Black market is a product of the bad management and planning by the Eastern European government. Black market is created by a minimum price by the government to keep prices low, rationing, a queuing system and people that are willing to break the law to feed their thirst for some products. Whenever wants are not satisfied these black markets appear and if you are capable of paying, someone will supply you with what you need. In some parts of Eastern Europe the black markets were fairly open dealings. People were sick of rationing, and needed certain goods their own government could not provide, thus they turned to criminal elements.
The government fixes prices of all inputs and outputs, but these prices do not reflect the scarcity of the resources or product. The use of the price mechanism would be a better indicator for scarcity of recourses.
Externalities and environmental problems occur often in Eastern European countries. Planners are far more interested in securing output than in reducing damage to the environment. Environmental objectives are not written into plants thus causing inevitable damage to the environment.
All these reasons have encouraged the leaders of Eastern European countries to use more the price mechanism to make their economies more similar to market economies thus eliminating some of the problems.
b) Eastern European countries started making greater use of the price mechanism so they can start changing their economies to a west-like one. The price-mechanism is the one that decides how recourses will be allocated in a free-market economy. This huge “leap” from one system where all decisions were taken and made by the government through a planning process to a system where economic decisions were made by the market mechanism, aroused some problems and abnormalities to the eastern European countries.
Governments are using more positive economic policies including interventions to save local authorities. A major difficulty facing cities in Eastern Europe is the cost of subsidies to housing and utilities. For example real estate in Russia after the transition in general makes up major expenditure level for the local government in contrast with western cities as a major source of revenue. The transition revolutionized the finances and independence of Russian cities.
Where a country tries to use the price mechanism, inequality between people increases. There are people, which are better off than others in a higher level. When Romania went through the transition process the country started seeing some great technological changes, there was modernization, and the use of the Internet and mobile phones kept increasing. There were predictions for economic growth.
Despite these changes there was still corruption and poor infrastructure. The courts were corrupted. A third of all Romanians live in poverty. The rural population lives off what they grow but the urban poor are worse off. Even though wages have increased by the government, the government has no extra cash for the improvement of health care or education for the poor. People see the big new industries such as McDonalds just for the rich.
The Price Mechanism answers the economic question for whom to produce. All consumers have to spend money, a proportion of their income to acquire goods and services. But those with a little income or not at all, they cannot receive the same benefits as others with higher income or standard of living. It’s clearly unfair.
An unequal distribution of income will result in resources being biased in favor of satisfying the wants of the richer members of society. (Use of a Lorenz Curve to show this).
The curve shows that the richest percentage of the population is actually the smallest group in
Society, and the poorest group in society are a much larger proportion than the rich.
This inequality of wealth leads to a high percentage of crime as was seen in the former U.S.S.R. In sharp contrast to conditions before the transition, people now find themselves deprived of personal safety and security. The United Nations Development Program reported some terrifying results and details. There have been 9.7 million premature deaths in the countries of the former Soviet Union and Eastern Europe directly linked to the introduction of the “free market” during the last decade. Also in the report there have indications of high poverty rates, an escalation of in suicides and alcoholism, the return of previously-conquered diseases like tuberculosis and the rapid spread of new ones such as AIDS.
The ‘transition' in most of the countries in the former Soviet bloc in Central and Eastern Europe in reality has been a Great Depression. On average, gross domestic product in Central and Eastern Europe in 1997 was nearly 12 percent lower in 1997 than in 1990. But in many countries the situation was much worse. In Latvia and Lithuania, for example, GDP was only 59 percent of the 1990 level.
Another problem that prompted several countries in Eastern Europe is that goods and services, which are judged to be essential, may not be provided on an adequate scale. The self-interest factor will cause people to be greedy, selfish and do not care about others, main aim will be to maximize profits and eliminate competition.
There have been privatizations at extremely low prices that allowed many enterprises to fall into the hands of local or foreign criminal elements, and the exploitation of political influence to secure advantageous licenses.
There has been an increase in the mortality rate. Between 1980 and 1995 in Russia, life expectancy for Russian men fell by four years, more than in any other country and today life expectancy for males in the Russian Federation is 58 years. By 1995 ten of the transition countries experienced a decline in population.
In almost all countries, the suicide rate for men is higher than the average for the European Union. In Hungary it is almost three times as high and in the Russian Federation, Latvia and Lithuania, more than three times greater.
The transition economies came with costs. There has been a huge deteriorating human security. Employment is no longer secure, nor, is incomes. Rich, get richer, poor get poorer. For many people income poverty has become a way of life. People’s residents are no longer stable; there have been mass migrations occurring within the countries in transition. There is not a secure privilege to a decent education, a healthy life or a sufficient nutrition. It depends whether u have the financial ability or not. These costs make up of what is called the free-markets social catastrophe.
It is inevitable that a transition from a command to a market economy will reduce output. A big problem that got triggered due to the transition process is that before the process government planners allocated factors of production between differing production units such as factories or farms. All the economic decisions were taken by the state. With the transition, the firm now has to buy its own inputs in order to produce its good or service to the market. With the price mechanism firms have to make their own decisions on how to produce, when to produce and what methods to use. Since many firms were caught by surprise from the transition process, they were not used to making these decisions or buying their own inputs. Therefore, this has lead to a significant decrease in output thus causing unemployment.
In the free market most land and capital is owned by the private sector. Moving from one type to another involved many assets to be sold to private individuals. A way to do that is for the state to give the company to the workers. This is not a very good deal because the worker in a factory, which produces goods for export to the West, will do far better than a worker whose factory is outdated. Also some with power like manager of very successful enterprises will use their influence to get the asset transferred into their name.
The governments of Eastern Europe required to privatize 100% of their economies. They faced several obstacles during this process. There was an absence of a capital market. There were no institution channel funds into industry. There was not an Entrepreneurial culture. For years the only methods of advancement had been through work for the state. Firms were no used of making profits thought business for them.
Privatizing can be dangerous since it can lead to a creation of a monopoly. A private monopoly in a market with no regulations can be more damaging to the community than a state monopoly.
The diagram shows how a profit maximizing monopoly can charge the high price p1, whilst supplying only a small quantity q1 of the product. An efficient state monopolist should be able to charge p2 and produce q2. This is marginal cost pricing. A state monopoly not trying to cover its own re-investment could charge p3, but it would require a subsidy to operate in this way in the long term.
The large falls in output had lead to extreme rises in unemployment. The movement to a market system had forced many factories and plants to close and workers were laid off. Some enterprises were forced to become more efficient especially now they competing in the economy against imports of the West or other firms. Firms to become more efficient they will try laying off some workers and making the remaining work harder and more productive.
Recent % Unemployment Rates for Selected Transition Economies
Year Bulgaria Czech Rep Hungary Poland
1989 na 0.0 0.3 0.1
1990 1.5 0.8 1.9 6.1
1991 11.5 4.1 7.5 11.8
1992 15.6 2.6 12.3 13.6
1993 16.4 3.5 12.1 15.7
1994 12.8 3.2 10.4 16.0
1995 10.5 2.9 10.4 14.9
1996e 12.5 3.5 10.5 na
Year Romania Russia Slovak R. Slovenia
1989 na na 0.0 na
1990 na 0.0 1.5 na
1991 3.0 0.1 11.8 na
1992 8.1 0.8 10.3 11.0
1993 10.2 5.5 14.4 na
1994 11.0 7.1 14.8 na
1995 8.9 8.2 13.1 15.0
1996e 6.1 9.3 12.8 na
NB. (i) Russian figure here is "open" unemployment. (ii) Separate figures for Albania show
Unemployment rates of 20% in 1995 and 27% in 1992, and for Ukraine 1.2% in 1996, and for
Kazakhstan 3.5% in 1996.
Source: The Economics of Transition, May 1997, and EBRD Transition Report.
For all countries in transition unemployment has been a really heave cost to bear.
Another problem, which was linked with the transition process, is very high inflation. Most of the transitional economies have experienced hyperinflation. There are various reasons for this. For essential commodities, artificially low prices were maintained. Basic consumer items were subsidized and sold at prices below marginal cost. These subsidies were too expensive to maintain especially during the transition process when it became extremely difficult to collect taxes. During command economies people’s incomes were low but supply was high. There were frequent shortages in shops and people were frequently unable to spend their income. There was little trust in state baking services and saving became a common thing. The abolition of price controls meant all that saved money would flood into the market and cause prices to rise.
Many state enterprises became bankrupt without state support. In Poland and Hungary many of these enterprises were allowed to collapse and the short-term unemployment was accepted as an essential price for transition. In these countries hyperinflation was painful but only for a short amount of time.
In a market system resources are allocated by price. When a market system is introduced prices rise until demand equals supply.
High prices can trigger a wage price spiral. High prices have caused workers in Eastern Europe to demand high wages. High wages in turn will make firms increase prices further to deal with the high costs. This will again initiate a demand for high wages. It was important for the Eastern European governments to print more money so they can hold those increases in wages and prices. If they don’t firms will lose customers because of the high prices. If there aren’t enough sales, waste of resources will be caused and further unemployment. This would mean strikes, street riots and criminal unrest.
When moving from command to planned economies some currencies need to be converted. Most eastern bloc currencies were inconvertible. They were unable to be converted into dollars or other western currency. That made it difficult for some countries to buy western goods or travel to the west. Also there was no market rate of exchange. When convertibility was introduced the value of these currencies fell, leading to inflation.
There have been many problems caused by the transition process of these Eastern European countries. Some would say if it were really worth it to transform into a market economy. In some countries the good things that transition brought cancelled these problems. Many countries managed to recover and be more powerful in economic terms than they were before in their existing command type economy.
c) The market mechanism has sure brought some important and severe changes in the economic and social state of the Eastern European countries. These changes in Eastern Europe were important so problems in running national economies would be solved. Some countries benefited a lot some others not that much. The market mechanism is not perfect; there is not such thing as perfect. Both the command and planned economic systems have disadvantages and loopholes. But in countries in Eastern Europe the system could have been improved a lot by changing it to a market-like system. The commands systems in Eastern Europe were based on suppressing political regimes. In Eastern Europe there has been a serious lack in personal freedom. Command economies can work only on the expense of individual freedom. Even though there was low inflation in Eastern Europe, there was a lot of excess demand build up. There were long waiting lines and a frustrating queuing system. In eastern European countries there was some growth in production. But too much of that output produced was going into the defense industry, it was not used efficiently. Also lack of competition resolved in goods of low quality being produced and there is serious lack of incentives for investment. There was low unemployment but many people got an extra job in a black market. Criminal activities increased more. The changes of the market mechanism has solved many of these problems but brought other ones. These new problems are not as large or significant as the previous ones. Some new problems have been inequality of wealth has got bigger. Poverty levels increased since many people found them unemployed, an effect of the market economy. Whole countries have found themselves totally transformed some very quickly, others in a lot of time. Some countries used shock therapy to transform overnight. An example of such country was Poland. The effects were dramatic; Poland suffered a fall in GDP of over 20% in two years. The economy quickly recovered and by 1993 was again growing at a fast rate. The growth between 1994 and 2000 was 5.5% on average. Today Poland is a recognizable mixed economy with a stable currency. Some other countries preferred a steady long-term change. For example Ukraine, failed to transform itself into a market economy. Politicians, ex factory managers or even criminal elements, control factories and enterprises. Official GDP has fallen to one third of its 1989 by 2000. There is not need to pay taxes, workers are not getting paid, there are under funded services such as education and health care. There is lack of rule that triggers rapid criminal activity. Ukraine is an example of a country where the market mechanism failed to work.
The market mechanism works by the relations of demand and supply. If there is effective demand people will attempt to provide goods to satisfy their needs. With this way the market mechanism decides the allocation and use of resources. This has been a more efficient way in allocating recourses and its less complex than the chaotic planning of the command planned economies. It’s less complicated but also less fair. Only the people with the ability to pay can satisfy their needs and wants. The privatization has caused many firms to be handed to experienced managers that their main aim is to maximize profit.
Many key prices and markets have been liberalized. From now on markets will decide what price a commodity should have. The first effect of this has been inflation as express demand was converted into high prices. But inflation fell over the 1990’s.
The market mechanism can lead to market failure. That exists when the price and quantity demanded for a product or service are not at a level where that will ensure the more efficient use of resources. There are many externalities caused by market failure, such as pollution. Many manufacturers would dumb waste into a river in a second without taking into consideration the harm they are causing and they could get away with it. The government has to act and ensure that by passing laws to control businesses will minimize pollution. Without government intervention the good produced by the polluter will be cheaper, since he can charge the low price now the pollution cost is ignored. This artificial low price will cause demand to be higher and then there will be true efficient equilibrium. This means resources are not allocated, as they should.
World Bank and EBRD figures taken by the Financial Times
World Bank and EBRD figures, published in the Financial Times on 30/06/99, suggest that the transition economies of Eastern Europe have performed better or worse according to the determination with which they have embraced the market based reforms and their willingness to “westernize” their political institutions and economic structures rather than remaining under the regime and domination of former communist organizations.
As can be seen from the bar chart, Poland which under the Balcerowicz Plan, bore all the pain of transition in a short period of time and managed to return to a path of economic growth and prosperity. In contrast most of the states of the former USSR have sunk into decline and inefficiency. Russia’s GNP for 1999 was forecast by the World Bank at $167 billion.
This map shows the advantage of geographical proximity to western European markets and firms looking to invest eastwards to take advantage or relatively high skilled workforces at relatively low wages. The more westerly countries of the former eastern bloc had experienced command economies for about 40 years, and had a less fixed Marxist culture.
According to the European Bank for Reconstruction and Development (EBRD), 1999 was an important year and a significant turning point.
The 2000 EBRD annual report, published in November suggested that the region as a whole was likely to grow by 4.8%, followed by a further 4% in 2001. The forecast proved correct according to the 2001 repot and showed the rapid growth since the transition began. As the graph conveys, the recovery is no longer confined to the more progressive countries. By the end of 2001 sever countries’ output was expected to have exceeded 1989 levels. The countries were Albania, the Czech Republic, Hungary, Poland, Slovakia and Uzbekistan. The EBRD points out that for the first time since 1989 Russian growth exceeds that of Poland.
According to the European Commission in April 2001, all ten eastern European candidates for admission to the EU recorded positive growth in 2000, for the first time since 1989. The average growth rate was 4%. Much of the growth was attributable to the candidates’ success in negotiating good trading terms with EU. In the case of Hungary the EU share of export had reached 70%.
Unemployment is still a problem in Eastern European countries. In Slovakia is over 18% and in Poland and Bulgaria is 16%.
Many of the problems facing Eastern European countries in their attempt to run national economy have been banned since the introduction of the market mechanism. It is implied that the market mechanism does and did provide solutions for many problems and gave the ability to the government of Eastern European countries to run their national economies much easier and with less complications. As we saw from the statistics many of these countries now are experiencing economic growth and development. They are far better off as they used to be with the command-planned economies.
It had been recognized that change was necessary for the Eastern European countries with command-planned economies since the command structures of the pre-1990 era, before communism fell, could not deliver or guarantee long-term growth. Some countries such as Poland and Hungary look forward in catching up with Western European countries like other countries have. Many of these countries have applied to join the EU since they realized they could benefit a lot from EU trade among members.
Over all Eastern Europe entered the 1990’s with an unforeseen full with precautions future by entering into the transition process, but now it seems the future its more clear for them and their people.
Eastern European countries started making greater use of the price mechanism so they can start changing their economies to a west-like one. The price-mechanism is the one that decides how recourses will be allocated in a free-market economy. This huge “leap” from one system where all decisions were taken and made by the government through a planning process to a system where economic decisions were made by the market mechanism, aroused some problems and abnormalities to the eastern European countries.
Governments are using more positive economic policies including interventions to save local authorities. A major difficulty facing cities in Eastern Europe is the cost of subsidies to housing and utilities. For example real estate in Russia after the transition in general makes up major expenditure level for the local government in contrast with western cities as a major source of revenue. The transition revolutionized the finances and independence of Russian cities.
Where a country tries to use the price mechanism, inequality between people increases. There are people, which are better off than others in a higher level. When Romania went through the transition process the country started seeing some great technological changes, there was modernization, and the use of the Internet and mobile phones kept increasing. There were predictions for economic growth.
Despite these changes there was still corruption and poor infrastructure. The courts were corrupted. A third of all Romanians live in poverty. The rural population lives off what they grow but the urban poor are worse off. Even though wages have increased by the government, the government has no extra cash for the improvement of health care or education for the poor. People see the big new industries such as McDonalds just for the rich.
The Price Mechanism answers the economic question for whom to produce. All consumers have to spend money, a proportion of their income to acquire good and services. But those with a little income or not at all, they cannot receive the same benefits as others with higher income or standard of living. It’s clearly unfair.
An unequal distribution of income will result in resources being biased in favour of satisfying the wants of the richer members of society. (Use of a Lorenz Curve to show this).
The curve shows that the richest percentage of the population is actually the smallest group in
Society, and the poorest group in society are a much larger proportion than the rich.
This inequality of wealth leads to a high percentage of crime as was seen in the former U.S.S.R. In sharp contrast to conditions before the transition, people now find themselves deprived of personal safety and security. The United Nations Development Program reported some terrifying results and details. There have been 9.7 million premature deaths in the countries of the former Soviet Union and Eastern Europe directly linked to the introduction of the “free market” during the last decade. Also in the report there have indications of high poverty rates, an escalation of in suicides and alcoholism, the return of previously-conquered diseases like tuberculosis and the rapid spread of new ones such as AIDS.
The ‘transition' in most of the countries in the former Soviet bloc in Central and Eastern Europe in reality has been a Great Depression. On average, gross domestic product in Central and Eastern Europe in 1997 was nearly 12 percent lower in 1997 than in 1990. But in many countries the situation was much worse. In Latvia and Lithuania, for example, GDP was only 59 percent of the 1990 level.
Another problem that prompted several countries in Eastern Europe is that goods and services, which are judged to be essential, may not be provided on an adequate scale. The self-interest factor will cause people to be greedy, selfish and do not care about others, main aim will be to maximize profits and eliminate competition.
There have been privatizations at extremely low prices that allowed many enterprises to fall into the hands of local or foreign criminal elements, and the exploitation of political influence to secure advantageous licenses.
There has been an increase in the mortality rate. Between 1980 and 1995 in Russia, life expectancy for Russian men fell by four years, more than in any other country and today life expectancy for males in the Russian Federation is 58 years. By 1995 ten of the transition countries experienced a decline in population.
In almost all countries, the suicide rate for men is higher than the average for the European Union. In Hungary it is almost three times as high and in the Russian Federation, Latvia and Lithuania, more than three times greater.
The transition economies came with costs. There has been a huge deteriorating human security. Employment is no longer secure, nor, is incomes. Rich, get richer, poor get poorer. For many people income poverty has become a way of life. People’s residents are no longer stable; there have been mass migrations occurring within the countries in transition. There is not a secure privilege to a decent education, a healthy life or a sufficient nutrition. It depends whether u have the financial ability or not. These costs make up of what is called the free-markets social catastrophe.
A big problem that got triggered due to the transition process is that before the process government planners allocated factors of production between differing production units such as factories or farms. All the economic decisions were taken by the state. With the transition, the firm now has to buy its own inputs in order to produce its good or service to the market. With the price mechanism firms have to make their own decisions on how to produce, when to produce and what methods to use. Since many firms were caught by surprise from the transition process, they were not used to making these decisions or buying their own inputs. Therefore, this has lead to a significant decrease in output thus causing unemployment.
In the free market most land and capital is owned by the private sector. Moving from one type to another involved many assets to be sold to private individuals. A way to do that is for the state to give the company to the workers. This is not a very good deal because the worker in a factory, which produces goods for export to the West, will do far better than a worker whose factory is outdated. Also some with power like manager of very successful enterprises will use their influence to get the asset transferred into their name.
