Economic Transition from Centrally Planned to Market Economy

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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.


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. ...
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