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What have been the economic effects of the transition away from central planning in Eastern European economies?

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Introduction

What have been the economic effects of the transition away from central planning in Eastern European economies? Economic systems exist in order to resolve the basic economic problem, which is the concept of scarcity of resources in a world of infinite human wants. Eastern European countries became command economies following the communist take-over of their governments. A centrally planned economy is one where the state owns all the resources and factors of production with no private ownership. The state makes all the economic decisions and allocates all the resources through a complex planning system. All of the production is carried out by State Owned Enterprises (SOEs) and consumers are directed in what they can buy and there is no free choice of unemployment. The motivation behind the system is 'working together for the common good' where top priorities include being as self-sufficient as possible and being independent of capital economies. Also, the aim of this economy was to allocate resources with minimal use of the price mechanism and encourage rapid economic growth. In the past, centrally planned economies traded with other economies of the same sort. Those that were poorly developed followed Marxist ideology, which had extreme socialist ideas that aim for full employment, for everyone to have a reasonable standard of living and to be an equal a society as possible. There were advantages and disadvantages to the command economy. On the positive side, the economy provided a reasonable standard of living for everyone. ...read more.

Middle

This means that individuals have to make their own decisions about production and may prefer to be cautious and produce less at the beginning so they do not over produce and lose money. They are not used to having to make important decisions for themselves and need to learn from their own experiences about exact quantities that they need to produce. The industries had difficulty obtaining the raw materials that they need and may also have problems transporting their products to the markets. There was disruption across other countries, which were also in the transition process, because of the fact that certain factories and shops cut down on imports due to the uncertainty of being able to pay for them. Also, the option of importing for less from countries in the West was now open when it had previously been banned, which meant that countries had the whole world to choose imports from. The countries that were worst affected by falls in GDP generally saw a large growth in their informal sectors. Ukraine, for example, had an informal sector that was approaching the size of its formal sector in 1998. The large falls in output led to sharp rises in unemployment. One of the advantages of a command economy was that it ensured almost no unemployment, and the shift to a market system led to a change in the employment situation. Many enterprises went out of business and factories and plants were closed, which created unemployed workers. ...read more.

Conclusion

Wage inequalities increased the gap between wealth differences. Also, as a market economy rewards those with higher levels of human capital, when in the past coal miners were paid more than doctors were, in a mixed economy this switched around. The transition period lasted different lengths of time for different countries. Where some countries, such as the Ukraine, failed to transform into a market economy. By 2000, the official GDP had fallen to one third of its level in 1989. Government provided services such as education and healthcare are under-funded, as the tax base is very low. Since 1990, all those people who rely on the state for their income, such as doctors and pensioners, have seen a fall in their real income. Criminal activity has been encouraged and investment has been discouraged due to the lack of rule of law in the economic sphere. Therefore, long term growth prospects do not look promising in the Ukraine. In general, Eastern European countries have managed their transitions relatively well, and they are all aiming to join the European Union. To do this they need to match their legal systems with the rest of the EU law and need to have stable currency along with low inflation. As we can see, there have been many effects of the transition away from central planning in Eastern Europe. There have been effects on output, unemployment, inflation, ownership and wealth, the distribution of resources and government finances. In most cases these have not been positive changes to begin with but have over time improved and now have a better prospective for the future economy. ...read more.

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