The Implications Resulting from Market Transitions in a Command Economy
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The communist nations of China, Central and Eastern Europe provide prime examples of command economies that were forced to move to more market-based systems in the late 1970s. Their transitioning was a result of the intrinsic failings of the communist central planning system in addition to the discontent of their populations. While these two regions faced similar pressures to change, their methods were very different. The transitional reforms that have occurred over the last twenty years within these countries have created unique non-market environments, each of which present further implications for foreign firms wishing to do business in these regions.
The transition in Central and Eastern European to more market based systems occurred relatively quickly in comparison to that of China. The key faults of central planning involved coordination problems between supply and demand which led to severe shortages, bizarre pricing, and labor issues. In addition, the government relied on debt financing to alleviate their economic situation. With the social ailments that rose from these economic conditions, individuals began to question the authority of the communist party. Polands reform process began with the rise of a political group called the Solidarity. This group came to power during the huge balance of payments deficit in the 1980s and they initiated a market revolution, or shock therapy, to deal with the troubled economy. This shock therapy was thought necessary to minimize the strife associated with reform and to quickly adjust the peoples attitudes and behaviors to the new market. It involved freeing prices, currency convertibility, devaluation, and tight monetary policy to deal with hyperinflation, shortages, and the like. The Solidarity instituted laws to govern private property rights as well as contract law in order to encourage growth of private domestic businesses and to lure foreign investors.
The Polish reform acted as a catalyst as well as a model to help encourage reform in surrounding communist nations such as Czechoslovakia and Russia. The main purpose of privatization in Poland, Czechoslovakia, and Russia was to develop correct market incentives and encourage foreign as well as domestic investment. All of this was accomplished through case-by-case sales and more commonly vouchers sold to citizens that could be used for direct purchase of shares in companies or voucher funds. While the rapid transition from a command economy to a market economy in Central and Eastern Europe was quite traumatic at times for the population, the overall results were positive and have caused these countries to grow at unprecedented rates in modern times.
The reforms in Central and Eastern Europe have created vibrant new marketplaces for foreign firms. The establishment of democratic institutions serve as source of reassurance to foreign investors that their money is safe and provides opportunities for them to build business relationships. The new legal framework and stock markets are conducive to businesses and have made it easier for investors to invest. The substantial population growth in these countries since transitioning presents new sources of labor as well as new consumers for foreigner companies