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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 ofeconomic resources and
state planning
Government and privateownership of economic
resoures split rather evenlyMostly private (individualor 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 ownerB. 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 TransitionThe 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.