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Describe the main economic problem which may arise in transition economies

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-Ankita Shah Economics Essay Question a) Describe the main economic problem which may arise in transition economies The Eastern European countries like The Soviet Union, Poland, Ukraine etc. were command economies throughout the 1940s and the 1950s; however during the 1990s these economies started transforming themselves into market-oriented economies. These countries while they were in a process of transition were known as transition economies. This transition created a lot of problems for the people living in these nations and also for the government itself. The first immediate problem that the economy faced when it started the transition was a sharp fall in its GDP because of the reduction in the output. The average fall of all the countries was about 30%. For example the GDP of Albania was about 1.0 in 1976-85; it fell to about -10.8 by 1991. This can be seen form Table 44.1. Russia has seen its output fall to 53% of its 1989 level. The fall in the output was because of various reasons. Due to the transition now that there is no central planning the factories could produce whatever they wanted. They started cutting back on investment because they did not want to take too many risks; this lead to reduced demands for the supplies. So the suppliers cut off workers, leading to large scale unemployment and this led to the reduced demand which had an impact on the decrease in the output of the country. ...read more.


Different countries in Eastern Europe tried different methods in order to ensure a smooth transition. In a command economy, land, capital and all the other factors of production are owned by the state government where as in a free market economy they are owned by the private sector. So during the transition the governments could either decide to transfer or sell these assets to the private companies, industries or individuals. The duty of the government was to ensure that these assets were equitably distributed among all the people in the country. In order to do so different countries used various methods. The state could just give the property and capital away to the people or the companies who were using them at that time. For example if a firm was allotted a specific factory to produce the goods which the government told them to produce, they would now just own the factory. This was a very unequal way of allotting the goods and led to a lot of problems, because a factory with good quality modern machinery would be much better off than a factory where the machinery was old and needed to be replaced. This method also led to a lot of inequalities among the people. The rich corrupt politicians in some countries seized all the state assets and increased the unequal distribution of wealth. The government could just sell all the state assets into a fund and give a share of this fund to all the citizens of that country. ...read more.


New tax reforms such as the introduction of VAT can also increase the government income so that the government can have a larger social security safety net system and transfer payments. In the long run even though this transition was quite problematic to all of the Eastern European countries it was no doubt necessary for them for two main reasons. One reason was that the main aim of a command economy was to give the people personal freedom and command economies actually tell people what to do. The only way you can give people personal freedom is by giving them economic freedom. Another more important reason was the growth of inefficiencies within the countries. Often most of the products were unsatisfactory and only a few people could obtain them because of the long queues and the shortages. There were also long waiting lists for essential goods like housing and shops were often lacking the basic necessities like food for all the people. A lot of investment was wasted on things that people did not want. There was over employment of people and since the wages of the workers were minimal, a large informal sector started growing rapidly and a lot of workers looked at black markets as a second source of income. Inequality was widespread and this led to a growth in both absolute and relative poverty. This is why there was an urgent need in those countries to transform their economies into free-market systems. ...read more.

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