Term used to describe countries that are in the process of moving from a centrally-planned economy towards free market principles. In an earlier time they could have been called part of the 'second world', whereas today some are moving towards the 'first world' (such as Hungary or Croatia), while others are still effectively 'third world' (like Vietnam or Mozambique). Some are progressing quite quickly, while for others like Yugoslavia or Tajikistan the term 'developing economy' seems like a euphomistic misnomer.

Economic dislocation is a hallmark in many transitional economy - there was considerable instability in these countries in the early 1990s as previously subsidised industries were left floundering, and market forces had not yet adjusted for new levels of demand and supply. Political instability, mistrust between government and the public, and a weak legal system affected institutional strength, essential for sustained investment and economic growth. What growth has occured has either been in areas not dependent upon centralised control (eg: foreign-invested industries, family-run businesses where trust is usually innate, organised crime), or was achieved through corruption and/or the suppressing of human rights.

Other features in transitional economies include

  • low incomes despite high unemployment. There is usually a high degree of income inequality (many a 23 year old secretary earns ten times what dad gets)
  • centralisation of income and growth in urban areas and service industry
  • cumbersome bureaucracy and high taxes, but anybody smart enough to earn good money is shrewd enough to evade the taxman.
  • a seller's market, with shortages and high inflation, caused by import restrictions, weak competition and declining productivity.
  • lots of women wanting to emigrate.

    Socialism provided a very good education system in some academic disciplines, however managerial education did not provide the cognative skills to navigate organisations in uncertain conditions. In transitional economies, a rift is growing between the young technocrats who learnt business on the streets (with occasional forays into Western MBA programmes), and older rent-seeking bureaucrats who earnt their careers on the basis of doctorates or connections, and now just want to feel wanted (sometimes in the form of bribes).

    Transitional economies look to their more successful neighbours as role-models, but with some reservation. While people in 'New Europe' like to consider themselves part of the West, they generally do not have the level of cosmopolitanism found in countries which have had greater levels of immigration over the last fifty years. With other things on their mind, they are only slowly beginning to appreciate environmentalism and other progressive issues their far wealthier Western neighbours seem preoccupied about. Many are in a quandary over the costs of capitalism versus the legacy of Communism, and some fear that the European Union could even be as bad as the Soviet Block. At least in 1985 you could smoke indoors.

    Perhaps you might feel old reading this, but many of the new entrepreneurs in transitional economies do not remember the fall of the Berlin Wall.

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