The centrally planned economies existed in Soviet Union. The problem in the central economies was its inability to generate wealth and raise the living standard. The production and distribution would come from central government, deciding for the states, what to produce and how to distribute in what quantities. The workforce was assumed to be fully employed and salary was predetermined, regardless of the potential of the worker (Greenspan, 1997).
In these economies there was no effective market clearing mechanism, the result was huge surplus of unwanted goods by population on one side and shortage of goods, which were in needed. This imbalance in demand and supply led to rationing the quota, as the quantity of the goods was limited. As production and planning was followed through state orders rather than by market demand, the finance had no control over the actions that were remotely planned by the center without following the market rules (Greenspan, 1997).
In such economies, there was nothing like credit, interest or market values, as every thing belonged to the state. Due to the lack of a developed financial system, these economies as a consequence wasted their resources as much as much five to seven times more than Western European economies, yet without any productive result, which led to the dismemberment of Soviet Union and the rest of Eastern Bloc in early 1990s (Greenspan, 1997).
REASONS FOR GOING FOR FREE MARKET
These countries started the free market polices for the following reasons (IMF, 2000)
The free market economy allows prices to be determined by demand and supply with little market barriers.
The macroeconomic stabilization process after initial burst of high inflation stabilizes the inflation and allows the liberalization to take place, which keeps a tight control over the state budget and growth of money allowing the growth of progressive fiscal system to develop.
The privatization process creates a strong financial sector allowing the companies to produce the goods, which are in demand in the market.
The presence of a legal and institutional reforms establish the rule of law by state leading to the creation of competitive policies.
These economies had no financial infrastructure; they had to develop their economies from scratch allowing liberalization, macroeconomic stability and market mechanism, despite the surmounting hurdles in their ways. It was thought by these states that the hardship phase will be temporary and will be vanish with time (Greenspan, 1997).
This transition started liberating their economies, and in initial phase went into full swing of inflation and reached 450 percent a year in Central EU States and nearly 900 percent in the Baltic states, but stabilized by 30 percent in later years (IMF, 2000).
The experiment of free market in the transition economies has not been a real success as it was thought to be; however according to IMF, the transition economies became more democratic with greater freedom of speech and expression. And now the countries of Central Europe, such as Czech Republic, Hungry and Slovakia are developing very fast and are