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 of economic resources and state planning Government and private ownership of economic resoures split rather evenly Mostly private (individual or 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 owner B. 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 Transition The 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.