Transition economies are involved in a process of moving from a centrally planned economy to a mixed or free market economy.

Transition economies

Some key aspects of the transition process

  • Liberalization of markets to give prices a bigger role in allocating scarce resources between competing uses
  • Privatisation of government (state) assets – transferred to the private sector
  • Reduction in tariff and other trade barriers so that the economy becomes more open
  • Reduction in the scale and scope of government subsidies e.g. to loss making industries
  • Legal reforms e.g. to protect private property rights
  • Banking reform and interest rate liberalization

Examples of transition economies

Bosnia and Herzegovina Montenegro
The former Yugoslav Republic of Macedonia
Commonwealth of Independent States and Georgia
Armenia, Azerbaijan, Belarus
Georgia, Kazakhstan, Kyrgyzstan
Republic of Moldova, Russian Federation
Tajikistan, Turkmenistan
Ukraine, Uzbekistan

Problems faced by transition economies

  1. The removal of subsidies / state aid in many countries led to a sharp rise in unemployment as unprofitable businesses shed thousands of jobs
  2. Inflation increased as market subsidies and price ceilings were taken away – in some cases countries experienced hyper-inflation as prices moved towards market levels
  3. In many countries, a severe recession followed in the early stages of transition
  4. An underlying lack of cost and no-price competitiveness meant that many transition countries ran large trade deficits
  5. Endemic corruption has proved difficult to reduce
  6. Wealth and income inequalities widened
  7. Many countries have experienced a brain drain of younger and skilled workers in search of better pay and conditions in richer nations

Revision Video: Transition Economies

Transition economies - revision video

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