Transition for Planned Economy to Market Economy;

Defining the term

Transition economy is an economy changing
from a planned economy to a free market
economy. Changing from planned to market
economy means transforming of the socialist
centrally planned economies into market
economies referring the most essential changes
to be done are changing the form of ownership
from the public to private one, changing the
form of planning, establishing free enterprise
and competition.

A transition economy refers to an economy that is undergoing a significant shift from a centrally planned or socialist economy to a market-based or free market economy. This transition involves a range of changes, including the transformation of ownership structures, planning mechanisms, and the establishment of free enterprise and competition.

Here are the key aspects involved in the transition from a planned economy to a free market economy:

1. Change in Ownership: One of the fundamental changes in a transition economy is the shift from public or state ownership of resources, industries, and enterprises to private ownership. This involves privatizing state-owned enterprises, allowing individuals and private entities to own and manage businesses.
2. Reformation of Planning: In a planned economy, the government typically controls and directs economic activities through central planning. During the transition, there is a need to reform the planning mechanisms to allow market forces to play a greater role. This may involve decentralizing planning and allowing market forces to determine resource allocation, production levels, and pricing.
3. Establishment of Free Enterprise: A significant aspect of transitioning to a free market economy is the promotion of free enterprise. This means creating an environment where individuals and businesses have the freedom to engage in economic activities, start new businesses, and make independent decisions regarding production, investment, and consumption.
4. Introduction of Competition: Competition is a crucial element of a market-based economy. Transitioning economies often introduce measures to encourage competition by removing barriers to entry, promoting fair market practices, and establishing antitrust regulations to prevent monopolistic behavior. Competition helps drive efficiency, innovation, and consumer choice.
5. Legal and Institutional Reforms: Transitioning to a free market economy requires comprehensive legal and institutional reforms. This includes enacting new laws and regulations that protect property rights, establish contract enforcement mechanisms, ensure transparency, and provide a framework for fair and efficient market operations. Institutions such as independent judiciary, regulatory bodies, and financial systems also need to be developed or reformed.

The process of transitioning from a planned economy to a free market economy can be complex and challenging, and it often takes time to achieve the desired outcomes. Different countries have taken various approaches to this transition, resulting in a range of outcomes and experiences.

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Transition in broad sense implies:

-liberalizing the law on economic activities;

-developing indirect, market-oriented instruments
for macroeconomic stabilization (appropriate
monetary and fiscal arrangements);

-achieving economic efficiency through
privatization;

-establishing an institutional and legal framework
to secure property rights and rule of law to
enforce transparent market-entry regulations

1. Liberalizing the law on economic activities: Removing government restrictions to encourage business growth and competition.
2. Developing indirect, market-oriented instruments for macroeconomic stabilization: Using market-based tools like monetary and fiscal policies to stabilize the economy and manage inflation.
3. Achieving economic efficiency through privatization: Transferring state-owned enterprises to the private sector to enhance productivity and competition.
4. Establishing an institutional and legal framework to secure property rights and rule of law: Creating laws and institutions to protect property rights, enforce contracts, and ensure a fair and stable business environment.
5. Enforcing transparent market-entry regulations: Implementing clear and fair regulations to promote competition and prevent monopolistic practices during market entry.

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Transition process is usually characterised by the
changing and creating of institutions,
particularly private enterprises; changes in the
role of the state, thereby, the creation of
fundamentally different governmental
institutions; and the promotion of private-owned
enterprises, markets and independent financial
institutions.

The transition process involves:

1. Changing and creating institutions, particularly private enterprises: During transition, existing institutions may undergo changes, and new ones may be established, with a focus on promoting private enterprises and entrepreneurship.
2. Changes in the role of the state and the creation of fundamentally different governmental institutions: The transition often involves a shift in the role of the state from direct control and regulation of the economy to a more facilitating and regulatory role. This change may require the creation of new government institutions that support market-oriented policies and promote economic development.
3. Promotion of private-owned enterprises, markets, and independent financial institutions: The transition process aims to encourage the growth of private-owned enterprises, establish competitive markets, and foster the development of independent financial institutions. This promotes economic dynamism, innovation, and efficiency in resource allocation.

Overall, these aspects of the transition process reflect a shift towards a market-oriented economy, with an emphasis on private enterprise, reduced state control, and the establishment of supportive institutions for economic growth and development.

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Transition economies undergo economic
liberalization, letting market forces set prices
and lowering trade barriers; macroeconomic
stabilization (development of appropriate
monetary and fiscal arangements to control
inflation); and restructuring and
Privatization in order to create a financial
sector and move from public to private
ownership of resources.

Transition economies undergo several key processes:

1. Economic liberalization: This involves reducing government intervention in the economy and allowing market forces to play a more significant role. It includes liberalizing prices, removing price controls, and reducing trade barriers to promote competition and efficiency.
2. Macroeconomic stabilization: This entails developing appropriate monetary and fiscal arrangements to control inflation and maintain macroeconomic stability. Measures such as adjusting interest rates, managing government spending and taxation, and controlling the money supply are implemented to stabilize the economy.
3. Restructuring and privatization: This involves restructuring state-owned enterprises to improve efficiency and competitiveness. Privatization is a key component of this process, which entails transferring ownership and control of state-owned assets and companies to the private sector. This move from public to private ownership aims to promote market-based resource allocation and enhance productivity.
4. Creating a financial sector: Transition economies also focus on establishing a well-functioning financial sector. This involves developing independent and efficient financial institutions, including banks, stock exchanges, and regulatory bodies. A strong financial sector is crucial for mobilizing savings, allocating capital, and facilitating investment and economic growth.

Overall, these processes aim to transition the economy from central planning and state control to market-oriented systems, promoting efficiency, competition, and private sector participation in the allocation of resources.

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In the mid 80s, many countries appeared on
the spectrum of heavy debt.

Remedies- transformation to market
economy augmenting the share of
private
property in GDP.

The final decade of the 20th century
witnessed a global trend of dramatic
transition — vigorous privatization
voluntarily or under compulsion from
funding agencies .

In the mid-1980s, many countries faced significant levels of debt, and to address this issue, they implemented remedies focused on transitioning to a market economy and increasing the contribution of private property to the Gross Domestic Product (GDP). During the final decade of the 20th century, there was a global trend characterized by a dramatic transition, which involved vigorous privatization efforts, both voluntarily and under pressure from funding agencies. These privatization initiatives aimed to transfer state-owned assets and enterprises to the private sector, promoting market-oriented economic systems and addressing the debt challenges faced by these countries.

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The race to transformation has led to one group
of countries approaching the finish line, others
languishing at various points along the track, and
a few barely off the starting blocks.

Some Central and Eastern European economies
(Albania, Bulgaria, Croatia, Czech Republic, FR
Macedonia, Hungary, Poland, Romania, Slovak
Republic, Slovenia) and the Baltics (Estonia,
Latvia, Lithuania) knocked on the doors of the
European Union.

The process of economic transformation has resulted in different outcomes for various countries. While some have made significant progress and are nearing the finish line of economic transformation, others are at different stages along the track, and a few have only just begun.

In the case of Central and Eastern European economies, including countries such as Albania, Bulgaria, Croatia, the Czech Republic, FR Macedonia, Hungary, Poland, Romania, the Slovak Republic, and Slovenia, as well as the Baltic countries of Estonia, Latvia, and Lithuania, they have made notable strides in their economic transformations. As a result, they have actively pursued membership in the European Union, symbolizing their integration into the broader European community and embracing market-oriented systems and policies.

This indicates that these countries have successfully implemented reforms, improved their economic structures, and met the criteria set by the European Union for membership. Their progress highlights their commitment to market-based economies and aligning with the standards and principles of the EU.

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But in many economies in the Commonwealth
of Independent States (Armenia, Azerbaijan,
Belarus, Georgia, Kazakhstan, Kyrgyz
Republic, Moldova, Russia, Tajikistan,
Turkmenistan, Ukraine, Uzbekistan),
including Russia, there has been uneven
progress and prospects remain murky (dark).

CIS stands for the Commonwealth of Independent States. It is a regional organization consisting of former Soviet Union countries that have chosen to cooperate and maintain close ties with each other following the dissolution of the Soviet Union in 1991. The CIS includes countries such as Russia, Ukraine, Belarus, Kazakhstan, Armenia, Azerbaijan, and others. The organization facilitates economic, political, and cultural cooperation among its member states while respecting their individual sovereignty. The CIS serves as a platform for dialogue, coordination, and collaboration on various regional issues and initiatives.

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Some nations have been experimenting with market
reform for several decades, while others are relatively
recent adopters (e.g. Republic of Macedonia, Serbia and
Montenegro).

In most developing economies (from Latin America,
South-east Asia and Central Asia) were in the process
of transition –the agenda was to gradually transform regulated
and centrally controlled economy into market
economy i.e., restructure and privatize the state-
owned enterprises, and financial institutions

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In some cases, reforms have been accompanied with
political upheaval(a big change causes problems)
such as the overthrow of a dictator (Romania),the
collapse of a government (the Soviet Union),the
collapse of a government (the Soviet Union), a
declaration of independence (Croatia),the collapse of
a government (the Soviet Union), a declaration of
independence (Croatia), or integration with another
country (East Germany).
In other cases, economic reforms have been adopted
by incumbent (official position) governments with
little interest in political change (ChinaIn other cases,
economic reforms have been adopted by incumbent
(official position) governments with little interest in
political change (China, Laos).

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The existence of private property rights
may be the most basic element of a
market economy and therefore
implementation of these rights is the
main indicator of transition process.

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The main ingredients of the transition process are:

a. Liberalization;

b. Macroeconomic stabilization
(i.e., discipline
in fiscal and monetary policy with the
progress toward sustainable BOP in order
to
control inflationary
pressure and lowered over
time);

c. Restructuring
and
privatization (the processes
of creating a
viable financial sector and
reforming the
enterprises in these economies
to render them capable of producing goods
that
could be
sold in free markets and of
transferring their ownership into pvt hands);
d.
Legal and institutional reforms

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Aim of transition

to initiate a profound and unique change, a
‘transformational recession’ (concurrent reform
both from macro and micro perspectives) and to
overcome the ‘shortage flation’ (leap to a market
economy) syndrome (case of Poland in 1990)
known as ‘shock therapy’ model.

This transition is by design, not by chance

Endorses a system of right to private property
guided by free choice.

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Main Focus

The main focus is to achieve macroeconomic
stability-

strengthening financial sector and structural
reforms in state owned institutions to make
them commercially viable and ensure their
sustainability.

thereafter privatize them to ensure the
allocation of resources (labor, capital and
goods and services) through market forces

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The transition economies replace the Soviet
type economic system by market capitalism and
economic liberalization

The core of transition process involves the
following:

a) freeing of internal market i.e., abolition of:
central planning, centralized distribution of
goods (state trading), and price controls

b) opening of foreign trade (removal of trade
restrictions & reduction of tariffs)

c)freedom of private sector entry (break up of
monopolies and privatization)

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A new economic era of liberalization
ushers in-

an era of eco-political dynamism under
the strong scrutiny by the media;

application of socio-economic and
political pressure from the citizens

avoiding ownership concentration in
few hands (oligarchy).

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The transition process demands- minimum standard of
living to preserve the social fabric in the economy and to
foster social consensus — endorsing the private property
rights and free choice.

However, the fundamental transitional problem is political
not economic which gives way to the adoption of market
economy. It results into the formulation of a “social
contract” (developmental consensus) in the society

Without political cooperation even well-developed
programs fail

Ignoring politics is bad economics-

consensus provides credibility in the
transition process.

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When is transition over?

Referring World Bank transition is over in 10 years.

There used to be wide variation in the labour and
capital productivities during transition, once these
variations diminishes, transition is completed.

During the transition period — the economy is like no
man’s land — thus responsibility of government is to
encourage and promote growth with the creation of
macro economic, institutional and legal conditions
that favor the output growth.

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However, dominance of private property is
core of transition economy — ‘no capitalism
without capitalists’ and ‘common property is
nobody’s property’.

Nevertheless, privatization and liberalization
are simply instruments of economic policy -
creation of new economy by privatizing the
old one.

Privatization helps to increase state revenue
through the proceeds of selling enterprises to
achieve economic justice.

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Vito Tanzi, Director of the IMF’s Fiscal Affairs
Department, defines that the transformation to a
market economy is not complete until functioning
fiscal institutions and reasonable and affordable
expenditure programs including basic social safety
nets for the unemployed, the sick, and the elderly,
are in place.

Transition is complete once there is the provision
safety nets to the disadvantaged groups.

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Tanzi states that these spending programs
must be financed from public revenues
generated through taxation without imposing
excessive burdens on the private sector

Based on the definitions eight countries,
which joined the EUBased on the definitions
eight countries, which joined the EU on 1
May 2004 (Czech RepublicBased on the
definitions eight countries, which joined the
EU on 1 May 2004 (Czech Republic,
EstoniaBased on the definitions eight
countries, which joined the EU on 1 May
2004 (Czech Republic, Estonia,
HungaryBased on the definitions eight
countries, which joined the EU on 1 May
2004 (Czech Republic, Estonia, Hungary,
LatviaBased on the definitions eight countries,
which joined the EU on 1 May 2004 (Czech
Republic, Estonia, Hungary, Latvia,
LithuaniaBased on the definitions eight
countries, which joined the EU on 1 May
2004 (Czech Republic, Estonia, Hungary,
Latvia, Lithuania, PolandBased on the
definitions eight countries, which joined the
EU on 1 May 2004 (Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland,
SlovakiaBased on the definitions eight
countries, which joined the EU on 1 May
2004 (Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Poland, Slovakia, Slovenia)
have completed the transition process.

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Performance of Transition Economy

Made substantial progress in terms of economic
liberalization.

Successful in trade and foreign exchange system,
price liberalization, etc.

In `19 out of 26 countries — privately owned
enterprises produced 50–75 % of the 1997 GDP.
Experienced healthy growth of 4.4–11.4 % .
Economic liberalization correlated with GDP
growth (IMF Working Paper WP/98/100, July
1998).

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The overall assessment is that the countries’
performance during the first 12 years of the
transition has been poor.

While important structural transformations have
taken place, the relative gap in per capita income
between these countries and the advanced
economies has widened.

However, it brought political freedom and
eliminated shortages and brought new
consumption opportunities

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Transition economies are considered
successful when

a) the output decline stops within
2–3
years and

b) annual inflation rate falls below 50 %
p.a. within 2–3 years.

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Inflation rates for most transition
countries seem to be relatively high. But
inflation threshold of 13% is acceptable
(Christoffersen & Doyel, 1998).

Not easy to evaluate the transition from
centrally planned economies to market
economies. Even then the transition has
yielded notable successes.

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It is observed in terms of universal, commitment to
democracy and to the establishment of a
market-based economy; a commitment to
macroeconomic stability (e.g., Russia’s
determination to prevent an inflationary spiral in
the aftermath (repercussions), or event result of the
ruble’s devaluation in 1998); and basic structural
underpinnings of market economies (put in place in
most countries, at least in a de jure sense (legal
right) including bankruptcy procedures,
competition policy and anti-monopoly regulations,
improvements in accounting standards, and
legislation for regulating financial markets)

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References

^ a b Falke, Mike. Community Interests: An Insolvency Objective in Transition Economies?, No.
01/02, Frankfurter Institut für Transformationsstudien

^ Havrylyshyn, Oleh; Wolf, Thomas. Determinants of Growth in Transition Countries
Havrylyshyn, Oleh; Wolf, Thomas. Determinants of Growth in Transition Countries, Finance &
Development Magazine, June 1999, Volume 36, Number 2 by the IMF

^ EBRD’s 1994 Transition Report

^ World Bank. Transition. The first ten years. Analysis and Lessons for Eastern Europe and the
Former Soviet Union

^ Tanzi, Vito. Transition and the Changing Role of Government Tanzi, Vito. Transition and the
Changing Role of Government, Finance & Development Magazine, June 1999, Volume 36,
Number 2 by the IMF

^ EBRD. Law in transition online 2006 — Focus on central Europe

[edit] External links

Article on Everything2

Policy Research Working Papers from the World Bank

Health in transition economies — a dossier

World Bank, “10 Years of Transition”

Tanzi, V., “Transition and the Changing Role of Government”

Havrylyshyn, O. and Wolf, T. “Determinants of Growth in Transition Countries”

Nsouli, S. M. “A Decade of Transition — An Overview of the Achievements and Challenges”

Stanley Fischer and Alan Gelb, 1991, “Issues in Socialist Economy Reform,” Journal of
Economic Perspectives, Vol. 5 (Fall), pp. 91–105.