The economic system of any country identifies the means by which households, firms, and the government make decisions relating to the three resource allocation questions of:
What goods and services are to be produced: Whether an economy should produce capital goods or weapons or should they cater to fulfil the present needs of the generation by providing consumer goods.
How are they to be produced: What technique of production to be used, capital-intensive or labor-intensive.
For whom to produce: Should an economy cater to the needs of richer sections by providing luxury goods or should they worry about poor or middle-income groups? Should someone get more than others based on inheritance or should we try to distribute equally amongst everyone through the process of taxation?
In market economies, these decisions are largely driven by market mechanisms, taken by individuals and firms without government intervention, whereas command/planned/communist economies are run solely by the government.
A transition economy is one evolving from a planned economy (meaning one controlled by the government, as in the former Soviet bloc countries) to a free-market economy (like those in North America and Europe). This transition process is usually a long and difficult one, with countries facing numerous challenges as they move through this change. It is a complex process requiring a lot of time and effort. The process includes a few key features like:
Economic liberalization, which involves opening up the market, removing trade barriers, and reducing state control over the economy.
Privatization, which involves transferring ownership and control of state-owned enterprises to the private sector. In transition economies, this process is often accompanied by the establishment of stock markets and other institutions necessary for a market-oriented economy.
Macroeconomic stabilization which needs to be undertaken by the government as liberalization can lead to a high burst of inflation. There is a release of pent-up demand from the planned economy. Transition economies often suffer from high inflation, budget deficits, and a lack of foreign investment.
Deregulation, which involves reducing the number and scope of regulations that govern the economy. This is done to create a more competitive and efficient market.
China and Poland are the biggest examples of successful transitioning economies.
The process of transitioning from the planned to the market involves many challenges, few of which are being discussed below:
The transition process can lead to economic turbulence as state-owned enterprises when privatized can cause a reduction in the workforce. The unemployment becomes higher as private firms look for efficiency by reducing labor costs with profit maximization as their main aim.
Many transition economies also experience price inflation as a result of the removal of price controls which were in the planned economy. In market economies, the newly privatized firms began to charge prices that reflect the true costs of production.
Another gripping challenge is the problem of moral hazard. The problem of moral hazard implies that inferior performance can arise when the risks associated with poor performance are insured against. For example, in the context of transition economies, under communism people felt that the state would insure them against the risks associated with global competition, including the risk of losing their jobs. As a consequence, many workers tend to remain inefficient and unproductive, knowing that employment prospects would not be reduced under the planned economy. Many workers may lack the skills required by employers in the newly privatized firms.
Corruption could be another big challenge. The privatization process can lead to corruption as government officials and business people seek to gain control over state-owned enterprises, which was visible in the case of Russia's transition. There can be a problem of unregulated markets selling poorly made products until things get settled.
Many transition economies suffer from a lack of entrepreneurs who can help in promoting market capitalism.
Legal and institutional reforms are needed to redefine the role of the state in these economies, establish the rule of law, protect property rights, and promote a market-oriented legal system.
Despite these challenges, many countries have successfully transitioned to a market-oriented economy. The benefits of such an economy include the creation of more jobs and higher incomes, as well as the opportunity and conditions to foster enterprise and innovation.
Transition economics is a special branch of economics that investigates how an economy should reform itself to endorse capitalism and democracy. It has become especially important after the collapse of Communism in Central and Eastern Europe.
However, there are two differing views about the process of transition- one which argues for a rapid transformation and the other one argues for a gradual approach. A gradual approach allows for a smoother transition, giving the government and citizens time to adapt and adjust to the new system. A more rapid approach can lead to economic turbulence, but it can also lead to quicker results. The choice between these two approaches depends on the specific circumstances of each country.
In conclusion, the transition from a centrally planned economy to a market-oriented economy is a complex and challenging process. It requires a lot of time, effort, and institutional and legal reforms. However, despite the challenges, many countries have successfully made the transition and are now enjoying the benefits of a market-oriented economy.
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