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Table of Contents

Page   

List  of Tables  II

1.  Introduction  1

2.  Socialist and Market Economy  1

2.1  Socialist Economy  1

2.2  Market Economy  2

3.  Transition from a Socialist to a Market Economy  4

3.1  Instruments of Transition  4

3.1.1  Price Liberalization  4

3.1.2  Privatization  5

3.1.3  Liberalization of Foreign Trade  6

3.1.4  Reform of the Financial System  7

3.1.5  Currency Policy  8

3.2  Phases of Transition  10

4.  Conclusion  11

List  of Literature  12

Phases of Transition 9

- 1 - 1.Introduction

In the last years many socialist regimes, especially in Eastern Europe, collapsed and changed into market economies.

The transformation to a market economy is in general a difficult process e. g. because companies get privatized, foreign trade becomes more liberal or the currency changes.

This essay first describes both a socialist and a market economy. Then the transition process with its stages and instruments is explained. This shall provide insight into the problems arising from transforming a socialist into a market economy.

2. Socialist and Market Economy

The following part of the essay should briefly describe the two different economic structures.

2.1 Socialist Economy

Socialism is based on Marxism-Leninism which can be defined as “the official ideology of the Soviet Union and its satellites in communist times, built on the works of Marx and Engels and consolidated by Lenin” ¹ while socialism is said to be “a system in which the economic process is geared to the welfare of the society as a whole rather than that of private individuals”. 2

¹ Nürnberger, K.: Beyond Marx and Market, Pietermaritzburg 1998, p. 268

² Nürnberger, K.: Beyond Marx and Market, Pietermaritzburg 1998, p. 272

- 2 - Originally,Marxism-Leninism had the objective to create a “classless society” where people are equal. ³ To achieve this “socialists expect the political leadership of a society to take over control of the economy and consciously direct it towards greater equality” ⁴ . That means that work is guaranteed for everybody who can work. Those who cannot are supported by society. Every citizen receives a basic income to s atisfy general needs. Because of this nobody has to live in poverty.

But on the other hand incentives are missing. As there is no competition on the market and the workers get paid no matter if they work hard or not they are not that motivated. This is the reason why socialist economies are usually less productive and efficient than market economies.

Another important principle of socialism is that the factors of production are not owned privately but by the state. ⁵ Factories work on the basis of an econo mic plan which is made by the state. ⁶ But how does the state know what the population needs? Therefore there is often either a lack or a surplus of certain goods. 7

2.2 Market Economy

The market economy is based on capitalism and liberalism. Capitalism can be defined as “a system geared to the accumulation of capital in private hands” ⁸ while liberalism can be seen as “a philosophy which believes in the freedom of individuals and groups from interference by the state or other external authorities” ⁹ .

³ Cf Nürnberger, K.: Beyond Marx and Market, Pietermaritzburg 1998, p. 20

⁴ Nürnberger, K.: Beyond Marx and Market, Pietermaritzburg 1998, p. 57

⁵ Cf Nürnberger, K.: Beyond Marx and Market, Pietermaritzburg 1998, p. 58-62

⁶ Cf Krugman, P. R.; Obstfeld, M.: International Economics, Fourth Edition, Reading 1995, p. 719 and cf Jepma, C. J.; Jager, H.; Kamphuis, E.: Introduction to International Economics, New York 1998, p. 353

⁷ Cf Nürnberger, K.: Beyond Marx and Market, Pietermaritzburg 1998, p. 63

⁸ Nürnberger, K.: Beyond Marx and Market, Pietermaritzburg 1998, p. 261