What special challenges existed for the former communist countries (Central and Eastern European countries and members of the Commonwealth of Independent States) transitioning from centrally planned economies to market-based economies? How successful have these countries been?

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: These countries had a legacy of poor decision-making under central planning. The problems included overdevelopment of heavy industries (like steel and defense), outdated technology, environmental problems, and little established trade with market economies. They needed to remove state control of transactions and undertake a major reorganization of production. Transition involved accomplishing three challenging tasks. (1) Shifting to competitive markets and market-determined prices with a new process of resource allocation. (2) Establishing private ownership, with privatization of state-run enterprises. (3) Establishing a legal system with contract laws and property rights and enforcing these rights. For success, the transition process had to impose discipline on firms inherited from the era of central planning and provide encouragement for new firms that are not dependent on the government.

The Central European countries and the Southeastern European countries pursued strong, rapid liberalizations (except for Bosnia, Serbia, and Montenegro, which were involved in fighting). 

The Central European countries joined the European Union in 2004, and Bulgaria and Romania joined in 2007. The members of the Commonwealth of Independent States (CIS) instead followed paths of less liberalization. Three countries, Belarus, Turkmenistan, and Uzbekistan, continue to resist enacting reforms. Others, such as Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Russia, Tajikistan, and Ukraine, enacted partial reforms that were adopted slowly over time and that sometimes reversed. 

By 1998 the Central European, Baltic, and Southeastern European countries, on average, were selling over 60 percent of their exports to buyers in industrialized countries. Rapid and deep liberalizations, along with favorable geographic location close to the markets of Western Europe, facilitated the shift by these countries to a desirable export pattern. They increased their exports of light manufactured goods like textiles, clothing, and footwear. They also used their low-cost skilled labor to expand export of such products as vehicles and machinery. In contrast, most CIS countries did not reorient their exports much, and on average only about a quarter of their exports went to industrialized countries in the late 1990s. Many CIS countries resisted trade liberalizations and continued to produce low-quality manufactured products that could not be exported outside the region.