Problems of transition

Communist countries were known to have centrally planned economic system. However, communism collapsed in the late 1980s. The countries of the former soviet union (known to have had communism), after their independence, began to move away from central planning towards market system, and thus became mixed economies. Economies which are in the process of moving away from soviet-style central planning to market system are called ‘transition economies’.

Transition economies undergo a set of structural transformations intended to develop market-based institutions. These include economic liberalization, where prices are set by market forces rather than by a central planning organization. In addition to this trade barriers are removed, there is a push to privatize state-owned enterprises and resources, state and collectively run enterprises are restructured as businesses, and a financial sector is created to facilitate macroeconomic stabilization and the movement of private capital.

However, the transition process has its own pains and problems.

Problems of transition when central planning in an economy is reduced

    • Rising unemployment

Transition process involves in privatisation of firms. The newly privatised firms face competition from other firms, and thus try to be efficient. This also means that they will no longer employ workers more than what is needed and the firms also may try to shift too capital-intensive production methods. Transition also means that the government also will not employ as much as before. This will create unemployment at least in the early stages of transition. Whether the country will be able to solve will depend on its success in the transition process.

    • Rising inflation

Many transition economies also experienced price inflation as a result of the removal of price controls imposed by governments. When this happened, the newly privatised firms began to charge prices that reflected the true costs of production. In addition, some entrepreneurs exploited their position and raised prices in an attempt to profit from the situation.

    • Inequality

Transition economies probably had a fairly equal distribution of wealth(atleast in the theory) among the people. However, when the central planning is reduced, inequality tends to increase as as some exploited their position as entrepreneurs and traders in commodities, while others suffered from unemployment and rising inflation.

    • Corruption and consumer abuse

As the economy starts the transition, the legal system is usually not adequate to prevent corruption. Loop-holes in the legal system would mean that the markets are not properly regulated to protect consumers. Market-driven economies will only develop when citizens are granted extensive property rights, and can protect these rights through the legal process. This was largely absent in the former communist transition economies.

Leave a Comment