Home      Discussion      Topics      Dictionary      Almanac
Signup       Login
Transition economy

Transition economy

Discussion
Ask a question about 'Transition economy'
Start a new discussion about 'Transition economy'
Answer questions from other users
Full Discussion Forum
 
Encyclopedia
A transition economy or transitional economy is an economy which is changing from a centrally planned economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...

 to a free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

. Transition economies undergo economic liberalization
Economic liberalization
Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities; the doctrine is associated with classical liberalism...

, where market forces set prices rather than a central planning organization and trade barriers are removed, privatization
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...

 of government-owned enterprises and resources, and the creation of a financial sector to facilitate macroeconomic stabilization and the movement of private capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

. The process has been applied in China
People's Republic of China
China , officially the People's Republic of China , is the most populous country in the world, with over 1.3 billion citizens. Located in East Asia, the country covers approximately 9.6 million square kilometres...

, the former Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

 and Communist bloc countries of Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...

, and many third world
Third World
The term Third World arose during the Cold War to define countries that remained non-aligned with either capitalism and NATO , or communism and the Soviet Union...

 countries.

The transition process is usually characterized 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. In essence, one transition mode is the functional restructuring of state institutions from being a provider of growth to an enabler, with the private sector its engine. Another transition mode is change the way that economy grows and practice mode. The relationships between these two transition modes are micro and macro, partial and whole. The truly transition economics should include both the micro transition and macro transition. Due to the different initial conditions during the emerging process of the transition from planned economics to market economics, countries uses different transition model. Countries like P.R.China and Vietnam adopted a gradual transition mode, however Russia and some other East-European countries used more aggressive model of transition.

Transition indicators


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.

The main ingredients of the transition process are:
  • Liberalization – the process of allowing most prices to be determined in free markets and lowering trade barriers that had shut off contact with the price structure of the world's market economies.
  • Macroeconomic stabilization – bringing inflation under control and lowering it over time, after the initial burst of high inflation that follows from liberalization and the release of pent-up demand. This process requires discipline over the government budget and the growth of money and credit (that is, discipline in fiscal and monetary policy) and progress toward sustainable balance of payments.
  • Restructuring and privatization
    Privatization
    Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...

    – the creation of 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 private hands.
  • Legal and institutional reforms – redefining the role of the state in these economies, establishing the rule of law, and introduce appropriate competition policies.


According to Oleh Havrylyshyn and Thomas Wolf of the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

, transition in a broad sense implies:
  • liberalizing economic activity, prices, and market operations, along with reallocating resources to their most efficient use;
  • developing indirect, market-oriented instruments for macroeconomic stabilization;
  • achieving effective enterprise management and economic efficiency, usually through privatization;
  • imposing hard budget constraints, which provides incentives to improve efficiency; and
  • establishing an institutional and legal framework to secure property rights, the rule of law, and transparent market-entry regulations.


Edgar Feige, cognizant of the trade-off between efficiency and equity, suggests that the social and political dcosts of transition adjustments can be reduced by adopting privatization methods that are egalitarian in nature, thereby providing a social safety net to cushion the disruptive effects of the transition process.

The European Bank for Reconstruction and Development
European Bank for Reconstruction and Development
Founded in 1991, the European Bank for Reconstruction and Development uses the tools of investment to help build market economies and democracies in 30 countries from central Europe to central Asia. Its mission was to support the formerly communist countries in the process of establishing their...

 (EBRD) developed a set of indicators to measure the progress in transition. The classification system was originally created in the EBRD's 1994 Transition Report, but has been refined and amended in subsequent Reports. The EBRD's overall transition indicators are:
  • Large-scale privatization
  • Small-scale privatization
  • Governance and enterprise restructuring
  • Price liberalization
  • Trade and foreign exchange system
  • Competition policy
  • Banking reform and interest rate liberalization
  • Securities markets and non-bank financial institutions
  • Infrastructure reform

Process


Transition trajectories can be idiosyncratic. Some nations have been experimenting with market reform for several decades, while others are relatively recent adopters (e.g., Republic of Macedonia
Republic of Macedonia
Macedonia , officially the Republic of Macedonia , is a country located in the central Balkan peninsula in Southeast Europe. It is one of the successor states of the former Yugoslavia, from which it declared independence in 1991...

, Serbia
Serbia
Serbia , officially the Republic of Serbia , is a landlocked country located at the crossroads of Central and Southeast Europe, covering the southern part of the Carpathian basin and the central part of the Balkans...

 and Montenegro
Montenegro
Montenegro Montenegrin: Crna Gora Црна Гора , meaning "Black Mountain") is a country located in Southeastern Europe. It has a coast on the Adriatic Sea to the south-west and is bordered by Croatia to the west, Bosnia and Herzegovina to the northwest, Serbia to the northeast and Albania to the...

). In some cases reforms have been accompanied with political upheaval, such as the overthrow of a dictator (Romania
Romania
Romania is a country located at the crossroads of Central and Southeastern Europe, on the Lower Danube, within and outside the Carpathian arch, bordering on the Black Sea...

), the collapse of a government (the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....

), a declaration of independence (Croatia
Croatia
Croatia , officially the Republic of Croatia , is a unitary democratic parliamentary republic in Europe at the crossroads of the Mitteleuropa, the Balkans, and the Mediterranean. Its capital and largest city is Zagreb. The country is divided into 20 counties and the city of Zagreb. Croatia covers ...

), or integration with another country (East Germany). In other cases economic reforms have been adopted by incumbent governments with little interest in political change (China
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...

, Laos
Laos
Laos Lao: ສາທາລະນະລັດ ປະຊາທິປະໄຕ ປະຊາຊົນລາວ Sathalanalat Paxathipatai Paxaxon Lao, officially the Lao People's Democratic Republic, is a landlocked country in Southeast Asia, bordered by Burma and China to the northwest, Vietnam to the east, Cambodia to the south and Thailand to the west...

, Vietnam
Vietnam
Vietnam – sometimes spelled Viet Nam , officially the Socialist Republic of Vietnam – is the easternmost country on the Indochina Peninsula in Southeast Asia. It is bordered by China to the north, Laos to the northwest, Cambodia to the southwest, and the South China Sea –...

). Transition trajectories also differ in terms of the extent of central planning being relinquished (e.g., high centralized coordination among the CIS states) as well as the scope of liberalization efforts being undertaken (e.g., relatively limited in Romania
Romania
Romania is a country located at the crossroads of Central and Southeastern Europe, on the Lower Danube, within and outside the Carpathian arch, bordering on the Black Sea...

).

According to the World Bank's "10 Years of Transition" report "... the wide dispersion in the productivity of labour and capital across types of enterprises at the onset of transition and the erosion of those differences between old and new sectors during the reform provide a natural definition of the end of transition." Mr. Vito Tanzi, Director of the IMF's Fiscal Affairs Department, gave definition 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. Mr Tanzi stated that these spending programs must be financed from public revenues generated—through taxation—without imposing excessive burdens on the private sector.

Countries in transition


Although the term "transition economies" usually covers the countries of Central and Eastern Europe and the Former Soviet Union, this term may have a wider context. There are countries outside of Europe, emerging from a socialist-type command economy towards a market-based economy (e.g., China). Moreover, in a wider sense the definition of transition economy refers to all countries which attempt to change their basic constitutional elements towards market-style fundamentals. Their origin could be also in a post-colonial situation, in a heavily regulated Asia
Asia
Asia is the world's largest and most populous continent, located primarily in the eastern and northern hemispheres. It covers 8.7% of the Earth's total surface area and with approximately 3.879 billion people, it hosts 60% of the world's current human population...

n-style economy, in a Latin America
Latin America
Latin America is a region of the Americas where Romance languages  – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...

n post-dictatorship or even in a somehow economically underdeveloped country in Africa
Africa
Africa is the world's second largest and second most populous continent, after Asia. At about 30.2 million km² including adjacent islands, it covers 6% of the Earth's total surface area and 20.4% of the total land area...

.

In 2000, the IMF listed the following countries with transition economies:
In addition, in 2002 the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...

 defined Bosnia and Herzegovina
Bosnia and Herzegovina
Bosnia and Herzegovina , sometimes called Bosnia-Herzegovina or simply Bosnia, is a country in Southern Europe, on the Balkan Peninsula. Bordered by Croatia to the north, west and south, Serbia to the east, and Montenegro to the southeast, Bosnia and Herzegovina is almost landlocked, except for the...

, and the Federal Republic of Yugoslavia (later Serbia and Montenegro
Serbia and Montenegro
Serbia and Montenegro was a country in southeastern Europe, formed from two former republics of the Socialist Federal Republic of Yugoslavia : Serbia and Montenegro. Following the breakup of Yugoslavia, it was established in 1992 as a federation called the Federal Republic of Yugoslavia...

) as transition economies. In 2009, World Bank included Kosovo
Kosovo
Kosovo is a region in southeastern Europe. Part of the Ottoman Empire for more than five centuries, later the Autonomous Province of Kosovo and Metohija within Serbia...

 in the list of transition economies. Some World Bank studies also include Mongolia
Mongolia
Mongolia is a landlocked country in East and Central Asia. It is bordered by Russia to the north and China to the south, east and west. Although Mongolia does not share a border with Kazakhstan, its western-most point is only from Kazakhstan's eastern tip. Ulan Bator, the capital and largest...

. According to the IMF, Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...

 is in transition to a market economy, demonstrating early stages of a transition economy.

Eight countries, which joined the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...

 on 1 May 2004 (Czech Republic
Czech Republic
The Czech Republic is a landlocked country in Central Europe. The country is bordered by Poland to the northeast, Slovakia to the east, Austria to the south, and Germany to the west and northwest....

, Estonia
Estonia
Estonia , officially the Republic of Estonia , is a state in the Baltic region of Northern Europe. It is bordered to the north by the Gulf of Finland, to the west by the Baltic Sea, to the south by Latvia , and to the east by Lake Peipsi and the Russian Federation . Across the Baltic Sea lies...

, Hungary
Hungary
Hungary , officially the Republic of Hungary , is a landlocked country in Central Europe. It is situated in the Carpathian Basin and is bordered by Slovakia to the north, Ukraine and Romania to the east, Serbia and Croatia to the south, Slovenia to the southwest and Austria to the west. The...

, Latvia
Latvia
Latvia , officially the Republic of Latvia , is a country in the Baltic region of Northern Europe. It is bordered to the north by Estonia , to the south by Lithuania , to the east by the Russian Federation , to the southeast by Belarus and shares maritime borders to the west with Sweden...

, Lithuania
Lithuania
Lithuania , officially the Republic of Lithuania is a country in Northern Europe, the biggest of the three Baltic states. It is situated along the southeastern shore of the Baltic Sea, whereby to the west lie Sweden and Denmark...

, Poland
Poland
Poland , officially the Republic of Poland , is a country in Central Europe bordered by Germany to the west; the Czech Republic and Slovakia to the south; Ukraine, Belarus and Lithuania to the east; and the Baltic Sea and Kaliningrad Oblast, a Russian exclave, to the north...

, Slovakia
Slovakia
The Slovak Republic is a landlocked state in Central Europe. It has a population of over five million and an area of about . Slovakia is bordered by the Czech Republic and Austria to the west, Poland to the north, Ukraine to the east and Hungary to the south...

, Slovenia
Slovenia
Slovenia , officially the Republic of Slovenia , is a country in Central and Southeastern Europe touching the Alps and bordering the Mediterranean. Slovenia borders Italy to the west, Croatia to the south and east, Hungary to the northeast, and Austria to the north, and also has a small portion of...

) have completed the transition process.

Branch of economics


Transition economics is a special branch of economics dealing with the transformation of a planned economy to a market economy. It has become especially important after the collapse of Communism in Central and Eastern Europe. Transition economics investigates how an economy should reform itself to endorse capitalism and democracy. There are usually two sides: one which argues for a rapid transformation and one which argues for a gradual approach. Gérard Roland's book Transition and Economics. Politics, Markets and Firms (MIT Press 2000) gives a good overview of the field. A more recent overview is provided in Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia by Martin Myant and Jan Drahokoupil.

External links