Transition from Command to Free Enterprise

I. Transitional Economy

An economy which is changing from a centrally planned economy (Command) to a free market (Market or Mixed).

Government ownership ofeconomic resources and

state planning

Government and privateownership of economic

resoures split rather evenlyMostly private (individualor business) ownership of

economic resources

Command

I. Transitional Economy

Transition economies undergo economic deregulation / liberalization which results in the following changes: market forces set prices rather than a

central planning organization (gov’t) trade barriers are removed privatization of government-owned

enterprises and resources the creation of a financial sector (banking)

to facilitate the movement of private capital.

II. From Command to Market/Mixed Economy

Since 1980s, Less Developed or Command economy countries began to see limitations of centrally planned economies

Why? Central planning failed to: Create economic value

Provide incentives

Achieve rapid growth

Satisfy consumer needs

II. From Command to Market/Mixed Economy More on privatization (sale or transfer of

government owned business to private individuals)

A. Can sell business to one ownerB. Sell shares in business (stock market) Privatization means only profitable business

will continue to operate. Unprofitable businesses fail and close

Means secure life long employment for some is over because competition weeds out the weak

III. Economic Systems in Transition The shift toward a market-based

economic system involves: 1. Deregulation/Liberalization –

Remove Legal restrictions / gov’t control Establish private ownership Lower trade barriers to trade with other

countries

2. Privatization - transfers the ownership of state property into the hands of private individuals

III. Economic Systems in TransitionThe shift toward a market-based economic system involves:

3. Legal system - that protects property rights and the machinery to enforce that system (patents/copyrights)4. Macroeconomic (big picture economics) stabilization:

Bring inflation under control over time Initially, Inflation will burst high due to release of

pent up demand after years of Government control Requires Economic discipline and growth of money

and credit Progress towards paying debts

IV. Obstacles to Transition

Lack of Managerial/Free Market Expertise

Money Shortage for Investment Environmental Degradation Cultural Adjustment

Workers need to develop a different work ethic based on incentive to influence labor!

Not just meet quota, everyone paid the same…. You changed the rules!! (Remember

TicTacToe)

V. Other Issues in Transition

The Legal System and Government

Establishment of a legal system protecting property rights

Laws that ensure the transfer of property

Law and order prevent criminals and government from interfering with the day to day business of the economy

Laws need to provide a framework of regulation

VI. Russia in Transition

Operated under a staunchly communist / command system for about 75 years

Underwent a rough transition of simultaneous economic and political reform

But government tax revenues are increasing and foreign investment is returning

Challenges include developing managerial talent and fostering political and social stability

VI. Russia in Transition

By 1992 government lifted price controls, prices tripled

Wealth was unevenly distributed and organized crime and corruption infiltrated society and the economy

Financial aid from the World Bank and the IMF was mismanaged and not used efficiently

Recently Russia has started to tap into their vast oil, natural gas and mineral resources to sell on the world market

VII. Countries (In Transition)

BIG 3: Russia (Former Soviet Union) China (Communist Gov’t / Mixed

Economy) India (Central Control / Mixed Economy) Also Cuba is a slower/ smaller scale

example.

China and India considered by many as the new Economic Powerhouses.