). This effective implementation can be depicted in the GDP of Russia, which according to the IMF has been on the rise in the last decade from $500 billion in the year 2000 to about $1.61 trillion in the year 2008, while that of Belarus was $20 billion in the year 2000 and rose to $60 billion by the year 2008.

In the late 1990s, Russia faced a serious foreign exchange (currency convertibility) crisis due to concerns about its fiscal situation and had to introduce a series of emergency measures, including re-intensification of capital controls and the announcement of a debt moratorium. Russia lifted the last remaining restrictions on the rouble on July 1, 2006 clearing the way for making its currency fully convertible. The rouble's exchange rate will continue to be linked to a bi-currency basket and will be managed by the central bank. The situation in Belarus is the reverse, the banking system in the country is still unreformed which results in a weak banking system and constant inflationary constraints generated by excessive money creation. Consequently, the banking sector continues to finance the state and loss-making enterprises, often under government directives, which makes the banks accumulate bad loans in their portfolio and the situation of the sector is fragile. Not surprisingly, it is difficult to attract deposits, lending resources are few and credit to the private sector is also inhibited by the slow pace of privatization and the growth of private businesses.

A significant disparity in the market economy transition is that of Deregulation. From the end of 2000 to 2005, Russia underwent a deregulation reform. Laws were approved that extremely cut down procedures and reduced the bureaucracy associated with entry regulations (registration and licensing) and with regulation of existing business (inspections). Russia is making a conscious effort to allow for a free and efficient marketplace by reducing the role of the government in the energy sector in particular, the industry giants Gazprom, occupy a unique position by guaranteeing a significant revenue on sales of gas in Europe with other independent actors on the scene such as Lukoil, Rosneft, NOVATEK, and Itera. This is commendable for a state that once formally declared socialism as the only possible ideology. In Belarus the expansion of the private sector has been limited by an antagonistic climate for business, including not only high inflation but also disproportionate regulations, impulsive legislation, and uncertainty about the implementation of laws and regulations (e.g. re-registration and licensing requirements). Recently, the government announced to encourage the growth and development of small and medium-size enterprises which is a progressive step.

Foreign Direct Investment is any form of investment that earns interest in enterprises which function outside of the domestic territory of the investor. Consistent economic growth, de-regulation, liberal investment rules, and operational flexibility are all the factors that help increase the inflow of Foreign Direct Investment or FDI. According to Hill (2008), foreign direct investment is highly beneficial to two parties, the home country that is the country where the institution is originally based and the host country that is the country where the institution is going to establish a subsidiary. Against these benefits, there are also costs. One of the benefits to the host and home country is that it brings about a check on the balance of payment in a nation. Foreign direct investment also has a positive impact on the growth of the host and home countries economy because it brings about competition which leads to increased productivity in the host country and also increases inward flow of foreign earnings and the demand of home country's export. Another benefit of foreign direct investment to a stable economy is that it creates employment opportunities both in the host and home countries and allows for the transfer of relevant technology.

In addition to the aforementioned, no institution or foreign direct investor would want to invest in a volatile political environment as seen in Belarus. This is because the essence of such investment would be defeated. Foreign direct investment and business development thrives in a stable political environment considering the fact that an unstable political system would also contain unstable economic policies and this would be detrimental to investors. It is important to note that a stable political condition is one major tool for sustainable growth and economic progress, and that stability is what the democratic system tends to offer. In FDI Russia's achievements are noteworthy compared to that of Belarus. In Belarus for instance, large and medium- size industrial enterprises are technologically backward and in need of major financial investments, however, the “rule of golden stock” which requires any enterprise with foreign participation to give the government 51% of shares expressly and soaring taxes on foreign investment inhibit investors from entering the country's market. Russia in contrast, hosts a number of FDI projects, with an inward FDI stock exceeding $20 billion in 2001. But inflows crashed down during the country´s 1998 financial crisis and did not recover in the subsequent four years, and this crisis also affected Belarus because of the close economic relationship of the two countries. Furthermore, in 2001 and 2002, outflows exceeded inflows and this unusual net-capital-exporting status meant that less financial resources were accessible exactly when they were required to transform the production system. In times gone by, investors have been attracted to Russia in search of natural resources, new markets and efficiency.

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According to UNCTAD the country´s natural resources, especially petrochemicals, possess great potential for foreign direct investment, as long as foreign investor's interests are considered. Multinationals such as Cadbury, MTS, Stollwerck, Philip Morris, Svyazivest, and so on, are present in Russia. The scale for such outlay, however, has been inhibited by the low purchasing power of the Russian population, as indicated in the GDP-per-capita level. In recent times, the country has been a focus for more technology-based and efficiency-type projects, mainly in the automobile industry (Volvo Truck´s assembly project in Moscow, General Motors´s export-oriented joint venture with AvtoVAZ to produce off-road vehicles, and Renault´s car manufacturing project in Moscow).

Projections for the different types of inflows are associated to diverse factors. As mentioned above, the country´s capacity to attract FDI depends largely on the government´s willingness to tolerate some form of foreign ownership and on the readiness of the private owners of Russian companies to accept foreigners as shareholders. In FDI, prospects depend mostly on what impact the investment has on the population´s income. Furthermore, the gini coefficient measures the inequality of income distribution within a country. It varies from zero, which indicates perfect equality, with every household earning exactly the same, to one, which implies absolute inequality; the gini coefficient of Belarus is among the lowest in the world, because of the states restrictive economic policies, which makes it difficult attracting foreign investment and more importantly by retaining most of the soviet style social guarantees which have reduced in Russia. Belarus according to a World Bank (2007) country brief is depicted as having a comprehensive social security and basic health and education services that have been sustained since independence and remain available. According to Lainela 2008, Russia's had a gini coefficient of 0.29 when the Soviet Union collapsed and at the end of 2002 according to the World Bank, the gini coefficient was 0.37, showing that income distribution is more evenly distributed. Improvements in the general business climate and in intellectual property protection, can also have positive effects on investments. FDI growth in Russia was progressive until the 1998 financial crises and has not reached the peak level of 1997, about 40 % of foreign direct investments were directed to the industrial sector of the economy in 2000. Among the industries the food industry attracted most FDI, 800 million dollars, while the oil extracting industries received 450 million dollars of FDI.

In conclusion, all the literatures that have been reviewed have pointed to the fact that the issues arising from the present day economic crisis cannot be overemphasized as nations particularly those in transition have to focus on them to enable them record success in their businesses. In as much as economics of nations are plunging down the financial curve, it is pertinent to note that other issues discussed above are relatively important issues that these nations have to consider in establishing a globally successful business. According to Daniels 2009, free market reforms translate to greater wealth and higher standards of living. The shock therapy approach used by Russia through the rapid introduction of free market prescriptions has been able to overcome the complexities of the planned economy to a large extent than the Belarussian still socialist model. The core features of an efficient transition such as privatisation, price liberalisation, fragmentation of unions, deregulation etc, have been efficiently incorporated into the Russian business climate. In order to be integrated into a global economy, Belarus has to introduce discipline to its market, ensure basic protections for employees, put in place a transparent monitoring mechanism, and to take measures which promote trade such as a fiscal and monetary reform. The IMF has given loans to a government like Belarus without adequate public oversight and in the absence of market discipline. This can be likened to a process of financing a dictator, and spawning corruption. The direct consequence of this is a harmful business and political climate and a wrecked economy. In the end there is very little to show for the IMF debts while repayments are in effect paid for funds that have vanished without hope for accountability and the present value of the debt is even higher. The servicing of huge unproductive debts drain the funds needed for education, health care and the overall long term economic development thereby dashing the prospects of integration into a global economy.

Presently, the global market is facing a shrink in the economy and this has to a large extent affected the business environment (OECD, 2008). Many multinational corporations have collapsed. See the case of Lehman Brothers one of the most prestigious players in the banking industry who filed for bankruptcy after a failed attempt at saving the company that had incurred debts worth billions of dollars in the United States mortgage market (BBC NEWS, 2008). If a multinational banking giant like Lehman Brothers could go under, how much more unreformed banking systems like that of Belarus.

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