Transition Economies

Why do you think the ‘Transition Economies’ are choosing to move toward a more ‘free market’ approach?

Introduction

Transition Economies are economies that are undergoing structural adjustment (moving away from command economy policies toward capitalism).According to an IMF Issues Brief (2000), these economies can be classified as under

CEE (Central and Eastern European economies) -Albania, Bulgaria, Croatia, Czech Republic, FYR Macedonia, Hungary, Poland, Romania, Slovak Republic, Slovenia

Baltics -Estonia, Latvia, Lithuania

CIS -Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan

Transition economies in Asia -Cambodia, China, Laos, Vietnam

Characteristics of command economies in the past

• The command economies were characterized by State ownership and central economic planning for ‘common social good’. The economy was directed by the government rather than by decentralized market mechanisms.

• Resources were mobilized to achieve economic growth .This was successful through the 1950s. But planners committed more resources than were available. So there were shortages.

• Industrialization and military strength had the highest priority in terms of resource allocation in the Soviet Union. In China emphasis was placed on developing small-scale industries scattered throughout the rural areas.

• The command economies neglected consumer goods industries.

This resulted in inefficiencies (IMF Issues Brief (2000))

• Allocative Inefficiency - Allocation of inputs was done by directive. Governments fixed prices of virtually all inputs and outputs, but prices did not reflect the relative scarcity of the resource or product. The result was that prices were too low and shortages occurred resulting in allocative inefficiency.

• Productive Inefficiency: - The aim of self-sufficiency and avoidance of trade with western countries resulted in productive inefficiency. Macroeconomic policy was passive, meaning that money and prices accommodated output plans but did not play a role in influencing their outcome.

Characteristics of Free Market Economies

In a free market, individuals, rather than government, make the majority of decisions regarding economic activities and transactions. Markets coordinate economic activity and changes in prices (products and resources) signal that changes have occurred within particular markets. The main characteristics are

• Decision making is done by the market

• There is private ownership of land and capital etc.

• Prices and wages are fixed by the market

• Profits (incentives) drive the markets.

Advantages