Talk:Transition economy

Romania not any more
Since 2000 Romania had become a fully free-market economy. -- Eliade 18:53, 31 July 2006 (UTC)

I am not sure how did you arrive at this list, especially for Asian countries... I am not sure how to help, but there must be some backgorund and references... Also a question to Eliade - How come Romania would not be on the list, when Hungary and Poland are?

List of countries is OR
List of countries is OR, I added the tag. We need reference as to which countries are "Transition economy" or the list should be deleted. Please see WP:OR policy.Farmanesh 13:13, 10 July 2007 (UTC)

I think the list should be in a multicolumn bulleted list for readability. —Preceding unsigned comment added by 173.49.68.191 (talk) 05:37, 27 June 2010 (UTC)

Transition period
The closing sentence of the initial section states the following: "The term transition period is often used to describe the process of transition from capitalism to socialism, preceding the establishment of fully developed socialism." Isn't it actually meant to state the opposite direction, i.e. transition from socialism to capitalism, preceding the establishment of fully developed capitalism? Martin Jurek (talk) 16:59, 21 March 2016 (UTC)

Dr. Popov's comment on this article
Dr. Popov has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

"Dear Wikipedia,

The article has many shortcomings, but it is easier to write a new one than to rewrite this one. Below I deleted some sentences, added others and more important - added the whole section "Transition strategies" with the very telling chart (I will send the word file by e-mail). Hope this helps.

If bthese type of comments are acceptible, I will try to do the same for the other articles that you sent to me. But I cannot promise I can do it before June 11, as you asked.

All the best,  VP

A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a market economy.[1] Transition economies undergo a set of structural transformations intended to develop market-based institutions. These include economic liberalization, where prices are set by market forces rather than by a central planning organization. In addition to this trade barriers are removed, there is a push to privatize state-owned enterprises and resources, state and collectively run enterprises are restructured as businesses, and a financial sector is created to facilitate macroeconomic stabilization and the movement of private capital.[2] The process has been applied in China, the former Soviet Union and Eastern bloc countries of Europe and some Third world countries, and detailed work has been undertaken on its economic and social effects. The transition process is usually characterized by the changing and creating of institutions, particularly private enterprises; changes in the role of the state, thereby, the creation of fundamentally different governmental institutions and the promotion of private-owned enterprises, markets and independent financial institutions.[3] In essence, one transition mode is the functional restructuring of state institutions from being a provider of growth to an enabler, with the private sector its engine. Another transition mode is change the way that economy grows and practice mode. The relationships between these two transition modes are micro and macro, partial and whole. The truly transition economics should include both the micro transition and macro transition.[citation needed] Due to the different initial conditions during the emerging process of the transition from planned economics to market economics, countries uses different transition model. Countries like P.R.China and Vietnam adopted a gradual transition mode, however Russia and some other East-European countries, such as the former Socialist Republic of Yugoslavia, used a more aggressive and quicker paced model of transition.[citation needed] The term transition period is often used to describe the process of transition from capitalism to socialism, preceding the establishment of fully developed socialism. Contents [hide] •	1 Transition indicators •	2 Context •	3 Transition in practice •	4 Process •	5 Countries in transition •	6 Branch of economics •	7 See also •	8 References •	9 External links o	9.1 Mongolia Transition indicators[edit] The existence of private property rights may be the most basic element of a market economy, and therefore implementation of these rights is the key indicator of the transition process. The main ingredients of the transition process are: •	Liberalization – the process of allowing most prices to be determined in free markets and lowering trade barriers that had shut off contact with the price structure of the world's market economies. •	Macroeconomic stabilization – bringing inflation under control and lowering it over time, after the initial burst of high inflation that follows from liberalization and the release of pent-up demand. This process requires discipline over the government budget and the growth of money and credit (that is, discipline in fiscal and monetary policy) and progress toward sustainable balance of payments.[4] •	Restructuring and privatization – creating a viable financial sector and reforming the enterprises in these economies to render them capable of producing goods that could be sold in free markets and transferring their ownership into private hands. •	Legal and institutional reforms – redefining the role of the state in these economies, establishing the rule of law, and introducing appropriate competition policies.[5] According to Oleh Havrylyshyn and Thomas Wolf of the International Monetary Fund, transition in a broad sense implies: •	liberalizing economic activity, prices, and market operations, along with reallocating resources to their most efficient use; •	developing indirect, market-oriented instruments for macroeconomic stabilization; •	achieving effective enterprise management and economic efficiency, usually through privatization; •	imposing hard budget constraints, which provide incentives to improve efficiency; and •	establishing an institutional and legal framework to secure property rights, the rule of law, and transparent market-entry regulations.[6] Edgar Feige, cognizant of the trade-off between efficiency and equity, suggests[7] that the social and political costs of transition adjustments can be reduced by adopting privatization methods that are egalitarian in nature, thereby providing a social safety net to cushion the disruptive effects of the transition process. The European Bank for Reconstruction and Development (EBRD) developed a set of indicators to measure the progress in transition. The classification system was originally created in the EBRD's 1994 Transition Report, but has been refined and amended in subsequent Reports. The EBRD's overall transition indicators are: •	Large-scale privatization •	Small-scale privatization •	Governance and enterprise restructuring •	Price liberalization •	Trade and foreign exchange system •	Competition policy •	Banking reform and interest rate liberalization •	Securities markets and non-bank financial institutions •	Infrastructure reform[8] Context[edit] Further information: Soviet-type economic planning The economic malaise affecting the Comecon countries – low growth rates and diminishing returns on investment – led many domestic and Western economists to advocate market-based solutions and a sequenced programme of economic reform. It was recognized that micro-economic reform and macro-economic stabilization had to be combined carefully. Price liberalization without prior remedial measures to eliminate macro-economic imbalances, including an escalating fiscal deficit, a growing money supply due to a high level of borrowing by state-owned enterprises, and the accumulated savings of households (“monetary overhang”) could result in macro-economic destabilization instead of micro-economic efficiency. Unless entrepreneurs enjoyed secure property rights and farmers owned their farms the process of Schumpeterian “creative destruction” would limit the reallocation of resources and prevent profitable enterprises from expanding to absorb the workers displaced from the liquidation of non-viable enterprises. A hardening of the budget constraints at state-owned enterprises would halt the drain on the state budget from subsidization but would require additional expenditure to counteract the resulting unemployment and drop in aggregate household spending. Monetary overhang meant that price liberalization might convert “repressed inflation” into open inflation, increase the price level still further and generate a price spiral. The transition to a market economy would require state intervention alongside market liberalization, privatization and deregulation. Rationing of essential consumer goods, trade quotas and tariffs and an active monetary policy to ensure that there was sufficient liquidity to maintain commerce might be needed.[9] In addition to tariff protection, measures to control capital flight were also considered necessary in some instances.[10]

Transition strategies 25 years ago, on the eve of transition, economic discussion in the profession was dominated by the debate between shock therapists, who advocated radical reforms and rapid transformation, and gradualists, justifying a more cautious and piecemeal approach to reforms. Shock therapists pointed out to the example of East European countries and Baltic states – fast liberalizers and successful stabilizers, that experienced a recovery after 2 to 3 years fall in output, while their CIS counterparts were doing much worse. Gradualists cited the example of China, arguing that the lack of recession and high growth rates is the direct result of the step by step approach to economic transformation.

Definition. Although there is no commonly accepted definition, most economists would probably agree that several criteria are applied to distinguish shock therapy from gradualist strategy: •	Instant (as opposed to step by step) deregulation of prices; introduction of convertibility of national currency; •	Macroeconomic stabilization (bringing down inflation to less than 40% a year in 6 months); •	Cutting subsidies from 10-15% GDP to 2-3% GDP during 1-2 years; •	 Privatization of 50% of state property during 2-3 years or faster.

According to such a definition, central European countries proceeded successfully with consistent shock therapy, Russia and most CIS states tried shock therapy, but were not able to adhere to it in a consistent way (instant deregulation of prices and fast privatization, but  no macroeconomic stabilization and reduction of subsidies), whereas China with its strategy of “dual track price system” (coexistence of controlled prices for planned input and output and market prices for freely purchased and sold goods for over a decade) and  “growing out of socialism” (no privatization, but permission to start non-state businesses from scratch that were growing faster than state sector) is a classical (and the only perfect) example  of gradualism.

Arguments. Shock therapists were arguing that “one cannot cross the abyss in two jumps”, that rapid liberalization allows to avoid painful and costly period, when the old centrally planned economy (CPE) is not working already, while the new market one is not working yet. No less important was the political reason – the assumption (that later proved to be wrong – see last section) that there is a window of opportunity for reforms (before the decline in real incomes and other costs would cause public discontent), so that if liberalization and privatization are not fast enough, reforms could be reversed (Castanheira, Popov, 2002).

Gradualists in turn stressed that protection of property rights is essential for growth whereas privatization creates uncertainty with property rights, so it is better to “grow out of socialism” like China did; that institutional vacuum resulting from rapid transition (market economy without appropriate regulatory institutions) may have a devastating impact on output; that resources need to be re-allocated from non-competitive to competitive sectors, which may take considerable time; that for senior citizens even a temporary decline in real incomes is not acceptable, so if the government is too weak to ensure transfers, the elderly would loose.

Evolution of views. In the early 1990s the predominant view was that of the “Washington consensus” that basically advocated shock therapy. The conventional wisdom of the day was probably summarized in the 1996 World Development Report (WDR) From Plan to Market, which basically stated that differences in economic performance were associated mostly with "good and bad" policies, in particular with the progress in liberalization and macroeconomic stabilization: countries that are more successful than others in introducing market reforms and bringing down inflation were believed to have better chances to limit the reduction of output and to quickly recover from the transformational recession.

“Consistent policies, combining liberalization of markets, trade, and new business entry with reasonable price stability, can achieve a great deal even in countries lacking clear property rights and strong market institutions”, – was one of the major conclusions of the WDR 1996 (World bank, 1996, p. 142).

The conclusion did not withstand the test of time, since by now most economists would probably agree that because liberalization was carried out without strong market institutions it led to the extraordinary output collapse in CIS states. Liberalization may be important, but the devil is in details, which often do not fit into the generalizations and make straightforward explanations look trivial.

Theory. Among many explanations for the transformational recession that occurred in the 1990s in most transition economies there is one that hardly anyone can deny: an adverse supply shock caused by the change in relative prices. The evidence for all transition economies is that the reduction of output by country is well explained by the indicator of distortions in industrial structure and trade patterns (it remains statistically significant no matter what control variables are added). The magnitude of distortions, in turn, determines the change in relative prices, when they are deregulated. In Russia industries with the greatest adverse supply shock (deteriorating terms of trade – relative price ratios for outputs and inputs), such as light industry, experienced the largest reduction of output (Popov, 2007).

Consider a country where deregulation of prices (or elimination of trade tariffs/subsidies) leads to a change in relative price ratios and thus produces an adverse supply shock for at least some industries. Capital should be reallocated from industries facing declining relative prices and profitability to industries with rising relative prices. Assume that 50% of the total output is concentrated in non-competitive industries (this whole sector should disappear either gradually or at once depending on how fast relative prices will change); capital is not homogeneous and cannot be moved to the competitive sector, whereas labor can be reallocated to the competitive sector without costs.

If prices are liberalized instantly, then non-competitive sector becomes unprofitable and output falls immediately by 50%; later savings for investment are generated only by the competitive sector, so it takes a number of years to reach the pre-recession level of output. If reforms are carried out slowly (gradual price deregulation or elimination of tariffs/subsidies), so that every year output in the non-competitive sector falls by, say, 10%, this fall could be largely compensated by the increase in output in the competitive sector. The best trajectory, of course, is the one with such a speed of deregulation that leads to the reduction of output in the non-competitive sector at a natural rate, i.e. as its fixed capital stock retires in the absence of new investment.

The example illustrates that there is a limit to the speed of reallocating capital from non-competitive to competitive industries, which is determined basically by the net investment/GDP ratio (gross investment minus retirement of capital stock in the competitive industries, since in non-competitive industries the retiring capital stock should not be replaced anyway). It is not reasonable to wipe away output in non-competitive industries faster than capital is being transferred to more efficient industries (Popov, 2007).

Market type reforms in many post-communist economies created exactly this kind of a bottleneck. Countries that followed shock therapy path found themselves in a supply-side recession that is likely to become a textbook example: an excessive speed of change in relative prices required the magnitude of restructuring that was simply non-achievable with the limited pool of investment. Up to half of their economies was made non-competitive overnight due to the change in relative prices after deregulation. Output in these non-competitive industries was falling for several years and fell in some cases to virtually zero, whereas the growth of output in competitive industries was constrained, among other factors, by the limited investment potential and was not strong enough to compensate for the output loss in the inefficient sectors.

Hence, at least one general conclusion from the study of the experience of transition economies appears to be relevant for the reform process in all countries: provided that reforms create a need for restructuring (reallocation of resources), the speed of reforms should be such that the magnitude of required restructuring does not exceed the investment potential of the economy. In short, the speed of adjustment and restructuring in every economy is limited, if only due to the limited investment potential needed to reallocate capital stock. This is the main rationale for gradual, rather than instant, phasing out of tariff and non-tariff barriers, of subsidies and other forms of government support of particular sectors (it took nearly 10 years for the European Economic Community and for NAFTA to abolish tariffs).

Empirical evidence. The collapse of output during transition can be best explained as adverse supply shock caused mostly by a change in relative prices after their deregulation due to distortions in industrial structure and trade patterns accumulated during the period of central planning (additional adverse supply shock came from the collapse of state institutions), while the speed of liberalization, to the extent it was endogenous, i.e. determined by political economy factors, had an adverse effect on performance. In contrast, at the recovery stage the ongoing liberalization starts to affect growth positively, whereas the impact of pre-transition distortions disappears. Institutional capacity and reasonable macroeconomic policy, however, continue to be important prerequisites for successful performance (Popov, 2000, 2007, 2014).

Not surprisingly, in 2004-05 the list of countries that exceeded the pre-recession level of output in 1989 included a lot of procrastinators in terms of economic liberalization: in addition to 5 central European countries and Estonia, there were also Turkmenistan, Uzbekistan, Belarus and Kazakhstan, not to speak about China and Vietnam. In 2012, after the “Great recession” of 2008-09, Central European countries and Estonia fell out from the list, whereas Azerbaijan joined the club of top performers (fig. ; Popov, 2013).

Fig. GDP change in FSU economies, 1989 = 100% Source: (Popov, 2013, based on EBRD Transition Reports for various years. Central Europe is the unweighted average for Czech Republic, Hungary, Poland, Slovakia, and Slovenia.

As time passed, there appeared statistics that allowed to test the predictions of theories. Quite a number of studies were undertaken with the intention to prove that fast liberalization and macro-stabilization pays off and finally leads to better performance (Sachs, 1996; De Melo, Denizer, and Gelb, 1996; Fisher, Sahay, Vegh, 1996; Aslund, Boone, Johnson, 1996; Breton, Gros, and Vandille, 1997). To prove the point, the authors tried to regress output changes during transition on liberalization indices developed by De Melo et al. (1996) and by EBRD (published in its Transition Reports), on inflation and different measures of initial conditions.

But attempts to link differences in output changes during transition to the cumulative liberalization index and to macro stabilization (rates of inflation) have not yielded any impressive results: it turned out that dummies, such as membership in the ruble zone (i.e. FSU) and war destruction, are much more important explanatory variables than either the liberalization index or inflation (Åslund, Boone, Johnson, 1996). Other studies that tried to take into account a number of initial conditions (repressed inflation – monetary overhang – before deregulation of prices, trade dependence, black market exchange rate premium, number of years under central planning, urbanization, over-industrialization, and per capita income) found that initial conditions do matter and that in some cases liberalization becomes insignificant as well (De Melo, Denizer, Gelb and Tenev, 1997, p. 25; Heybey, Murrel, 1999). Other papers (Katyshev, Polterovich, 2006; Godoy, Stiglitz, 2006; Popov, 2007) showed that the speed of reforms and privatization has a negative impact on output at the stage of the transformational recession and that institutional capacity of the state is a crucial factor of output dynamics (Polterovich, 2008; Popov, 2014).

Political economy of transition. The criteria for the success or failure of a particular strategy of transition was not always linked to the dynamics of output, income and welfare after reforms. A huge importance was attached by the interested parties in post-communist countries and in the West to the “victory of capitalism and democracy”, elimination of communism and to irreversibility of reforms (Kolmorgen, 2007).

The conventional wisdom before transition tended to identify reform with liberalization and even suggested that democracy may threaten the reform process (Pickel, 1993). The implicit assumption was that deregulation and greater marketization (liberalization and reform) should inevitably lead to greater efficiency in the allocation of resources, and hence will necessarily increase the total welfare in the long run. In the short-term, however, it was understood that reforms can cause considerable losses for certain groups of the population and thus provoke resistance to reform. It was therefore suggested that reforms should be implemented quickly (shock therapy), before the pain of reforms generates opposition that makes further reforms politically impossible. In fact, one of the major justifications of shock therapy was the belief that reformers have a narrow window of opportunity – if they were not be able to capitalize on the reform momentum, the democratic process would finally allow the losers to gain strength and stall the reforms. “The concentration of political power, limited political competition and rapid implementation enhance the prospects of the adoption of economic reforms”, – this is how the conventional wisdom was summarized in the 1999 EBRD Transition report (EBRD, 1999, p.102). This conventional wisdom emerged mostly from the analysis of the reform experience in developing countries.

Nothing of this sort seemed to have happened in transition economies. First, as was argued earlier, the pace of reforms did not have a significant impact on performance, which was determined mostly by initial conditions, by the institutional capacity of the state, and by how prudent macroeconomic policy was. Countries lagging behind the front-runners (in terms of liberalization) in many cases did better than most advanced reformers. Land has never been neither privatized nor traded in China during the reform period, but agricultural output grew faster than in other transition countries.

Secondly, and surprisingly, the pace of reform/liberalization turned out to be higher in countries with stronger democratic institutions, less stable governments, frequent elections and changes of governments. While reforms in East European countries were initially carried out by non- communist parties, later, when opposition communist-successor parties came to power, they did not reverse the reforms and sometimes even did not slow down the pace of liberalization. The Transition Report (EBRD, 1999, chapter 5) provides evidence that there is a positive correlation between the reform index on the one hand and the dissolution of political power on the other. Countries with limited executive power (limited authority of the president and/or the prime-minister), with governments based on coalitions rather than on a firm parliamentary majority, with the frequent changes of governments (short average tenure of governments), and with higher level of democracy in general were also ahead of others in terms of the speed of economic reforms. Hellman (1998) examines the cases in which reforms got stuck and concludes that the frequency of elections actually helped to push reforms forward. The more elections the country had, the better were the chances to re-ignite the reforms. Dethier, Ghanem and Zoli (1999), using panel data from 25 post-communist countries, argued that democracy facilitates economic liberalization. While the way the causation runs is still disputable, there is little doubt that economic liberalization and democratization in post communist countries were going hand in hand (Castanhiera, Popov, 2002).

<References Åslund, Anders, Boone, Peter, and Johnson, Simon (1996). How to Stabilize: Lessons from Postcommunist Countries. - Brookings Papers Econom. Activity, 1: 217-313, 1996.

Breton, Paul, Gros, Daniel and Vandille, Guy (1997). Output Decline and Recovery in the Transition Economies: Causes and Social Consequences. - Economics of  Transition, Vol. 5 (1), pp. 113-130, 1997.

Castanheira, Micael and Vladimir Popov. (2002). “Political Economy of Growth in Transition Economies” Paper written for Filer, R. (ed) Growth in Transition.

De Melo, Martha, Denizer Cevdet, Gelb, Alan, and Tenev, Stoyan (1997). Circumstance and Choice: The Role of Initial Conditions and Policies in Transitions Economies. The World Bank. International Financial Corporation. October 1997.

De Melo, Martha, Denizer, Cevdet, and Gelb, Alan (1996). Patterns of Transition From Plan to Market. - World Bank Econom. Review, 3: 397-424, 1996.

Dethier J.-J., Ghanem, H. and Zoli, E.  (1999). .Does Democracy Facilitate the Economic Transition? An Empirical Study of Central and Eastern Europe and the Former Soviet Union. World Bank mimeo.

EBRD (1999). Transition Report 1999. EBRD, 1999.

Fisher, Stanley, Sahay, Ratna, Vegh, Carlos, A. (1996). Stabilization and Growth in the Transition Economies: The Early Experience. - Journal of Economic Perspectives, 10 (2), 1996, pp. 45-66.

Godoy, Sergio and Joseph Stiglitz (2006). "Growth, Initial Conditions, Law and Speed of Privatization in Transition Countries: 11 Years Later," NBER Working Papers 11992, National Bureau of Economic Research, Inc.

Hellman, J. (1998), Winners Take All: The politics of Partial Reform. – World Politics, 50: 58-74.

Heybey, Berta and Murrell, Peter (1999). The Relationship between Economic Growth and the Speed of Liberalization During Transition. – Journal of Policy Reform, 3 (2), 1999. Katyshev, Pavel, Victor Polterovich (2006). Reform policies, initial conditions and transformational recession. NES working paper, WP/2006/065. (http://www.nes.ru/dataupload/files/programs/econ/preprints/2006/Katyshev_Polterovich.pdf). Kollmorgen, Raj (2007). Postcommunist Transformations in Central and Eastern Europe: Between Success and Failure (Paper prepared for the Symposium: Europe at the Beginning of the 21st Century: Opportunities and Challenges, Thursday, April 19, 2007, Institute for European Studies at the University of British Columbia, Vancouver, Canada).

PICKEL, ANDREAS (1993). Authoritarianism or democracy? Marketization as a political problem. - Policy Sciences, 26: 139-163, 1993.

Polterovich, V. (2008). Institutional Trap. The New Palgrave Dictionary of Economics, Second Edition, 2008.

Popov, V. (2000). Shock Therapy versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational Recession). – Comparative Economic Studies, Vol. 42, Spring, 2000, No. 1, pp. 1-57. Popov, V. (2007). Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies after 15 Years of Reforms. - Comparative Economic Studies, Vol. 49, Issue 1, March 2007, pp. 1-31. Popov, V. (2013). An Economic Miracle in the Post-Soviet Space: How Uzbekistan Managed to Achieve What No Other Post-Soviet State Has. MPRA Paper No. 48723, posted 31 July 2013. Popov, V. (2014). Mixed Fortunes. An Economic History of China, Russia and the West. OUP, 2014. Sachs, Jeffrey D. (1996). The Transition at Mid Decade. - Amer. Econom. Review Papers Proc., 86:2, pp. 128-133. World Bank (1996). From Plan to Market. World Development Report, 1996. >

Transition in practice[edit] It is usually believed that the most influential strategy for the transition to a market economy was that adopted by Poland launched in January 1990. But China was carrying out transition to the market gradually from 1979 and Vietnam was exercising gradual transition from 1986 (Doi Moi course) and deregulated 90% of the prices overnight from April 1, 1989. Polish strategy was strongly influenced by IMF and World Bank analyses of successful and unsuccessful stabilization programmes which had been adopted in Latin America in the 1980s. The strategy incorporated a number of interdependent measures including macro-economic stabilization; the liberalization of wholesale and retail prices; the removal of constraints to the development of private enterprises and the privatization of state-owned enterprises; the elimination of subsidies and the imposition of hard budget constraints; and the creation of an export-oriented economy that was open to foreign trade and investment. The creation of a social safety net targeted at the individual to compensate for the removal of job security and the removal of price controls on staple goods was also part of the strategy.[11] The choice of the transition strategy was influenced by the critical state of most post-socialist countries. Policy-makers were persuaded that political credibility took precedence over a sequenced reform plan and to introduce macro-economic stabilization measures ahead of structural measures that would by their nature take longer to implement. The “credibility” of the transition process was enhanced by the adoption of the Washington Consensus favoured by the IMF and the World Bank. Stabilization was deemed a necessity in Hungary and Poland where state budget deficits had grown and foreign debts had become larger than the country’s capacity to service. Western advisers and domestic experts working with the national governments and the IMF introduced stabilization programmes aiming to achieve external and internal balance, which became known as shock therapy. It was argued that “one cannot jump over a chasm in two leaps”.[12] The many foreign advisers from, principally, the United States, the United Kingdom and Sweden were often under contract to the international financial institutions and bilateral or multilateral technical assistance programmes. They favoured free trade and exchange rate convertibility rather than trade protection and capital controls, which might have checked capital flight. They tended to support privatization without prior industrial restructuring; an exception was to be found in Eastern Germany where the Treuhand (Trust Agency) prepared state-owned enterprises for the market at considerable cost to the government.[13] Western technical assistance programmes were established by European Union – through the Phare and TACIS programmes – and other donors (including the US AID, the UK Know-how Fund and UNDP) and by the IMF, the World Bank, EBRD and KfW, which also advanced loans for stabilization, structural adjustment, industrial restructuring and social protection. Technical assistance was delivered through the exchange of civil servants and by management consultants, including Agriconsulting, Atos, COWI, Ernst & Young, GOPA, GTZ, Human Dynamics, Idom, IMC Consulting, Louis Berger, NIRAS, PA Consulting, PE International, Pohl Consulting, PwC, and SOFRECO. It had been expected that the introduction of current account convertibility and foreign trade liberalization would force a currency devaluation that would support export-led growth.[14] However, when prices were de-controlled enterprises and retailers raised their prices to match those prevailing in the black market or towards world price levels, earning them windfall profits initially. Consumers reacted by reducing their purchases and by substituting better quality imported goods in place of domestically produced goods. Falling sales led to the collapse of many domestic enterprises, with personnel lay-offs or reduced hours of work and pay. This further reduced effective demand. As imports grew and exporters failed to respond to opportunities in world markets due to the poor quality of their products and lack of resources for investment, the trade deficit expanded, putting downward pressure on the exchange rate. Many wholesalers and retailers marked prices according to their dollar values and the falling exchange rate fed inflation. The central banks in several countries raised interest rates and tightened credit conditions, depriving state agencies and enterprises of working capital. These in turn found it impossible to pay wages on time, dampening effective demand further.[15] The impacts of the conventional transition strategies proved to be de-stabilizing in the short-term and left the population impoverished in the long-term. Economic output declined much more than expected. The decline in output lasted until 1992-96 for all transition economies. By 1994, economic output had declined across all transition economies by 41 percent compared to its 1989 level. The Central and Eastern European economies began growing again around 1993, with Poland, which had begun its transition programme earliest emerging from recession in 1992. The Baltic States came out of recession in 1994 and the rest of the former Soviet Union around 1996. Inflation remained above 20 percent a year (except in the Czech Republic and Hungary) until the mid-1990s. Across all transition economies the peak annual inflation rate was 2632 percent (4645 percent in the CIS).[16] Unemployment increased and wages fell in real terms, although in Russia and other CIS economies the rate of unemployment recorded at employment exchanges remained low. Labour force surveys undertaken by the International Labour Organization showed significantly higher rates of joblessness and there was considerable internal migration.[17] High interest rates induced a “credit crunch” and fuelled inter-enterprise indebtedness and hampered the expansion of small and medium-sized enterprises, which often lacked the connections to obtain finance legitimately.[18] In time domestic producers were able to upgrade their production capacity and foreign direct investment was attracted to the transition economies. Local-manufactured higher quality consumer goods became available and won market share back from imports. Stabilization of the exchange rate was made more difficult by large-scale capital flight, with domestic agents sending part of their earning abroad to destinations where they believed their capital was more secure. The promise of European Union membership and the adoption of the EU’s legislation and regulations (the Community acquis or ‘’acquis communautaire’’) helped secure trust in property rights and economic and governmental institutions in much of Central and Eastern Europe. Some economists have argued that the growth performance of the transition economies stemmed from the low level of development, decades of trade isolation and distortions in the socialist planned economies. They have emphasized that the transition strategies adopted reflected the need to resolve the economic crisis besetting the socialist planned economies and the overriding objective was the transformation to capitalist market economies rather than the fostering of economic growth and welfare.[19] But by 2000, the EBRD was reporting that the effects of the initial starting point in each transition economy on the reform process had faded. Although the foundations had been laid for a functioning market economy through sustained liberalization, comprehensive privatization, openness to international trade and investment, and the establishment of democratic political systems there remained institutional challenges. Liberalized markets were not necessarily competitive and political freedom had not prevented powerful private interests from exercising undue influence.[20] Ten years on, in the Transition Report for 2010, the EBRD was still finding that the quality of market-enabling institutions continued to fall short of what was necessary for well-functioning market economies. Growth in the transition economies had been driven by trade integration into the world economy with “impressive” export performance, and by “rapid capital inflows and a credit boom”. But such growth had proved volatile and the EBRD considered that governments in the transition economies should foster the development of domestic capital markets and improve the business environment, including financial institutions, real estate markets and the energy, transport and communications infrastructure. The EBRD expressed concerns about regulatory independence and enforcement, price setting, and the market power of incumbent infrastructure operators.[21] Income inequality as measured by the Gini coefficient rose significantly in the transition economies between 1987 and 1988 and the mid-1990s. Poverty re-emerged with between 20 and 50 percent of people living below the national poverty line in the transition economies. The UN Development Programme calculated that overall poverty in Eastern Europe and the CIS increased from 4 percent of the population in 1988 to 32 percent by 1994, or from 14 million people to 119 million.[22] Unemployment and rates of economic inactivity were still high in the late 1990s according to survey data.[23] By 2007, the year before the global financial crisis hit, the index for GDP had reached 112 compared to 100 in 1989 for the transition economies. In other words, it took nearly 20 years to restore the level of output that had existed prior to the transition. The index of economic output (GDP) in the countries of Central and Eastern Europe was 151 in 2007; for the Balkans/ South-eastern Europe the index was 111, and for the Commonwealth of Independent States and Mongolia it was 102. Several CIS countries in the Caucasus and Central Asia as well as Moldova and Ukraine had economies that were substantially smaller than in 1989.[24] The global recession of 2008-09 and the Eurozone crisis of 2011-13 destabilized the transition economies, reduced growth rates and increased unemployment. The slowdown hit government revenues and widened fiscal deficits but almost all transition economies had experienced a partial recovery and had maintained low and stable inflation since 2012.[25] Process[edit] Transition trajectories have varied considerably in practice. Some nations have been experimenting with market reform for several decades, while others are relatively recent adopters (e.g., Republic of Macedonia, Serbia and Montenegro). In some cases reforms have been accompanied with political upheaval, such as the overthrow of a dictator (Romania), the collapse of a government (the Soviet Union), a declaration of independence (Croatia), or integration with another country (East Germany). In other cases economic reforms have been adopted by incumbent governments with little interest in political change (China, Laos, Vietnam).[26] Transition trajectories also differ in terms of the extent of central planning being relinquished (e.g., high centralized coordination among the CIS states) as well as the scope of liberalization efforts being undertaken (e.g., relatively limited in Romania). Some countries, such as Vietnam, have experienced macro-economic upheavals over different periods of transition, even transition turmoil.[27] According to the World Bank's 10 Years of Transition report "... the wide dispersion in the productivity of labour and capital across types of enterprises at the onset of transition and the erosion of those differences between old and new sectors during the reform provide a natural definition of the end of transition."[28] Mr. Vito Tanzi, Director of the IMF's Fiscal Affairs Department, gave definition that the transformation to a market economy is not complete until functioning fiscal institutions and reasonable and affordable expenditure programs, including basic social safety nets for the unemployed, the sick, and the elderly, are in place. Mr Tanzi stated that these spending programs must be financed from public revenues generated—through taxation—without imposing excessive burdens on the private sector.[29] According to the EBRD a well-functioning market economy should enjoy a diverse range of economic activities, equality of opportunity and convergence of incomes. These outcomes had not yet been achieved by 2013 and progress in establishing well-functioning market economies had stalled since the 1990s. On the EBRD’s measure of transition indicators the transition economies had become “stuck in transition”. Price liberalization, small-scale privatization and the opening-up of trade and foreign exchange markets were mostly complete by the end of the 1990s. However economic reform had slowed in areas such governance, enterprise restructuring and competition policy, which remained substantially below the standard of other developed market economies.[30] Inequality of opportunity was higher in the transition economies of Central and Eastern Europe and Central Asia than in some other developed economies in Western Europe (except France, where inequality of opportunity was relatively high). The highest inequality of opportunity was found in the Balkans and Central Asia. In terms of legal regulations and access to education and health services, inequality of opportunity related to gender was low in Europe and Central Asia but medium to high in respect of labour practices, employment and entrepreneurship and in access to finance. In Central Asia women also experienced significant lack of access to health services, as was the case in Arab countries.[31] While many transition economies performed well with respect to primary and secondary education, and matched that available in many other developed economies, they were weaker when it came to training and tertiary education.[32] Over the decade 1994 to 2004, the transition economies had closed some of the gap in income per person with the average for the European Union in purchasing power parity terms. These gains had been driven by sustained growth in productivity as obsolete capital stock was scrapped and production shifted to take advantage of the opening-up of foreign trade, price liberalization and foreign direct investment. However the rapid growth rates of that period of catch-up had stalled since the late 2000s and the prospects for income convergence have receded according to the EBRD’s prognosis, unless there are additional productivity-enhancing structural reforms.[33] The recent history of transition suggested that weak political institutions and entrenched interest groups had hindered economic reform. The EBRD’s Transition Report 2013 looked at the relationship between transition and democratization. The report acknowledged that the academic literature was divided on whether economic development fostered democracy but argued that there was nonetheless strong empirical support for the hypothesis. It suggested that countries with high inequality were less inclined to support a limited and accountable state. In general, the proportion of the population with an income of between US$10–50 a day (the so-called “middle class”) correlated with the level of democracy; however this correlation disappeared in transition countries with high income inequality. Those countries with large natural resource endowments, for example oil and gas producers like Russia and Kazakhstan, had less accountable governments and faced less electoral pressure to tackle powerful vested interests because the government could rely on resource rents and did not have to tax the population heavily. Countries with a strong institutional environment – that is, effective rule of law, secure property rights and uncorrupted public administration and corporate governance – were better placed to attract investment and undertake restructuring and regulatory change.[34] To spur further economic reform and break out of a vicious circle, the EBRD Transition Report 2013 proposed that the transition economies should: •	Open-up trade and finance, which made reform more resilient to popular pressure (“market aversion”) and meant that countries could access the EU single market either as member states or through association agreements (such as those being negotiated with Ukraine, Moldova and Georgia); •	Encourage transparent and accountable government, with media and civil society scrutiny, and political competition at elections; •	Invest in human capital, especially by improving the quality of tertiary education.[35] Countries in transition[edit] Although the term "transition economies" usually covers the countries of Central and Eastern Europe and the Former Soviet Union, this term may have a wider context. There are countries outside of Europe, emerging from a socialist-type command economy towards a market-based economy (e.g., China). Moreover, in a wider sense the definition of transition economy refers to all countries which attempt to change their basic constitutional elements towards market-style fundamentals. Their origin could be also in a post-colonial situation, in a heavily regulated Asian-style economy, in a Latin American post-dictatorship or even in a somehow economically underdeveloped country in Africa.[3] In 2000, the IMF listed the following countries with transition economies:[5] •	Albania •	Armenia •	Azerbaijan •	Belarus •	Bulgaria •	Cambodia •	China •	Croatia •	Czech Republic •	Estonia •	Georgia •	Hungary •	Latvia •	Lithuania •	Kazakhstan •	Kyrgyz Republic •	Laos •	Republic of Macedonia •	Moldova •	Poland •	Romania •	Russia •	Slovak Republic •	Slovenia •	Tajikistan •	Turkmenistan •	Ukraine •	Uzbekistan •	Vietnam In addition, in 2002 the World Bank defined Bosnia and Herzegovina, and the Federal Republic of Yugoslavia (later Serbia and Montenegro) as transition economies.[28] In 2009, World Bank included Kosovo in the list of transition economies.[36] Some World Bank studies also include Mongolia.[37] According to the IMF, Iran is in transition to a market economy, demonstrating early stages of a transition economy.[38] The eight first-wave accession countries, which joined the European Union on 1 May 2004 (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia) and the two second-wave accession countries that joined on 1 January 2007 (Romania and Bulgaria) have completed the transition process.[39] According to the World Bank, "the transition is over" for the 10 countries that joined the EU in 2004 and 2007.[40] It can be also understood as all countries of the Eastern Bloc.[41] Branch of economics[edit] Transition economics is a special branch of economics dealing with the transformation of a planned economy to a market economy. It has become especially important after the collapse of Communism in Central and Eastern Europe. Transition economics investigates how an economy should reform itself to endorse capitalism and democracy. There are usually two sides: one which argues for a rapid transformation and one which argues for a gradual approach. Gérard Roland's book Transition and Economics. Politics, Markets and Firms (MIT Press 2000) gives a good overview of the field. A more recent overview is provided in Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia by Martin Myant and Jan Drahokoupil.[42] See also[edit] •	Soviet-type economy •	Planned economy •	Mixed economy •	Marketization •	Privatization •	Corporatization •	Real socialism References[edit] 1.	Jump up ^ Feige, Edgar L. (1994). "The Transition to a Market Economy in Russia: Property Rights, Mass Privatization and Stabilization" (PDF). In Alexander, Gregory S.; Skąpska, Grażyna. A Fourth way?: privatization, property, and the emergence of new market economics (PDF). Routledge. pp. 57–78. ISBN 978-0-415-90697-5. 2.	Jump up ^ Feige, Edgar L. (1991). "Perestroika and Ruble Convertibility" (PDF). Cato Journal (Cato Institute) 10 (3). Retrieved 2011-07-03. 3.	^ Jump up to: a b Falke, Mike. Community Interests: An Insolvency Objective in Transition Economies?, No. 01/02, Frankfurter Institut für Transformationsstudien 4.	Jump up ^ Aristovnik, Aleksander (2006-07-19). "The Determinants & Excessiveness of Current Account Deficits in Eastern Europe and the Former Soviet Union" (PDF). William Davidson Institute, University of Michigan. Retrieved 2010-07-05. 5.	^ Jump up to: a b "Transition Economies: An IMF Perspective on Progress and Prospects". IMF. 2000-11-03. Retrieved 2009-03-09. 6.	Jump up ^ Havrylyshyn, Oleh; Wolf, Thomas. Determinants of Growth in Transition Countries, Finance & Development Magazine, June 1999, Volume 36, Number 2 by the International Monetary Fund 7.	Jump up ^ Feige, Edgar L. Perestroika and Socialist Privatization: What is to be Done? and How?, Comparative Economic Studies Vol. XXXII, No.3 Fall 1990] 8.	Jump up ^ EBRD's 1994 Transition Report 9.	Jump up ^ Padma Desai, The Soviet Economy: Problems and Prospects, 1990, Oxford: Basil Blackwell, pp. xiii-xxii and 164 ISBN 0-631-17183-5 10.	Jump up ^ Michael Kaser on Privatization in the CIS in Alan Smith (editor), Challenges for Russian Economic Reform, 1995, London: Royal Institute for International Affairs and Washington DC: The Brookings Institution, p. 122. 11.	Jump up ^ Alan Smith, Introduction in Alan Smith (editor), Challenges for Russian Economic Reform, 1995, London: Royal Institute for International Affairs and Washington DC: The Brookings Institution, p. 5. 12.	Jump up ^ Marie Lavigne, The Economies of Transition: From socialist economy to market economy, 1995, London: Macmillan, pp. 117-119, 121 ISBN 0-333-52731-3 13.	Jump up ^ Michael Kaser on Privatization in the CIS in Alan Smith (editor), Challenges for Russian Economic Reform, 1995, London: Royal Institute for International Affairs and Washington DC: The Brookings Institution, pp. 122-123. 14.	Jump up ^ Marie Lavigne, The Economies of Transition: From socialist economy to market economy, 1995, London: Macmillan, pp. 116-117, 121 ISBN 0-333-52731-3 15.	Jump up ^ Marie Lavigne, The Economies of Transition: From socialist economy to market economy, 1995, London: Macmillan, pp. 130-135, 121 ISBN 0-333-52731-3 16.	Jump up ^ IMF staff estimates in Stanley Fischer, Ratna Sahay and Carlos Vegh, Stabilization and growth in transition economies: The early experience, April 1996, IMF Working Paper WP/96/31, Table 2, p. 8; downloaded from http://mpra.ub.uni-muenchen.de/20631/; retrieved on 1/11.2013; UNDP, Human Development Report for Central and Eastern Europe and the CIS, 1999, New York: United Nations Development Programme, Table 2.1, p. 14 ISBN 92-1-126109-0. 17.	Jump up ^ Simon Clarke (editor), Structural Adjustment without Mass Unemployment? Lessons from Russia, 1998, Cheltenham: Edward Elgar, pp. 40-41, 49 and 53 ISBN 1-85898-713-X; J L Porket, Unemployment in Capitalist, Communist and Post-Communist Economies, 1995, London: Macmillan pp. 98-100 and 117 ISBN 0-312-12484-8. 18.	Jump up ^ Marie Lavigne, The Economies of Transition: From socialist economy to market economy, 1995, London: Macmillan, pp. 130, 146, 150-154 ISBN 0-333-52731-3 19.	Jump up ^ László Csaba, Transformation as a subject of economic theory in Zbyněk Balandrán and Vít Havránek, Atlas of Transformation, 2011 at [1], retrieved 1/11/2013; Jeffrey Sachs, What I did in Russia, posted 14 March 2012, at http://jeffsachs.org/2012/03/what-i-did-in-russia/ retrieved 1/11/2013. 20.	Jump up ^ EBRD, Transition Report 2000, London: European Bank for Reconstruction and Development, p. 13 ISBN 1-898802-17-3. 21.	Jump up ^ EBRD, Transition Report 2010, London: European Bank for Reconstruction and Development, pp. 2-5. ISSN 1356-3424 The ISBN printed in the document (978-1-898802-33-1) is invalid. 22.	Jump up ^ The UNDP used a poverty line of $4 per person per day in 1990 dollars at purchasing power parity; UNDP, Human Development Report for Central and Eastern Europe and the CIS, 1999, New York: United Nations Development Programme, Table 2.5, pp. 20-21 ISBN 92-1-126109-0. 23.	Jump up ^ EBRD, Transition Report 2000, London: European Bank for Reconstruction and Development, Table 5.2, p. 103 ISBN 1-898802-17-3. 24.	Jump up ^ EBRD, Transition Report 2008, London: European Bank for Reconstruction and Development, Table A.1.1.1, p. 13 ISBN 978-1-898802-31-0. 25.	Jump up ^ EBRD, Transition Report 2013, 2013, London: European Bank for Reconstruction and Development, pp. 8 and 99-105. 26.	Jump up ^ Vuong, Quan-Hoang. Financial Markets in Vietnam's Transition Economy: Facts, Insights, Implications. Saarbrücken, Germany: VDM Verlag, Feb. 2010. ISBN 978-3-639-23383-4. 27.	Jump up ^ Napier, Nancy K.; Vuong, Quan Hoang. What we see, why we worry, why we hope: Vietnam going forward. Boise, ID: Boise State University CCI Press, October 2013. ISBN 978-0985530587. 28.	^ Jump up to: a b The first ten years. Analysis and Lessons for Eastern Europe and the Former Soviet Union (PDF). The International Bank for Reconstruction and Development/The World Bank. 2002. pp. xix; xxxi. ISBN 0-8213-5038-2. Retrieved 2009-03-09. 29.	Jump up ^ Tanzi, Vito. Transition and the Changing Role of Government, Finance & Development Magazine, June 1999, Volume 36, Number 2 by the International Monetary Fund 30.	Jump up ^ EBRD, Transition Report 2013, 2013, London: European Bank for Reconstruction and Development, pp. 8 and 13. 31.	Jump up ^ EBRD, Transition Report 2013, 2013, London: European Bank for Reconstruction and Development, pp. 6 and 78-96. 32.	Jump up ^ EBRD, Transition Report 2013, 2013, London: European Bank for Reconstruction and Development, p. 6. 33.	Jump up ^ EBRD, Transition Report 2013, 2013, London: European Bank for Reconstruction and Development, pp. 4, 8 and 10-17. 34.	Jump up ^ EBRD, Transition Report 2013, 2013, London: European Bank for Reconstruction and Development, pp. 5, 8-9, 34-35, 38-39 and 106. The Transition Report 2013 assessed the level of democracy in terms of the Polity IV Index on the type of governance regime, published by the Center for Systemic Peace, which rates governance on the basis of whether states have institutionalized processes for open, competitive and deliberative political participation; chooses and replaces chief executives in open, competitive elections; and imposes checks and balances on the discretionary power of the executive; see Polity data series. 35.	Jump up ^ EBRD, Transition Report 2013, 2013, London: European Bank for Reconstruction and Development, pp. 5, 34, 38 and 52-53. 36.	Jump up ^ "Kosovo – Country Brief 2010". The International Bank for Reconstruction and Development/The World Bank. October 2010. Retrieved 2011-02-03. 37.	Jump up ^ Ianchovichina, Elena; Gooptu, Sudarshan (2007-11-01). "Growth diagnostics for a resource-rich transition economy : the case of Mongolia" (PDF). The International Bank for Reconstruction and Development/The World Bank. Retrieved 2009-03-09. 38.	Jump up ^ Jbili, A.; Kramarenko, V.; Bailén, J. M. (2007-03-01). Islamic Republic of Iran: Managing the Transition to a Market Economy (PDF). The International Monetary Fund. p. xii. ISBN 978-1-58906-441-6. Retrieved 2011-02-03. 39.	Jump up ^ EBRD. Law in transition online 2006 – Focus on central Europe 40.	Jump up ^ Unleashing Prosperity: Productivity Growth in Eastern Europe and the Former Soviet Union, World Bank, Washington (2008), p. 42 41.	Jump up ^ http://www.oecd.org/globalrelations/regionalapproaches/centralandeasterneuropethecaucasusandcentralasia.htm 42.	Jump up ^ Myant, Martin; Jan Drahokoupil (2010). Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia. Hoboken, New Jersey: Wiley-Blackwell. ISBN 978-0-470-59619-7. External links[edit] •	Åslund, Anders (2008). "Transition Economies". In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267. •	Policy Research Working Papers from the World Bank •	Health in transition economies – a dossier •	Quarterly Newsletter issued by UNDP and LSE on Development and Transition issues in Europe and CIS •	IMF: Nsouli, S. M. "A Decade of Transition – An Overview of the Achievements and Challenges" •	GDP and Industrial Output during transition 1990–present – statistics Mongolia[edit] •	UNDP Mongolia Partnership for Progress 1997 to 1999 Key Documents •	Ger Magazine •	Human Development Report Mongolia 1997 •	In Their Own Words: Selected Writings by Journalists on Mongolia, 1997-1999 •	Modern Mongolia: From Khans to Commissars to Capitalists •	Wild East: Travels in the New Mongolia"

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 * Reference 1: Popov, Vladimir, 2013. "Economic Miracle of Post-Soviet Space: Why Uzbekistan Managed to Achieve What No Other Post-Soviet State Achieved," MPRA Paper 48723, University Library of Munich, Germany.


 * Reference 2: Popov, Vladimir, 2010. "The Long Road to Normalcy," Working Paper Series UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).

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