Transition Economy

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Transition Economy Definition

A transition economy refers to countries transitioning from a centrally planned economic system to a free market economy. A centrally planned economy is where the government makes all the decisions regarding the production and distribution of goods, while a free market economy is when market forces operate the same.

Transition Economy

Many countries have made this transition in the past few decades, especially when communism ended in the 1980s. Poland, Bulgaria, and Hungary were important countries that made this transition. This transition is likely to embrace capitalism and open gates for new business opportunities.

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  • Transition economies refer to the countries that relegate from a centrally planned or command economy to a free market economic system.
  • Since the breakdown of the Soviet Union, countries like Albania, Croatia, Slovenia, the Czech Republic, Hungary, and Poland have been good examples of such economies.
  • The transition economy countries face difficulties in bringing such transitions as they come with many challenges and major changes.
  • Many countries still operate under military rule and command economy and will continue to do so, inclined to a strong history of rule and dictatorships.

Transition Economy Explained

A transition economy depicts a country that was initially a state-run economy where the major economic decisions related to the supply of goods, production, and distribution are regulated by the government, implementing reforms, and restructuring itself to a market economy where privatization of businesses is allowed. Market forces like demand and customer needs dictate the production and distribution of goods, resources, and services.

Generally, centrally planned economies are closed systems, and everyone in it operates as per the laws and regulations of the authorities and within the set parameters. But the transition economy's meaning lies in bringing change by altering ways, inducing macroeconomic reforms, and giving more liberty and rights to the people interested in business activities.

The history of the transition economy goes back to the early 1980s when South American countries like Brazil and Argentina were relegated from military dictatorship to democracy, followed by the dissolution of the USSR when many countries transitioned from command economy to market economy.

When a country is centrally planned, people do not have many options, there is a lack of business opportunities, and the country operates in a closed system where the government dictates the rules and regulations and is the sole decision maker of production and distribution of goods, services, and utility supplies. Such countries often have less or no political connections with other countries and do not participate in the world economy. In contrast, a market economy is the opposite of it and is based on privatization and capitalist forces.

When a country transitions, it is a very challenging task for them. They have to face immediate crises like rising inflation, unemployment, and drastic changes in economic policies. Moreover, the transition comes with its short-term losses and long-term visions.

Features

  • The main feature of this transition is that the government lets people participate and establish their businesses, inviting new businesses to the market. It is mainly done with the aim of economic growth.
  • The market becomes flexible, and people explore new choices and various goods not previously in the centrally planned economy.
  • Transition in the economic system induces liberalization in the market and people's minds.
  • The government typically takes this step to bring macroeconomic stability and legal and policy reforms.
  • The economy takes a turn from communism to capitalism with evolving market competition.

Examples

Check out these examples to get a better idea:

Example #1

China, which is known as a communist nation where most of the decisions are taken by the government, has always shown interest in taking small steps towards becoming a country that has a huge market and tons of opportunities.

China's transition economy journey showed great results when, in 2017, its economy was boosted by 6.7%. The nation showed immense effort and ability to relegate its production-driven economy to services and consumption-led system. As a result, they not only have a sustainable strategy for manufacturing but also share a vision for it. In modern times, China is undoubtedly one of the best countries delivering a transition economy example to the world.

Example #2

In 2016, Taiwan, a well-known East Asian country, was transitioning its economy. The country's election ended, and Tsai Ing-Wen was elected the new president. He was very interested in changing laws and bringing positive changes in the country when he sat with many entrepreneurs, invited their ideas, and looked keen to open the country's gates to let new and private businesses explore the Taiwan market.

He enthusiastically believed in the country's medical field talent, and many top students were majoring in medicine. So he believed that Taiwan should welcome this industry and invite many private medical centers. This is one of the prominent transition economy examples present in the real world.

Advantages And Disadvantages

Let us see some advantages and disadvantages in the following section.

Advantages

  • The country lets private companies enter the market and explore business opportunities.
  • New companies bring new technologies and employment opportunities for local workers.
  • The country has become more lenient with international laws and market regulations.
  • It enables a more competitive and dynamic market.
  • Such transitions help nations make good political and business relationships with other countries.

Disadvantages

  • Less government intervention in business and market space.
  • People become more profit-driven, and hence capitalism strengthens.
  • Inequality starts growing and getting bigger with time, which is not there in the command-based economic system.
  • With time, higher interest rates and privatization bring inflation and corruption into the market.

Frequently Asked Questions (FAQs)

Which country is not a transitional economy?

North Korea can be a good example for countries that operate on a command economy. However, other countries like Laos, Cuba, and Vietnam still support a centrally planned economy but have recently become lenient with their regulations and let private enterprises work inside them.

Which countries are transition economies?

Countries like the Republic of China and Vietnam are good examples of transition economies. China, a traditionally communist nation, emerged as a good example, whereas India is in the transition phase. Apart from these, Russia and East European countries like Yugoslavia have taken a more aggressive approach toward transitioning their economies.

What are the key aspects of the transition economy process?

Liberalization and privatization are the most key aspects of the transition economy process. However, it takes time to adopt a transition as many structural transformations occur simultaneously, which leads to macroeconomic stabilization and legal reforms.