Transition of Economy, Privatization in Russia - Essay Example

Transition of Economy Introduction An economic system refersto sets of institutions which are meant for resource allocation in order to satisfy human wants. Thus, a transitional economy is an economy which is transforming from a centralized or planned economic system into a free market or mixed market economy. A transitioning economy always undergoes an economic liberalization whereby market forces are the sole determinants of prices in a market and not the centralized economic system. Moreover, the trade barriers which come with centralized markets are reduced or rather removed completely and the state-owned resources or businesses are privatized. The entire process of economic transition is characterized by the creation of private business institutions that completely change the state’s role and create significant government institutions which fully support and promote private-owned businesses alongside independent financial organizations (Parker, 1994). Therefore, a free market economy is an economy in which the demand and supply forces have little or lack the control of the government. In such markets, seller and buyers are freely allowed to transact any businesses across the State based on their mutual agreements without the control from the state in terms of subsidies, taxes and general regulation. A mixed economy on the other hand, is an economy in which all the decisions about utilization of resources are made partly by the public and partly by the private sectors. Thus, it is system where most wealth is generated mostly by the businesses but the state plays a chief role when it comes to resource allocation. These resources are majorly obtained from workers and businesses in form of taxes. Countries such as Russia and China are among the global nations which have successfully undergone economic transition. Economic Theory Under transitioning of an economy, the economic theory which is covered is the market transition theory which claims that the mechanism of the markets have a predictable implication for inequality. As compared to a centralized economy, the theory points out that transitions in markets or economies enhances the producer’s bargaining power. The major argument of this theory is that the cadre advantages reduce to the extent that the economy replaces redistribution as one of the dominant economic mode of resource allocation. The market economies widely vary when it comes to its pattern of power and related privileges in a manner that do not march the established markets. Variability in the market economies have always warned against any trials to forecast the changes in inequality without specifying the types of businesses and other related institutions that give a full image of the emerging market in the economy (Glanville & Glanville, 2011). Furthermore, this theory suggests that transition in economy predicts the contrast between two different economies; a previous centralized economy and the new economy where redistribution of resources have richly proven the source of the hypotheses about stratification and theory of the firm under socialism of the state. Thus, this has posed significant historical questions about the general impact of market changes in a planned economy since it majorly concerns the officials of communism. However, many free markets are considered an ideal type and a continuum which bridges a transitioned market is the poor guide to the full analysis of the emerging market economies. Therefore, the theory generally claims that the impact of the markets in the societies should be looked at skeptically since the transitioning markets or rather economies work through an meaningful allocation of assets, the general features of an emerging market, the social and political procedures through which the market economies are established in the market and the type of enterprises that such markets would host or rather have. This covers the mode in which the economy; the manner in which an economy can grow and gain publicity in both macro and micro transition of the economy. State Ownership and Privatization in China China is a nation which has experienced many turbulent years that have just ended recently when it managed to overthrow some of its oppressive shackles which are believed to have haunted the country’s economy since the Mao era. However, much of China’s progress in transitioning its economy is related to the Deng era which introduced some major reforms of a transition process that eventually allowed the nation to slowly move away from a centralized or rather a planned economy to a free and a wiser market. China introduced a two track system of transition which portrayed or rather depicted significant changes, from the previous years’ negative economic outlook that gave rise to wars, political unrests and famine. The transition process is gradually developing and stabilizing the country’s economy. Since 1970’s, China has grown its economy by an average GDP of 9% per year. In the year 2009, the country reported a 10.5% increase in its GDP and forecasted 11.8% increase in the year 2011. This prediction came true. Thus, the nation’s 2015 forecast for GDP is between 10 to 12% growth per year. Initially, during the Mao era, the country’s economy was fully controlled by the state in a way that all the outputs from industries were closely and collectively monitored by the government. The industries were supposed to meet a particular quota. This wiped out all the incentives that were meant for peasants resulting to low productivity that gave way to financial and food crisis across the nation. It is clear that the Mao era advocated for collectiveness in the economy, from the many industries that were linked to the state (Wang, Xu & Zhu, 2004). China’s economic transition process is relatively advantageous even if it does not function effectively due to the distortions of the previous planned system of economy. This transition showed relatively low rate of inflation, deficits, external debts and high savings. Moreover, the transition improved productivity through a stable process of resource allocation and an increase in the incomes of private enterprises; mostly farmers. These have generated considerable savings in both the rural and urban which are used to fund private investors in villages thus creating the first major component deemed as a non-state sector. Private enterprise across the nation makes a huge contribution to the country’s exports and development of the nation’s market economy which creates significant numbers of new jobs and promotes rural industrialization. State Ownership and Privatization in Russia Russia is a nation which is transitioning from a centralized economic system to a free market whereby the firms which were initially controlled by the state have been privatized and economic sectors liberalized. The country has reported an economic growth rate of about 6 to 7% in the last ten years and a foreign direct investment of over 3% of the GDP. This can be directly compared to that of China. In the year 2012, the value of the nation’s GDP was at US$2014 billion which represented a 3% of the global economy as reported by the World Bank. Russia’s transition from a command or state controlled operations to a free market began with a process of decentralization which transferred powers from the central government to the local authorities. In this process, the central government transferred its political and economic control to particular local governments. This move liberalized most of the prices in the markets. In the year 1993, the process of mass privatization was underway whereby the government shares in many companies were transferred to individual managers, the employees and the public. A year later, more than 75% of the nation’s economy was controlled by the private sector. This resulted to liberalized prices and private control of the economy that made the goods in the market to start reappearing; store queues were reduced significantly. Store managers had full control of the stores’ operations including the stock of products to be sold (Mcfaul, 1995). The nation’s local government played a key role in stabilizing the country’s economy in the process of transition. Its job was to protect the structure of the nation’s economy and at the same time attract new potential industries into the economy. In addition, it established basic control principles over the economic and political decisions of the state. All these was achieved through a budget which funded major entrepreneurial activities that included declaration of special economic status zone, declaration of the sovereignty and the efforts to establish a better barter contracts with several local firms. Therefore, the major reasons behind the nation’s economic transition were to free companies and encourage privatization which would attract new industries into the country’s economic system. This was achieved by creating specific zones where the free market oriented reforms could take place with a minimal control of the central government. Conclusion Economic transition has come a long way to free various centralized or planned economies across the globe. Free and mixed markets are taking over after a number of steps of transition in particular nation’s economies. Countries are struggling to have an economy where the central government would have minimal control over its operations; an economy where private enterprises would free operate, transact, control and determine the market prices in various industries. Cases in picture are countries such as China and Russia where most of the trading limitations in their economies have been terminated and gave way to free trades (Kikeri & Kolo, 2005). Therefore, transition in economy comes with several benefits or rather advantages to the willing and potential private entrepreneurs. In such systems, individuals have the freedom to own private productive resources and use them in whatever manner they opt wise provided the resources are subject to a common legal productive restriction. Thus, the countries that have undergone an economic transition have reported significant improvements in their overall productivity and gross domestic product (GDP). Reference List GLANVILLE, A., & GLANVILLE, J. (2011), ‘Economics from a Global Perspective,’ Glanville Books Ltd KIKERI, S., & KOLO, A. (2005), ‘Privatization: Trends and Recent Developments,’ World Bank Policy Research Working Paper, No. 3765 MCFAUL, M. (1995), ‘State Power, Institutional Change and the Politics of Privatization in Russia,’ World Politics, Vol. 47, No. 2. PARKER, D. (1994), ‘Ownership, Organizational Changes and Performance,’ in ‘The Political Economy of Privatization,’ Clarke, T., and Pitelis, C. (eds), Routledge, London. WANG, X., XU, L., & ZHU, T. (2004), ‘State Owned Enterprises Going Public: The Case of China,’ Economics of Transition, Vol.12, No.3. Read More