Transition economies refer to economies which are changing from a centrally planned economy to one of market economy. Since communism collapse in the late 1980s countries of former Soviet Union as well as all satellite states such as Hungary, Bulgaria and Poland sought to embrace capitalism and they abandoned central planning.
Transition economies often undergo structural transformations which are intended to assist in the development of institutions that are market based. Some of these include economic liberation where market forces are used to set prices rather than by central planning organizations.
Trade barriers are also removed in transition economies as there is a push to:
- Privatize resources and enterprises that are privately owned
- Restructure collectively and state run enterprises as businesses
- Create a financial sector to facilitate macroeconomic stabilization as well as movement of private capital.
Transition economies have been applied in China, Eastern bloc countries of Europe, some Third World countries, and former Soviet Union. There is also detailed work which has been undertaken on the social and economic effects of such transition.
Transition is often characterized by change and creation of institutions especially private enterprises, change in state role which fundamentally create different government institutions and promote enterprises that are privately owned.
Main ingredients needed in transition economies include the following:
- Institutional and legal reforms-There should be a redefining of state role in such economies in order to establish rule of law and also introduce appropriate competition policies.
- Privatization and restructuring- Creation of a financial sector that is viable and reforming enterprises that already exist in the economies undergoing a transition in order to render them capable of production of goods that can be sold in free markets. This also aids in transferring ownership into private hands.
- Liberalization-Transition process allows most of the prices to be established in free markets and lowers trade barriers that shut off contacts
- Macroeconomic stabilization- Brings inflation under control and lowers it over certain duration especially after the initial burst of inflation which is followed by liberalization and pent up demand.
There are certain problems which arise as a result of transition economies and some of these include increasing unemployment, rising inflation, lack of infrastructure, corruption, lack of entrepreneurship, moral hazards, inequality and lack of sophisticated legal systems. It is ideal to note that most of the transition economies often face severe short term difficulties as well as long term constraints especially on development.
There are different transition processes that are characterized by creating and changing of institutions especially private enterprises. Because of the different initial conditions that need to be followed during the emerging transition process, it has to be planned and different countries use varying transition models.
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