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Transition Economies

TRANSITION ECONOMIES

The term transition has been applied to the countries that have abandoned the Soviet-type political and economic system at the end of the twentieth century. As it suggests a passage from one state to another, it is important to define both the point of departure and the point of arrival.

The point of departure may be considered the communist system that appeared in Russia following the October 1917 Revolution, and which was imposed on the countries of Central and Eastern Europe under Soviet rule after World War II. The core of this system may be described in terms of three features. First, economic life was under the control of a single party. In the USSR, this was the CPSU (Communist Party of the Soviet Union). All the national parties in Central and Eastern Europe were subordinate to the CPSU until the very end of the system, notwithstanding some crises, even though not all were officially labeled communist. The two exceptions were Yugoslavia and Albania, whose leaders broke with the Soviet system in 1948 and 1961, respectively. The second feature was that the economic institutions were based upon state ownership of the means of production. The private sector was nonexistent or negligible, and market ways of operating could only be found in an illegal underground economy. Finally, the third feature was compulsory central planning that regulated production, trade, and distribution of incomes.

The transition process began as a rejection of these three foundations of the communist economic system. The initial shock came with the fall of the Berlin Wall on November 9, 1989, which triggered the collapse of the communist parties and the beginning of a threefold process: from one-party rule to democracy, from state ownership to private property, and from plan to market. In the Soviet case, the transition process also included the collapse of the Soviet state as a federation of republics; this led to the independence of the three Baltic states, and later of the other twelve former republics. Officially the Soviet Union was dissolved in December 1991. The Russian Federation was the biggest Soviet Republic and the dominant one, both economically and politically.

All the former communist countries in the world, with the exceptions of North Korea and Cuba, became engaged in a transition process. In the case of the Asian countries, particularly China and Vietnam, the transition process was well under way in the beginning of the twenty-first century. Although perhaps more advanced economically than in some former European communist countries, the transition did not touch the political system, which remained communist. Can one still speak of transition? The question is debated.

In all the countries the basic transition policies were identical in their economic design. They were prepared by the new governments with the help of Western experts and international organizations, with the dominant influence of the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development (the first institution created solely for the purpose of assisting the transition). The building blocks of the transition were again threefold. First, there was an overall liberalization of the economic activities. Prices that had been fixed or controlled by the state were freed, as were the rates of exchange (for converting foreign into local currencies and vice-versa) and the rates of interest. People became free to undertake business activities and engage in domestic and foreign trade. Second, a stabilization program was instituted to eradicate inflation, control the budget deficit, and limit the foreign debt. Third, a structural transformation was intended to create the institutions of a market economy. The main component of the transformation was privatization: the task not only of putting the former state ownership into private handsindividual or corporatebut also of creating a new private sector. Transformation also implied a banking reform, which would put an end to the monopoly of a single state bank and allow the new private sector to be financed by credit. Tax reform and the building of a modern financial market were on the agenda. In order to replace the former social security system where the citizens were in complete charge of the state through subsidized health, education, housing, and even recreation systems, a market-type social security safety net only partly financed by the state was needed.

These measures were applied in Russia as in most of the Central and East European countries, under a program that started with Boris Yeltsin's first term on January 2, 1992, and was conducted by a team of reformers headed by Yegor Gaidar. Liberalization was swift and stabilization was achieved, albeit with difficulties and some crises. However, structural transformation progressed slowly and unevenly, and, ten years later, it could not be considered finished. The private sector was dominant, but the restructuring of the former state enterprises had not been completed, and monopolies prevailed in such crucial sectors as energy. The private companies were not applying the rules of a transparent corporate governance. The banking reform continued, with the banking sector suffering as a result of the financial crisis of 1998. The social security reform was not implemented.

The former Soviet Republics were in a still more difficult position. They were hit by the collapse of the USSR. Their links with Moscow and among themselves, defined by the former central plan, were disrupted. Most of them, except for states rich in oil and natural resources, such as Kazakhstan or Turkmenistan, could only rely on foreign assistance to conduct their reforms. Some of them, such as Belarus, or to a lesser extent Ukraine, hardly began their structural transformation. Some others, such as the Caucasian states, or the southern republics of Central Asia, are still plagued by ethnic conflicts or border wars.

The full transition to a market economy was not yet completed in Russia ten years after its beginning. Why has it been a much more chaotic process than in the countries of Central Europe, or even Eastern Europe? Several factors may explain these differences: the length of the Communist rule in Russia; Russia's size and diversity; paradoxically, its huge natural resources, which relieved the state of the need for more radical reforms and allowed a small minority of corrupt businessmen to grab these resources through the mechanisms of privatization; and, the lack of incentives and assistance, which were provided to Central and Eastern Europe through the European Union enlargement process but were not available to the CIS countries.

See also: economy, post-soviet; market socialism; privatization

bibliography

Aslund, Anders. (1995). How Russia Became a Market Economy. Washington, DC: The Brookings Institution.

Braguinsky, Serguey, and Yavlinsky, Grigory. (2000). Incentives and Institutions: The Transition to a Market Economy in Russia. Princeton, NJ: Princeton University Press.

European Bank for Reconstruction and Development. (1999). Transition Report 1999: Ten Years of Transition. London: EBRD.

Kolodko, Grzegorz W. (2000). From Shock to Therapy: The Political Economy of Postsocialist Transformation. Oxford: Oxford University Press.

Lavigne, Marie. (1999). The Economics of Transition: From Socialist Economy to Market Economy, 2nd ed. New York: St. Martin's Press.

United Nations Economic Commission for Europe. (2000). Economic Survey of Europe, vol. 1. New York: UNECE.

Marie Lavigne

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