Transition economy

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A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a free market. Transition economies undergo economic liberalization (letting market forces set prices and lowering trade barriers), macroeconomic stabilization where immediate high inflation is brought under control, and restructuring and privatization in order to create a financial sector and move from public to private ownership of resources. These changes often may lead to increased inequality of incomes and wealth, dramatic inflation and a fall of GDP.

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.^[1]

Contents 1 Transition indicators 2 Process 3 Countries in transition 4 Branch of economics 5 References 6 External links

[edit] 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.^[1]

According to the IMF 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–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, establish the rule of law, and introduce appropriate competition policies.^[2]

According to Oleh Havrylyshyn and Thomas Wolf of the IMF, 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.^[3]

The EBRD developed 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 privatisation
• Small-scale privatisation
• Governance and enterprise restructuring
• Price liberalisation
• Trade and foreign exchange system
• Competition policy
• Banking reform and interest rate liberalisation
• Securities markets and non-bank financial institutions
• Infrastructure reform^[4]

[edit] 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, Serbia and Montenegro). In some cases reforms have been accompanied with political upheaval, such as the overthrow of a dictator (Romania), 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 governments with little interest in political change (China, Laos, Vietnam). 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).

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."^[5] 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.^[6]

[edit] 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 Asian-style economy, in a Latin American post-dictatorship or even in a somehow economically underdeveloped country in Africa.^[1]

In 2000, IMF listed following countries as transitions economies: Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Cambodia, China, Croatia, Georgia, Czech Republic, Estonia, Hungary, India, Laos, Latvia, Lithuania, Kazakhstan, Kyrgyz Republic, Republic of Macedonia, Moldova, Poland, Romania, Russia, Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan and Vietnam.^[2] In addition, in 2002 the World Bank defined Bosnia and Herzegovina, and Federal Republic of Yugoslavia (later Serbia and Montenegro) as transition economies.^[5] Some World Bank studies also include Mongolia.^[7]

Eight countries, which joined the European Union on 1 May 2004 (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia) have completed the transition process.^[8]

[edit] 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 Eastern Europe. Transition economics investigates how an economy should reform itself in order 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.

[edit] References

[edit] External links

• Policy Research Working Papers from the World Bank
• Health in transition economies - a dossier
• Quarterly Newsletter issued by UNDP and LSE on Development and Transition issues in Europe and CIS
• IMF: Nsouli, S. M. "A Decade of Transition - An Overview of the Achievements and Challenges"