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Economic Transition from Centrally Planned to Market Economy - Essay Example

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Economic Transition from Centrally Planned to Market Economy

These are countries such as Russia, Ukraine, Baltic Republics, Belarus, Georgia, Kazakhstan, etc. These former Soviet Union (FSU) countries had the biggest challenge.
The FSU countries had all been centrally controlled from Moscow. The removal of that control left them with a vacuum at the top. Camdessus (1994) observes that "the old structures of planning and control were disintegrating, creating conditions of economic and political crisis." They had to build administrative capacity and also take control of companies that were also controlled from Moscow. The challenge these countries faced was of a political transition from communism to democracy which was happening at the same time with economic transition.
Their first challenge was to have a currency of their own and start formulating their monetary and fiscal policies. The currency had to be stabilized and be made convertible. They inherited weak inefficient industries surviving on subsidies. It was important to ensure that while price controls are removed inflation does not get out of hand. Programs to revive industrial production had to be in place to ensure that the economy would begin to function. Inevitably inflation soared in all these countries due to collapse of production and lack of resources to import commodities. Unemployment increased exacerbating an already grave situation. Social welfare funding was a problem as more and more became unemployed. Indeed most of these countries were faced with a popular backlash as people were seeing their conditions deteriorating to conditions worse than before collapse of communism.

The instability of Russia was a great cause for concern. First these economies were deeply tied to Russia economically. Secondly the Red Army was always a threat to reverse the changes.

The second category are the Central European countries which cover Poland, Hungary, Romania, Bulgaria, Czech Republic and Slovakia. These countries although under influence of the Soviet Union had autonomy to a degree. In theory they had functioning government structures and parastatal organizations. In reality these structures were subservient to the Red Army control. In fact Blunden (1993) asserts that the "Red Army was the state.....[in t]hese countries [and] .[t]heir governments were in reality the local administrative apparatuses of the Red Army." Their immediate challenge was to transform politically into democracies and embark on economic reforms that removed government intervention with market forces.

The major challenge for these countries was the nationality question. Suppressed minorities seized this opportunity for self-determination. The Czech and the Slovaks in Czechoslovakia parted company. There was a bloody revolution in Romania.

Most of these countries traded with the USSR and the break-up of USSR destroyed their major markets. For instance Paci, Sasin and Verbeek (2004) point out that "[t]he loss of export markets in the East as a consequence of the Russian crisis in 1998 costs Poland around 3 percentage points of GDP." For a time barter deals were in place but these were not sustainable. What they needed was hard currency to purchase inputs for their own industry. As a result they had to turn their eyes to Western Europe and ...Show more

Summary

The collapse of the Soviet Union in 1991 had serious repercussions for countries in Eastern and Central Europe. For many years these countries had been under the influence of Soviet economy. Under communism economic activity was centrally planned but now there were being forced to change to market economy over-night.
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Economic Transition from Centrally Planned to Market Economy essay example
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