Transition Economies

Transition economies are countries with economies in transition that abandoned state socialism and central planning and have been attempting a move to capitalism. The central process of economic transformation typically involves three fundamental, revolutionary, systemic changes, including liberalization, macroeco-nomic stabilization, and structural adjustment through commodification, marketization, privatization, and the reduction of the role of the state. Broader mechanisms of economic transition involve the incorporation of transition countries into the world economy as well as the establishment of cultural attitudes, political, legal, and societal institutions supportive of and conducive to the continuous accumulation of capital through profit and investment. The successful creation of a thoroughly new, capitalist mode of social and economic organization should herald the formal end of transition economies as a meaningful descriptor.

In general, 34 countries and areas have been identified as economies in transition. They spread from Germany to China, Estonia to Uzbekistan, across central and eastern Europe, Russia, Transcaucasia, and central, east, and southeast Asia. Somewhat similar to the emergence of markets in the developing world, the declared rationale behind the transition economies' drive to capitalism lies in the ultimate goal to achieve developmental catch-up with the industrialized nations of the West.

Transition: From Plan to Market

Prior to the start of gradual market-oriented reforms in China in 1978 and before the radical anticommu-nist revolutions in Eastern Europe of 1989–91, state socialism was the primary doctrine of economic development and modernization across Eurasia. The main features of state socialism as a society included a state-owned, centrally planned economy, administered and controlled by a dominant communist party. On the basis of the ideology of Marxism-Leninism and through the capacity of the state, the Communist Party sought to mobilize the population to build an industrial and classless society. Despite considerable achievements of state socialism in terms of industrialization, economic development, low income differentials, full employment, good education, and healthcare, by the 1980s, it had become clear that capitalism was proving to be more successful as a system of production and consumption on a global scale. State socialist countries had failed to catch up with the core of the capitalist world economy. In response, most of these economies rejected central planning and embarked on a transition to capitalism.

To build capitalism, the transition economies were provided with policy advice, reform guidance, and some monetary assistance by the Western donors and international financial institutions such as the International Monetary Fund (IMF), the World Bank, and the European Bank of Reconstruction and Development (EBRD). The structural adjustment program, which had previously been implemented in Latin America, was consequently redesigned in 1989 in a more comprehensive fashion to fit the task of building capitalism from scratch. Dubbed the “Washington consensus” because of the location of the IMF and the World Bank in the U.S. capital city, the radical all-out transition approach called for rapid price and trade liberalization, accompanied by strict macroeconomic stabilization; the privatization of state-owned enterprises; the liberalization of labor and capital markets; tough monetarist fiscal consolidation through ending subsidies and cutting public services; rapid deregulation; and creation and the immediate opening of markets to entry by newly-created private businesses and foreign transnational corporations.

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