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What are transition economies? Basically, they are former socialist countries and are called so because they are in a period of economic transformation from central planning to a market economy. So, to put it simply, states that were communist but are now capitalist are technically transition economies

States in the early stages of transformation are those in Eastern Europe, and states in the vanguard of reform like Poland, the Czech Republic and Hungary have pretty much succeeded in creating thriving, dynamic private sectors which are generating new jobs and contributing to economic recovery; together with Estonia and Slovenia, this group are on the verge of entry to the European Union, and taking up the Euro.

Now, in my opinion that’s pretty worrying: firstly, try and understand that countries cannot have incompatible fiscal and monetary policies. What happens when they do can be messy (see my node on the Argentine Economic Crisis). So, what we have in the EU is many different countries all running different budgets, yet they are all tied to a single central bank’s policies – the European Central Bank (the ECB). This means that firstly they can’t respond to domestic problems with the economy by changing the money supply (in other words, adjusting interest rates). Giving away monetary policy is not a good idea, and it has serious consequences. In Argentina it led to an $800 billion default, and it can only be adopted for a short period of time. Yet what’s happening in Europe is that we’re adopting it forever in theory. Secondly, individual countries can risk the stability of the Euro by running huge deficits.

To stop this, at Germany’s request, the ECB insists that countries’ deficits must remain beneath 3% of GDP – if they go over, then it’s bang! It’s nasty – a fine consisting of 1% of GDP. That’s massive. Ironically, Germany is now getting dangerously close to the limit. But it’s only Germany, we can laugh at them. My point is this: we can’t just let in countries like Turkey into the Euro because their economies are vastly different to ours.

But I digress...

In contrast, in the twelve states of the former Soviet Union that now comprise the Commonwealth of Independent States (CIS) the massive slump in economic activity has been much more prolonged and earlier signs of recovery in 1997 are now overshadowed by fears that the Asian Financial Crisis will spread recession to the region. We’re talking Russia and Ukraine here.

Generally, they follow a pattern: an initial slump in output and hyperinflation following the breakdown of central planning and the liberalization of prices. Stability then slowly returns as privatisation begins and supply-side policies are initiated. Then they key idea is reform. They need monetary reform, fiscal reform, and all sorts of other reform.

Other problems include a need for a shift in peoples’ thinking – people still feel as if they live under a socialist government so they need to be eased into the market system. It’s not easy but we’re doing a good job undoing all that the damn Commies messed up.

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