What happens when command economies transform into market economies? How is the transition best undertaken?

Question

What happens when command economies transform into market economies? How is the transition best undertaken?

Answer 1

A great mess and no one really knows how to do it best, though there are a goodly number of "expert" opinions.

One of the fundamental problems is that in a command economy no one has much experience in valuing assets or running a business in the context of a market economy. Furthermore, the books that might have important cost information are often "cooked" by artificial prices.

That makes disposing of assets at "fair market value" very difficult.

One common result is that the assets are almost given away to insiders, who become all that much richer and more powerful as a result (Russia is a classic example).

Another common result is to sell at auction to outsiders - people with experience in market economies. But as they are in it for their benefits, they have no reason not to collude  to take advantage of the seller's ignorance. And even if they didn't, there is still the problem of not having enough information for reasonable evaluations. And there is the political reaction to "national assets sold at bargain basement prices".

A few have tried to make the transformation more gradual. In some cases not selling off existing factories, etc. but just allowing new players in the game. This has several problems:

1. Since some companies are still subsidized by the government, competition is hardly fair.

2. Since the rules keep changing, it is harder for anyone to make decisions for the long term.

3. Since there are only a few "free" enterprises, there is far less pressure to make the legal and infrastructure changes needed for a market economy - rule of law with property rights, etc.; a clear tax structure; reform of the banking system; regulation; etc.

If you do a web search on "transition to market economy", you'll find many useful hits:

http://www.cato.org/pubs/journal/cj16n2-...

http://usinfo.state.gov/products/pubs/ma...

http://www.esri.go.jp/en/tie/russia/russ...

http://www.imf.org/external/np/exr/cente...

Jeffrey Sachs was an advisor to Poland on their transition:

http://en.wikipedia.org/wiki/Jeffrey_Sac...

The Czech Republic is one of the most successful examples of transition:

http://www.ce-review.org/00/2/books2_per...

http://www.boogieonline.com/revolution/c...

http://jce.sagepub.com/cgi/content/abstr...