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Charles Wankel General Editor Transition Economies 1613 eral Unconstrained Model for Transfer Pricing in Multi- tered and controlled by a dominant communist party. national Supply Chains,” European Journal of Operational On the basis of the ideology of -Leninism Research (v.187/3, 2008). and through the capacity of the state, the Communist Party sought to mobilize the population to build an Ralph Drtina industrial and classless society. Despite considerable Rollins College achievements of state in terms of industri- alization, economic development, low income differ- entials, full employment, good education, and health care, by the 1980s, it had become clear that - Transition Economies ism was proving to be more successful as a system of production and consumption on a global scale. State Transition economics are countries with economies in socialist countries had failed to catch up with the core transition that abandoned state socialism and central of the capitalist . In response, most planning and have been attempting a move to capital- of these economies rejected central planning and ism. The central process of economic transformation embarked on a transition to . typically involves three fundamental, revolutionary, To build capitalism, the transition economies were systemic changes, including , macroeco- provided with policy advice, reform guidance, and nomic stabilization, and structural adjustment through some monetary assistance by the Western donors and commodification, , , and international financial institutions such as the Inter- the reduction of the role of the state. Broader mecha- national Monetary Fund (IMF), the , and nisms of economic transition involve the incorpora- the European Bank of Reconstruction and Develop- tion of transition countries into the world economy as ment (EBRD). The structural adjustment program, well as the establishment of cultural attitudes, politi- which had previously been implemented in Latin cal, legal, and societal institutions supportive of and America, was consequently redesigned in 1989 in a conducive to the continuous accumulation of capital more comprehensive fashion to fit the task of building through profit and investment. The successful creation capitalism from scratch. Dubbed the “Washington of a thoroughly new, capitalist mode of social and eco- consensus” because of the location of the IMF and the nomic organization should herald the formal end of World Bank in the U.S. capital city, the radical all-out transition economies as a meaningful descriptor. transition approach called for rapid price and trade In general, 34 countries and areas have been iden- liberalization, accompanied by strict macroeconomic tified as economies in transition. They spread from stabilization; the privatization of state-owned enter- Berlin to Beijing, Tallinn to Tashkent, across central prises; the liberalization of labor and capital markets; and eastern , , Transcaucasia, and cen- tough monetarist fiscal consolidation through ending tral, east, and southeast Asia. Somewhat similar to subsidies and cutting public services; rapid deregula- the emergence of markets in the developing world, tion; and creation and the immediate opening of mar- the declared rationale behind the transition econo- kets to entry by newly-created private businesses and mies’ drive to capitalism lies in the ultimate goal to foreign transnational corporations. achieve developmental catch-up with the industrial- Simultaneously, a wide range of other structural and ized nations of the West. institutional changes, such as destatization, the - oriented reform of the social protection sector, the tax Transition: From Plan to Market system, the legal system, accounting standards, and so Prior to the start of gradual market-oriented reforms forth, had to be initiated as well. These “shock therapy” in in 1978 and before the radical anticommu- measures became a general prescriptive mechanism nist revolutions in Eastern Europe of 1989–91, state to ensure the transition of post-communist countries socialism was the primary doctrine of economic toward the economic model of the so-called free enter- development and modernization across Eurasia. The prise economy epitomized in the Anglo-American main features of state socialism as a society included system of competitive capitalism and limited govern- a state-owned, centrally , adminis- ment involvement. The widely held belief at the time 1614 Transition Economies was that a rapid expansion in total output and a pro- graphical blocs of transition states, between different gression from a lower to higher level of development, individual countries, and between urban and rural understood broadly as raising the living standards of areas within those countries. Most of the initial varia- individuals in those countries,, would follow almost tion in the output performance of central and east- immediately after the government restrictions on peo- ern Europe, compared with the former ple’s commercial activities were removed. in the 1990s, is explained by the inherited structural liabilities and exogenous “transition shocks” caused The 1990s by the collapse of centralized planning and the com- Contrary to such popular expectations, however, the munist trade system, the disintegration of the Soviet 1990s turned out to be a lost decade for most tran- Union, and the associated detrimental effects of dis- sition economies. The ensuing transitional recession organization and trade implosion on the respective was to last for six years on average across central and transition economies. It is notable in this regard that eastern Europe and the former Soviet Union, ranging the sharpest decline in output occurred amid chaos in from two years in to 10 years in and war-ravaged countries like , . In terms of its scale, the deepest slump in , , Moldova, and . By con- output was suffered by Bosnia and Herzegovina (with trast, the gradually reforming transition economies of a decline of 88 percent), Georgia (minus 75 percent), east and southeast Asia, as well as the three former Armenia (minus 69 percent), and Moldova (minus 68 Soviet republics (, , and Uzbeki- percent). Only four countries (the , stan) that did not follow the “shock therapy” approach, , Poland, and ) managed some- generated a very different growth trajectory, either what milder recessions, loosing between 15–20 per- postponing the potentially severe economic disloca- cent of Gross Domestic Product (GDP), whereas the tion or, perhaps, avoiding it altogether. scale of depression in the other remaining economies Despite substantial differences that exist among the in the region ranged between 30–60 percent. transition economies, since 1999, all of these countries It has been argued that because of the often sub- have been on a steady path of growth, with the major- standard quality of Soviet bloc production, the real ity enjoying a rapid economic recovery and further welfare-reducing impact of the transitional depression expansion. In terms of prospects for catch-up develop- was lower than the official GDP figures seemed to indi- ment, the average income disparity between the richest cate. Yet the collapse of production also meant the end and the poorest transition economy grew during the of employment, and the resultant job losses were mas- transitional depression, peaking in 1999; yet it slowly sive. Large proportions of the redundant labor force decreased since, dropping from the ratio of 21:1 to 14:1 had to withdraw from economic activity altogether, by the end of the 2000s. With respect to approaching either migrating abroad or relying on informal sur- Western standards of living, the transitional depres- vival strategies at home. Unemployment levels reached sion of the 1990s proved to be a major setback, as these double digits in most transition economies, peak- economies’ average per capita income on the purchas- ing around 20 percent in relatively successful Poland ing power parity basis dropped to just 15 percent of and , and rising above 40 percent in the areas the U.S. level. Within the following decade, the original affected by civil strife and political instability. All the income differential was restored and projected to reach evidence based upon the broader human development up to 30 percent of the U.S. level by 2013. indicators, including life expectancy, infant mortality, demographic growth, income distribution, headcount Beyond Transition poverty, and educational attainment suggest a very sig- On a more disaggregate level, four different post- nificant social cost to transition across the region. transitional regime types can be identified as a succinct way to summarize the major outcome of Varieties of Emerging Capitalism transformation across post-communist Europe and The spatial impact of economic transition was very Eurasia. The first regime type includes politically uneven. The transition to capitalism produced a great unstable, war-damaged countries that have had to divergence in outcomes between the different geo- rely on substantial foreign assistance and workers’ Transition Economies 1615 remittances to sustain a model of chaotic uncoor- modities and raw materials, including oil, gas, ores, dinated capitalism. In the second group of gradual and minerals. or “lagging” reformers, state-led or statist capitalism The future developmental prospects and potential has emerged in combination with firm authoritar- of transition economies depend ultimately upon the ian rule. These transition economies all appear in progress achieved to date, favorable global market the low- and lower-middle-income groups within conditions, and the overall sustainability of their social the World Bank’s development classification scale. formations, types of emergent capitalism coupled with Most of them have remained on the medium level particular modes of political regulation. Nonetheless, of human development as well. However, in sharp because economic development is a cumulative, com- contrast to the uncoordinated capitalist economies, bined, and unequal phenomenon, a lot of the econo- state-led capitalism has been characterized by high mies in transition will hardly ever be able to catch up growth rates propelled mainly by strong manufac- with the rest. Hence, for them transition is to become turing exports. a permanent condition. Another distinct type of the newly emerged mar- ket economies covers the whole of Central Europe, See Also: Capitalism; Chicago School/Chicago Boys; Core; the Baltic states, and the outlying parts of the Bal- Dependency Theory; European Bank for Reconstruction kan region. These countries have already reached or and Development; Periphery; Socialism; World Bank. have closely approached both the average Western standards of income and consumption, as well as of Bibliography. Christian Chelariu et al., “Entrepreneurial human development. In contrast to all the other post- Propensity in a Transition Economy: Exploring Micro-level transitional regimes, countries in this third group are and Meso-Level Cultural Antecendents,” Journal of Busi- usually described as consolidated democracies, with ness and Industrial Marketing (v.23/6, 2008); Oleh Havry- well-established pluralist and civil society tendencies. lyshyn, Divergent Paths in Post-Communist Transforma- Capitalism in these states has acquired a certain affinity tion: Capitalism for All or Capitalism for the Few? (Palgrave with the continental European model of coordinated Macmillan, 2006); Alex E. Fernández Jilberto and Barbara . The notable exceptions are the dereg- Hogenboom, Big Business and Economic Development: ulated liberal market economies of the Baltic region. Conglomerates and Economic Groups in Developing Coun- In general, the third group of transition countries has tries and Transition Economies Under Globalization (Rout- firmly allied itself with the European and Euro-Atlantic ledge, 2007); Annette Miae Kim, Learning to Be Capitalists: economic, political, and military structures. Entrepreneurs in ’s Transition Economy (Oxford Finally, there is a very diverse intermediate fourth University Press, 2008); David Lane, ed., The Transfor- group of the transition economies, covering prima- mation of State Socialism: System Change, Capitalism, or rily the former Soviet republics. These countries are Something Else? (Palgrave Macmillan, 2007); David Lane broadly positioned in the middle of the global develop- and Martin Myant, eds., Varieties of Capitalism in Post- mental ladder. Politically, they are not formally allied Communist Countries (Palgrave Macmillan, 2007); Celine with the West, although these economies’ dependence Nauges and Caroline van Den Berg, “Economies of Density, on the Westbound export-driven growth has been by Scale and Scope in the Water Supply and Sewerage Sector: far the most considerable among all other transition A Study of Four Developing and Transition Economies,” states. Despite some spectacular exceptions, these Journal of Regulatory Economics (v.34/2, 2008); Jiangang countries generally have not continued with the adop- Peng, Financial-System Reform and Economic Growth in a tion of a Western-style polyarchy. Institution-wise, Transition Economy: The Case of China, 1978-2004 (Uni- these economies are characterized by open trade and versity of Western Australia, Dept. of Economics, 2008); fluid product, labor, and capital markets. However, Max Spoor, The of Rural Livelihoods in the level of political involvement in the economy is Transition Economies: Land, Peasants and Rural Poverty in more evident in this post-Soviet group than in Central Transition (Routledge, 2009). Europe and the Baltics. An additional feature of these intermediate grouping is that its richest economies Vlad Mykhnenko have benefited greatly from exporting primary com- University of Nottingham