Transition economies essay 2000.

'The performance of the world's transition economies has been a disappointment.' Is this assessment justified?

The fall of the Berlin Wall in the 1980s led many commentators to declare the beginning of a new age, where people all over the world would finally embrace the free market and together, perhaps match towards greater economic and prosperity.

Now, more than a decade later, the same commentators may regret their over-enthusiastic declarations. To many of them, the former communist states currently in transition have made little progress. In fact, the 'progress' seems to be in negative terms.

In terms of real GDP per capital, converted for purchasing power parity, the transition economies seem to be taking steps backward. They are not narrowing the gap between the West and themselves. The gap is actually becoming bigger. Russia's GDP figures has seen large declines.

The evil of inflation has cropped up. When prices were deregulated, the cost of living rose rapidly when good that used to be heavily subsidised more than quadrupled in prices. Works on seeing the price increases, demanded higher wages. This led to the endless price-wage spirals and hyperinflation, as well as the eventual devaluation of the rouble and other currencies of transition economies. The devaluation made things worse when imported goods became more expensive as well.

Serious unemployment came about. When the governments relaxed their control over the economy, and demand and supply forces were allowed to interact relatively freely, there was an immence upheaval of resources as producers rushed to attempt to produce what they perceived consumers to demand. Since labour was immobile, and did not have the skills to do anything except what the state had originally allocated them to do, they faced daunting structural unemployment.

On top of that, with the provision for private ownership, greater inequality emerged when aggressive businessmen and cronies of political powers took over state enterprises.

Given that the standard of living in so many different parts of the ex-Soviet bloc seemed to be going down, it's perhaps no wonder that many find the performance of transition economies to be disappointing.

There are however doubts that things are quite that bad. GDP per capita for many such nations may have fallen, but this is a poor indicator for the welfare of the people. As Rowe and Cobson commented, 'the economic hero (of the system) is a terminal cancer patient undergoing a costly divorce.' The best thing that could happen to boost GDP figures is a natural disaster. It would serve to boose national income, but in no way does this increase in national income really represent an improvement in welfare. The same principle works the other way. Just because GDP per capita is falling may not mean anything much. It may in fact be good if it involves less wastage or less expenditure on regrettables like defence or transport. Besides, figures for national income in command economics are likely not to be reliable, and are also more likely to be falsely high. Hence, transition economies may in truth in a better position than the command economies that they replaced.

Also, prices may have risen, but the price itself states nothing about the quality. In Poland, the price of haircuts may have risen, but they are accompanied by the availability of more hairstyles. The consumers may have traded off price for variety, and perhaps come out the better for it. Similarly, changes in quality of food, clothing and housing can also be observed. Perhaps the Consumer Price Index used in computing inflation overstates the true rise in costs of living and results in understatements of welfare improvements.

Structural unemployment is inevitable when so drastic a change in economic systems result. Workers need time to adjust to changes, to find new jobs that are suitable for them. In a sense, they need to be weaned off the government, and this takes time. Improvements in China have appeared to be promising. A recent feature in Newsweek was on how retrenched workers in China who have adjusted well to the changes. Some are in fact inspired to work harder to serve the consumers so that they 'will never be retrenched again'.

Investment in transition economies by the West has also picked up and alleviated the problems associated with the breaking down of traditional trade flows with other communist states. This investment has occurred mainly in the stable (socially and politically) transition economies, including Poland and the Czech Republic. Today, their performance can be said to be far from disappointing. Indeed, these nations are ranked higher than a couple of nations in the European Union and the so-called first world in the Human Development Index compiled by the United Nations.

How we view the performance of the world's transition economies depends on what expectations we had of them in the first place. Extreme enthusiasts with too high hopes are therefore opening themselves to disappointment, especially if they expect the free market to be the instant solution to every economic problem. Even so, they should not be disappointed by the progress (or lack of it) of all the transition economies. If claims that even Poland is not doing as well as it should, then one can perhaps be considered to be nit-picking. After all, the free market is not a panacea for all problems itself.

If the world's transition economies are to be successful, perhaps they need more time. A decade may be too short a time for these nations to adapt to a new system of doing things. Also, more aid in the form of foreign investments may help to relieve the trauma of broken down traditional trade flows. With more time and more aid, the performance of the world's transition economies may one day be satisfactory to all.