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Economics Challenges of Russia and Britain

Britain and Russia both experienced economic problems at least since the 1960s, as the two countries struggled to gain proper footing both financially and socially after two consecutive wars. Both countries were troubled by stagnant economies, resulting from socialist and communist policies. Although both Britain and Russia decided to turn away from heavily regulated to market economies as a solution to a stagnant economy, Britain’s transition is currently far more successful that Russia’s, although the latter country is slowly working its way to become financially stable.

After the Second World War, Britain decided to retreat from the international stage, and work on repairing its national infrastructure. The once great empire had been devastated by the two world wars, and wanted only to focus on improving living conditions at home. The newly elected Labour party, although it was nowhere as extreme as the USSR’s communist party, nationalized major utilities and services, and created a welfare state through which socialism would rise. From then on after 1945, Great Britain’s economy began to slowly decline, along with its position of power. In the 1970s, after oil prices began to skyrocket, inflation and unemployment grew along with it. The result was that British wages were quickly diminishing, causing unrest among the working class, who concluded that the only way to fix this problem was to strike (Berlinski 32). Unfortunately, the lack of available workers slowed down production, hurting the economy. High inflation, employment, and low economic growth led Britain to the Winter of Discontent in the late 70s. Nearly all production had stopped or was extremely inconsistent, and “picketing [was] affecting the supplies of essential goods” (Berlinski 11). The British economy was being held hostage by trade unions. One of Thatcher’s first decisions when she first became prime minister was to abolish the socialist systems that had been in place for several decades, and convert the economy to a capitalist free market. This transition was not a smooth nor easy one, and left the economy in shambles for several years until it was able to slowly work itself back together into a more efficient system. Since government owned industries did not have to work in order to make a profit, Thatcher believed that privatizing the nation’s industries would allow companies to compete with each other, thus allow the market to decide which prices would be best for the consumers (Powell et al 188). Under socialism, the government determined market prices and availability of products. Services and industries that did not do as well, or were not as profitable had to be subsidized by the government, which lead to the inflation of prices. Thatcher also realized that in order to foster economic growth and a competitive market, tax rates had to be brought down. The taxation rate of 98% for the highest income tax bracket in the late 70s was hardly an encouragement for British citizens to seek an improvement in their life. Thatcher’s economic policies included privatization, economic deregulation, and restriction of trade union’s powers to influence government policies. These policies did not work as well as she hoped they would. The British economy fell to shambles, as the inflation rate continued to stay up, a quarter of the British manufacturing industry disappeared, and the unemployment rate reached an all time high of 3.2 million in 1982 (Berlinski 39). The economy seemed to be completely ruined. After regulations were taken away, British banks were now able to the citizens rather than one another, increasing the amount of money made available to the public, and increasing the rate of inflation. Although the economy suffered for several years from the sudden transition, it was able to work itself back together by the mid 90s, into a more efficient capitalist system.

Although Thatcher supported financial deregulation, she opposed the idea of powerful trade unions, which had nearly ruined the supply side of Britain’s economy during the Winter of Discontent. By refusing to give in to the many strikes held by the unions, most notably the coal miner strike of 1984, Thatcher was able to bring down the unions’ power to influence and hinder production through strikes. Through this, union membership fell from 70 percent in the late 70s to 35 percent in 1998(Berlinski 139).

Although her contemporaries criticized her economic policies, today the positive effects of Thatcher’s economic reform can be clearly seen in Britain’s economic success. Unemployment managed to eventually come down, and also stay down. Currently, the rates for inflation and unemployment are extremely low, and since 1997, “Britain has ranked top in both output and inflation stabilization in the Organization for Economic Cooperation and Development” (Berlinski 136). Although Britain has lost much of its splendor from when it was a great empire, it is now one of the world’s most financially successful nations, thanks to the economic reforms set in place by Margaret Thatcher.

Russia, much like Britain, also underwent a rocky transition to capitalism, allowing its economy to vastly improve under the new economic system. However, Russia still struggles heavily with the issue of corruption, as the mostly autocratic government still plays a very important role in business, allowing industry leaders to seek the approval of political leaders, rather than the approval of consumers. Soviet Russia, despite becoming a military superpower, was incapable of improving the economy or living conditions, and “by the early 1980s, the economy had stopped growing” (Powell et al 340). Although nuclear bombs were in abundance, basic living necessities were hard to come by for the citizens. Gorbachev, after coming into power, decided that it was important to reform both the political and economic system, and the best way to do that was to improve the “economic well-being of the country and its people” (Powell et al 340). Elements of capitalism were brought to Russia through a program called perestroika, which would lead to competition and management flexibility. Unlike his friend Margaret Thatcher, Gorbachev welcomed the creation of new workers associations, and was sympathetic to the coal miners’ strike in 1989 (Powell et al 340). Unfortunately, the failure of Gorbachev’s radical economic reform led to the loss of his popularity, and Gorbachev turned over his powers to Boris Yeltsin, the first president of Russia. Just like Thatcher and Gorbachev, Yeltsin, with extra powers granted to him by parliament, attempted to carry out a decisive economic reform in order to quickly remedy the crisis at hand. The government pursued stabilization of the economy, and privatization of many major industries. The sudden cuts in government spending and regulation, and the increase in tax rates did not increase productivity, but rather led society to experience “a sharp, sudden loss in purchasing power”, causing a depression (Powell et al 369). Unlike Britain’s privatization reform, the Russian government carried privatization through giving out vouchers to its citizens, hoping to allow everyone to become a property owner. However, since these shares were so spread out that only the biggest shareholders had any say in the companies (Powell et al 370). Even worse, Russia was incapable of protecting the investors who lost their shares through bad investments, causing the country to fall even deeper into debt that before. Income inequality grew sharply as only a small percentage of Russians became immensely wealthy while the rest of the country experienced a steep decline in the standard of living. This occurred because the sudden withdrawal of government spending also took away social assistance benefits such as pension, and wages of common workers could not catch up to the steep rate of inflation, causing a sudden drop in the purchasing power of the average Russian (Powell et al 371).

These reforms carried out by Gorbachev and Yeltsin led to a sharp drop in living standards, completely crushing the belief that Russia would enjoy a great improvement in living standards once capitalism replaced communism. Their policies not only led to the breakup of the Soviet Union, but also an increase in poverty, and allowed individuals to take advantage of the new government in order to amass great wealth (Powell et al 351). Although Thatcher’s economic policies led to an eventual increase in the public’s trust of the market economy, Gorbachev’s and Yeltsin’s failure to reform the economy caused Russians to mistrust the newly introduced ideas of democracy and capitalism.

After Putin came into office, the economy enjoyed a period of recovery. Although he is credited with restoring the growth of the economy, Russia still faces many economic challenges. After 2000, income inequality continued to grow, even though poverty and unemployment had decreased. The large disparities in wage levels, high incomes of managers in certain industries, the flat 13 percent income tax, and abolition of estate taxes make it incredibly easy for the wealthy to get even wealthier (Powell et al 371). Since Russia’s economy is still reeling from the failed reforms set in place by Gorbachev and Yeltsin, the Russian government must have a firm hand in making sure that corruption does not further spread among the businesses. Big business’s are incapable of seriously influencing state policy, indicated by the Putin regime’s destruction of the Yuko’s oil firm (Powell et al 359). Since each business firm is determined to retain a friendly relationship with the government, none of them are willing to take a stand. Although the government’s ability to influence media and elections are often criticized, its ability to manipulate the law in order keep large companies in check and to redistribute resources seems like a fundamental asset for Russia’s recovering economy. Also, despite the increase in income disparity, the overall standard of living has improved since 1999 (Powell et al 370). The improvement of the economy allowed companies to pay back the government in back taxes, leading to a very favorable trend for the economy. However, Russia’s dependence on oil and gas exports makes it difficult to create a sustainable and stable economy, indicated by the financial crisis of 2008. Currently, President Medvedev and Putin call for diversification of Russia’s resources by funding the creation of a Russian Silicon Valley, hoping that Russia can be able to contribute to the current technology boom (Powell et al 371). In order for the economy to truly improve, Russia must diversify its resources, and also “set clear rules for economic activity, regulate markets, enforce the law, supply public goods and services, and promote competition” (Powell et al 372). Only then can its economy and standard of living truly and permanently improve.

Although both countries tried to implement economic reform that would essentially restructure the economy from scratch and quickly transition to capitalism, Russia is still trying to recover from the failures of the early economic reforms. While both countries had to make the difficult transition to capitalism, Russia had to make the far more difficult transition from the completely planned economy from the communist era to a free market economy. Unlike the British government, the Russian government simply did not have the means to enforce the economic policies enacted, making the transition to capitalism far more difficult. However, ever since the two countries chose to turn to a market economy, the standard of living has improved for all citizens, and while Britain has reached stability, Russia is now moving towards it.

References

  • 1. Dalton, Russell, Bingham Powell, and Kaare Strom. Comparative Politics Today: A World View. 10th ed. New York: Pearson, 2011. Print.
  • 2. Berlinski, Claire. There Is No Alternative: Why Margaret Thatcher Matters. New York: Basic Books, 2008.

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