Transition economies are involved in a process of moving from a centrally planned economy to a mixed or free market economy

1. Transition Economies
Year 1 Microeconomics

2. Free Market, Mixed and Command Economies
An economic system is a network of organisations used to resolve
the problem of what, how much, how and for whom to produce
Freemarket
• Markets
allocate
resources
• Driven by the
profit motive
• Limited role
for state
• Private sector
dominates
Mixedeconomy
• Mix of state
and private
ownership
• Government
intervention
in markets
• Mix will vary
from country
to country
Commandeconomy
• Most
resources are
state owned
• Planning
allocates
resources
• Little role for
market prices

3. Transition Economies
Transition economies are involved in a process of moving from a
centrally planned economy to a mixed or free market economy
Some key
aspects of the
transition
process
Liberalization of markets to give prices a bigger role in allocating
scarce resources between competing uses
Privatisation of government (state) assets – transferred to the
private sector
Reduction in tariff and other trade barriers so that the economy
becomes more open
Reduction in the scale and scope of government subsidies e.g. to
loss making industries
Legal reforms e.g. to protect private property rights
Banking reform and interest rate liberalization

4. Current Listing of Transition Economies (2014)
This listing of transition countries comes from the World Economic
Situation and Prospects 2014 published by the United Nations
• South-Eastern Europe
– Albania
– Bosnia and Herzegovina Montenegro
– Serbia
– The former Yugoslav Republic of Macedonia
• Commonwealth of Independent States and Georgia
– Armenia, Azerbaijan, Belarus
– Georgia, Kazakhstan, Kyrgyzstan
– Republic of Moldova, Russian Federation
– Tajikistan, Turkmenistan
– Ukraine, Uzbekistan

5. Problems that Transition Economies have faced
Many transition countries experience severe economic difficulties in
the short to medium term during their transition process.
• The removal of subsidies / state aid in many countries led to a sharp rise in
unemployment as unprofitable businesses shed thousands of jobs
• Inflation increased as market subsidies and price ceilings were taken away
– in some cases countries experienced hyper-inflation as prices moved
towards market levels
• In many countries, a severe recession followed in the early stages of
transition
• An underlying lack of cost and no-price competitiveness meant that many
transition countries ran large trade deficits
• Endemic corruption proved difficult to reduce
• Wealth and income inequalities widened
• Many countries have experienced a brain drain of younger and skilled
workers in search of better pay and conditions in richer nations

6. Advantages of Free Market Competition
Free markets operate without government intervention
• Competitive markets help to bring about
1. An efficient allocation of scarce resources – resources tend to go
where the market return is highest
2. Competitive prices for consumers and suppliers look to increase and
protect their market share
3. Competition drives innovation and invention in markets which can
bring higher profits for businesses and better products for
consumers
4. The profit motive stimulates capital investment which encourages
economies of scale and lower prices in the long run
5. Competition in the form of international trade in goods and services
helps to reduce domestic monopoly power and increases choice

7. Disadvantages of Centrally Planned Economies
1. Bureaucratic costs of central planning of resources – petty
officialdom can lead to wasteful inefficiencies and higher costs
2. Problems in fixing the prices of goods and services – central
planners are unlikely to be as accurate as the market in determining
suitable equilibrium prices
3. Relative absence of incentives for both workers and businesses can
damage productivity and lead to large levels of over-employment
4. Low productivity and weak incentives leads to rising losses for many
state-owned businesses. The incentive to innovate is also limited.
5. Changing consumer needs and wants are not expressed as
preferences in markets – the state is slow to react to these
6. The state suffers from information failures and there is a much
higher risk of corruption which ultimately damages welfare
7. State run economies are at higher risk of mal-investment driven by
political motivations

8. Cuba as a Transition Economy – Trade Partners in 2013
Nearly 30% of trade is with China and Venezuela – this will change
16%
15.2%
14.2%
7.5%
5.6%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Canada China Venezuela Spain Netherlands
Shareintotalexport

9. Cuba begins the process as a Transition Economy
• A 311-point economic reform agenda that was adopted by the
Cuban Communist Party in 2011.
– Reforms have allowed the setting up of small businesses and
measures to cut vast bureaucracy
– Farms have been turned over to producer-owned co-operatives to
encourage the profit motive
– Cuba is actively seeking inflows of foreign investment (FDI)
• The United States has recently moved to end trade sanctions
with Cuba that have lasted more than 50 years
• Cuba is reforming but will stick to her socialist principles
– For example land can be leased to overseas investors but not sold
– In 2015, more than 70 percent of the economy remains in state
hands, usually in the form of monopolies
• Cuba has a complex system of parallel currencies—the peso
for Cubans, a convertible peso for tourists, and multiple other
exchange rates

10. The Role of the State in a Mixed Economy
A mixed economy has a mix of private and public (Govt) sectors
• Businesses wholly or part state-
owned – for example: Royal Bank of
Scotland, Network Rail
State-Owned
Industries
• Broad range of welfare benefits
• Universal e.g. state pension
• Means-tested e.g. housing benefit
Welfare State
• Spending on education & health
• Capital spending on infrastructure
Government spending
on public services

11. Transition Economies
Year 1 Microeconomics