The Transition from a Command Economiy to a Market Economy

 

Basic Requirements

  1. Macro Economic stability
  2. Deregulation of Prices
  3. Liberalization of Trade
  4. Privatisation of state owned assets
  5. Establishment of market supporting institutions such as property laws
  6. Social Security e.g. unemployment benefits
  7. External Assistance

 

Macro Econ Stabilization

When prices were deregulated, rampant inflation was often a problem. However the problem with reducing inflation is that it can exacerbate the problem of falling Real GDP.
Falling Real GDP poses meant problems for governments there will be extra pressure put on the governments budget, there will be less taxes collected but increased need for spending

Liberalization of Trade

 

            This is important for exploiting comparative advantage however in the short term the developing economies may struggle to compete.

Privatisation

            Many state owned industries were very inefficient, with poor quality goods, overstaffing, and lack of incentives e.t.c. IN the Short term privatisation caused many problems such as

  1. an increase in unemployment and a negative multiplier effect
  2. Many industries were so bad no body wanted to buy them
  3. Working practices were not relevant to the free market
  4. Problem of corruption. Many state managers converted assets into their private property
  5. There was also a need to privatise the elaborate state admin system

External Assistance

 

            As a % of GDP East Germany got the most and it was the most successful. Russia got the least and struggled the most

Problems Faced by Russia and other countries making the change

  1. GDP fell by 50% between 1989 and 1998

- However GDP was previously overstated

  1. Collapse of the value of the rouble led to a fall in confidence and deterred foreign investment
  2. Crime and Corruption increased

 

 

If Planning was so bad why did things get worse?

  1. Statistics misleading
  2. Austere macro economic policies needed to prevent hyper inflation in wake of price liberalization
  3. Failure of corporate control. Workers and managers not used to incentives of free market
  4. Lack of Entrepreneurs
  5. Lack of Trade with Russia
  6. Inefficient nature of the economy
  7. Poor infrastructure
  8. Corruption meant many taxes not collected

Essays and Revision Notes on European Union

There revision notes and essays are free to use for revision. However they cannot be reproduced without permission.

Other notes on Europe available at Tutor 2U