Economic Transition to Market Economy

In this paper, I will discuss the main transition theory and processes applied by Poland and Hungary to transform them from a planned economy to a functioning market system. These countries have adopted different transition theories and process and phase of change. They were very successful in transforming their economic system to market economy. They have improved their economic performance in terms of macroeconomic indicators of change. These are growths rates, inflation control, unemployment levels, per capita income, increase in trade and other liberalization levels and intensity compared to other eastern European countries.

Compare to Hungary and Poland, other eastern European countries have taken steps and adopted their own unique mixture of theories and phase of change from a planned economy to a market system. In this paper, I will discuss based on critical literature review the issues of applying these theories to Poland and Hungary and why they were successful and why they were not successful in other countries. As well, what are the reforms still pending to increase the way the market system work in these countries. This paper will also discuss the importance of microeconomic reform and institutional formation to move towards a fully fledged sustainable market system. It would also discuss the effectiveness of shock therapy and gradualism theory.

Introduction

This preliminary study of the transition economies and transition dynamics in an academic sense is vital to understand the factors, which affect on the effectiveness of transition policies adopted and implemented.

As well, to understand the complexity of the process and its feasibility given the political, social and economic distortions created in a structural sense by the planned system and the scale of private ownership in these countries.

In addition, in this paper I will discuss the labor power and politics in these countries and also will discuss the importance of institutional building, microeconomic reform, and macroeconomic reform policies in terms of fiscal and monetary policy framework. In particular, the paper will discuss the labor market and financial deregulation, the role of independent central bank system to regulate the financial system to attract foreign direct investment, technological transfer as well as competition.

This paper will also investigate the importance of decentralization of the economic system and privatization of state owned industries. It would also discuss the development of business law and corporate law development and welfare reform, role of government expenditure on education, training and research and development.