Why China's Transition Differed From Russia's

Why China grew rapidly through its move toward markets while Russia's economy collapsed in the 1990s, and what explains the difference.

China and Russia both began moving away from central planning, but with dramatically different results. China’s economy grew rapidly from 1978 onward, while Russia’s collapsed in the 1990s. Economists have long debated why.

China’s approach

Gradual reform: China began in 1978 with agriculture, letting farming households keep extra output through the household responsibility system. Farm productivity rose quickly.
Dual-track prices: planned prices continued alongside market prices, easing the transition.
New firms first: rather than privatising state firms quickly, China let new businesses grow, including township and village enterprises, run by local governments, and later private firms and foreign-owned companies in special economic zones.
Political continuity: the Communist Party remained in control, maintaining order and administrative capacity.

Russia’s situation

Simultaneous political and economic collapse: the Soviet Union broke up in 1991, disrupting trade among republics and weakening the state.
Rapid liberalisation and privatisation amid weak institutions.
Industrial structure: Russia’s economy was dominated by large, inefficient heavy industries and defence firms, which could not easily adapt.

Different starting points

Economists stress initial conditions:

In 1978, most Chinese people worked in agriculture, where simple reforms brought quick gains, and labour could move from farms to new factories.
Russia was highly industrialised and urbanised, with most workers in state enterprises. Reform meant shrinking existing industries, not just adding new ones.

Debates

Some economists argue China’s gradual, state-led approach offers lessons for others. Others note that China’s model came with political repression, and that the right approach depends on each country’s circumstances.

Farming reform in China

In the village of Xiaogang in 1978, farmers secretly agreed to divide collective land into household plots, delivering a quota to the state and keeping the rest. Their output rose sharply. The government later adopted this system nationwide. Because most Chinese worked in farming, such simple incentive changes produced large, fast gains that Russia could not replicate.

Thinking one country simply chose better policies

Policy choices mattered, but so did very different starting points. China's large agricultural population and political continuity made gradual growth easier; Russia faced state collapse and an industrial economy that needed painful restructuring.

Key takeaways

China reformed gradually from 1978, starting with agriculture and dual-track prices.
China grew new firms, like township and village enterprises, before privatising state firms.
Russia faced state collapse and an industrialised economy needing painful restructuring.
Initial conditions help explain the different outcomes.