The breakdown of centralized socialism in the Union of Soviet Socialist Republics (USSR), Central and Eastern Europe, and Asia at the end of the twentieth century resulted in the adoption of the market process as a means of organizing the economy. The movement from a centralized socialist economy to an economy based on market relations has been termed transition and thus the economies that have adopted this process are called transitional economies. In particular, the transition process was associated with an explicit end-state, namely the establishment of a capitalist economic system. Hence, the transition involved, in essence, the introduction of private ownership and restructuring through the privatization of state enterprises; the establishment of market equilibrium through the abolishment of centrally administered commands; the liberalization of economic activity through institutional reform; a change in economic behavior as a result of economic actors adjusting their behavior in line with self-interest and the rules of market exchange; and the reduction of the state to the role of legislator and facilitator of economic activity.
The term transition has been criticized as being inadequate, however, because it does not capture all the complications involved during the process. The term implies a linear movement from point A (centralized socialism and disequilibrium) to point B (capitalism and equilibrium). Specifically, because transition implies an end-state, the achievement of that end-state completes the whole process. It can thus be argued that the process is already complete, for the transition economies have in fact established a capitalist economic system and most of the countries of Central and Eastern Europe are members of the European Union. In this view, the term transitional economy is obsolete.
It can also be argued, however, that the “transition” process is continuous, and that equilibrium can never be achieved. This has led to the use of terms such as transformational economy and developing economy. In addition, capitalism comes in many varieties, so the question of what type of capitalism should be the goal complicates the process (Marangos 2004). Some commentators have also questioned the goal of achieving a capitalist economic system, with alternatives such as market socialism being proposed as the most appropriate economic system. China and Vietnam are examples of this type of system. Lastly, an alternative term, “integration-assisted transition,” has been introduced by Aristidis Bitzenis and John Marangos (2007), who argued that the goal of transitional economies was the participation in the globalization process and attempting to integrate their economies into the globalized system by opening their borders, liberalizing their markets, and attracting foreign direct investments with the assistance of international financial institutions and multinationals.
The economic program of transition involved four elements. The first was macroeconomic stabilization, which reduced inflation and decreased the debt burden. The second was the liberalization of economic activity, including prices, trade, currency, and convertibility. The third was the reduction of the size of the public sector through privatization and the restructuring of state-owned enterprises. The last element was the establishment of new laws and regulations in areas such as property rights, corporate law, accounting practices, and tax regulation. It is clear, then, that the decision to move to a market-based economy required a total transformation of the economy. Meanwhile, the citizens of these countries were unprepared to face the economic adversity and uncertainty resulting from the free-market process, mainly because they had been protected for so long by the Socialist State.
Although all the countries in transition had more or less the same final goal, the results of their efforts are diverse. This is because different strategies, policies, paths, and conditions ensured a variety of transition processes and outcomes (Bitzenis 2007).
Bitzenis, Aristidis. 2007. Political and Economic Alternatives for the Central and East European Region and China. Global Business and Economics Review 9 (1): 101–122.
Bitzenis, Aristidis, and John Marangos. 2007. Globalization and the Integration-Assisted Transition in Central and Eastern Europe Economies. Journal of Economic Issues 41 (2): 427–434.
Marangos, John. 2004. Alternative Economic Models of Transition. Aldershot, U.K.: Ashgate. Reprinted in paperback in 2007 by Transaction Publishing.