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A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a free market. Transition economies undergo economic liberalization (letting market forces set prices and lowering trade barriers), macroeconomic stabilization where immediate high inflation is brought under control, and restructuring and privatization in order to create a financial sector and move from public to private ownership of resources. These changes often may lead to increased inequality of incomes and wealth, dramatic inflation and a fall of GDP.
Transition process is usually characterised by the changing and creating of institutions, particularly private enterprises; changes in the role of the state, thereby, the creation of fundamentally different governmental institutions and the promotion of private-owned enterprises, markets and independent financial institutions.[1]
According to Oleh Havrylyshyn and Thomas Wolf of the IMF, transition in a broad sense implies:
- liberalizing economic activity, prices, and market operations, along with reallocating resources to their most efficient use;
- developing indirect, market-oriented instruments for macroeconomic stabilization;
- achieving effective enterprise management and economic efficiency, usually through privatization;
- imposing hard budget constraints, which provides incentives to improve efficiency; and
- establishing an institutional and legal framework to secure property rights, the rule of law, and transparent market-entry regulations.[2]
Transition indicators
The existence of private property rights may be the most basic element of a market economy and therefore implementation of these rights is the main indicator of transition process.
The EBRD developed set of indicators to measure the progress in transition. The classification system was originally created in the EBRD's 1994 Transition Report, but has been refined and amended in subsequent Reports. The EBRD's overall transition indicators are:
- Large-scale privatisation
- Small-scale privatisation
- Governance and enterprise restructuring
- Price liberalisation
- Trade and foreign exchange system
- Competition policy
- Banking reform and interest rate liberalisation
- Securities markets and non-bank financial institutions
- Infrastructure reform[3]
Countries in transition
According to definitions given in the first part of this article, it might be possible to use the term “transition economy” in a wider context, covering a wider range of countries than merely in Central and Eastern Europe. There are countries outside of Europe, emerging from a socialist-type command economy towards a market-based economy (e.g. China). Moreover, in a wider sense the definition of transition economy refers to all countries which attempt to change their basic constitutional elements towards market-style fundamentals. Their origin could be also in a post-colonial situation, in a heavily regulated Asian-style economy, in a Latin American post-dictatorship or even in a somehow economically underdeveloped country in Africa.[1]
The economies of 25 countries could be defined as transitional:
Asia
Central/Eastern Europe
Commonwealth of Independent States
Note. *Turkmenistan opted out of the CIS (downgraded to associate membership) on 26 August 2005.
History
Transition trajectories can be idiosyncratic. Some nations have been experimenting with market reform for several decades, while others are relatively recent adopters (e.g., Republic of Macedonia, Serbia and Montenegro). In some cases reforms have been accompanied with political upheaval, such as the overthrow of a dictator (Romania), the collapse of a government (the Soviet Union), a declaration of independence (Croatia), or integration with another country (East Germany). In other cases economic reforms have been adopted by incumbent governments with little interest in political change (China, Laos, Vietnam). Transition trajectories also differ in terms of the extent of central planning being relinquished (e.g. high centralized coordination among the CIS states) as well as the scope of liberalization efforts being undertaken (e.g. relatively limited in Romania).
When is transition over?
According to the World Bank's "10 Years of Transition" report "... the wide dispersion in the productivity of labour and capital across types of enterprises at the onset of transition and the erosion of those differences between old and new sectors during the reform provide a natural definition of the end of transition.”[4] Mr. Vito Tanzi, Director of the IMF's Fiscal Affairs Department, gave definition that the transformation to a market economy is not complete until functioning fiscal institutions and reasonable and affordable expenditure programs, including basic social safety nets for the unemployed, the sick, and the elderly, are in place. Mr Tanzi stated that these spending programs must be financed from public revenues generated—through taxation—without imposing excessive burdens on the private sector.[5]
According to these definitions eight countries, which joined the EU on 1 May 2004 (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia) have completed the transition process.[6]
References
- ^ a b Falke, Mike. Community Interests: An Insolvency Objective in Transition Economies?, No. 01/02, Frankfurter Institut für Transformationsstudien
- ^ Havrylyshyn, Oleh; Wolf, Thomas. Determinants of Growth in Transition Countries, Finance & Development Magazine, June 1999, Volume 36, Number 2 by the IMF
- ^ EBRD's 1994 Transition Report
- ^ World Bank. Transition. The first ten years. Analysis and Lessons for Eastern Europe and the Former Soviet Union
- ^ Tanzi, Vito. Transition and the Changing Role of Government, Finance & Development Magazine, June 1999, Volume 36, Number 2 by the IMF
- ^ EBRD. Law in transition online 2006 - Focus on central Europe
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