The Aspects Of An Economic Transition - Economics Essay Example

Aspects of Economic Transition in Czech republic



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Transition is change from one state to another. It is caused by many factors such as deepening economic recession or trade and financial difficulties. According to David and Sachs (1990a), this aspect of change has two schools of thought; the conservative and radical reformers. Conservatives or moderate reformers are skeptical and cautious of dramatic change whereas liberal leaders and radical reformers entertain bolder reform measure that cause quick and sudden departure from traditional economy driving a country into a market economy. Their point of contention being the scope and pace of change. Transition brings about reforms that improve a country’s economic performance, promote economic modernization and thus raising the living standards of the people. On the other hand it results in political upheavals and relinquishing of central planning,

Moderate reformers prefer making the market the supplementary mechanism for the allocation of resources and determination of prices, with the operation of the market limited to certain sectors of the economy only. Favored slow, gradual and experimental approach to reforms maintains strict administrative control over key aspects in the economy such as investment and foreign exchange. They feared that drastic relaxation of controls over the economy will create serious imbalances in the management of the economy.

Radical reformers favor the market as a chief player in the economy with development of market for almost all factors of production such as capital, labor and machinery. With a more rapid and large scale structural reform to quickly remove the inefficiencies and rigidities of the traditional system, they could take risk for the sake of economic efficiency even if the moves resulted to economic disequilibrium (David L. and Jeffrey S., 1990a, p.128,).

The policy choice and sequence of reform are greatly influenced by the leadership concerns about the consequences of reform that might threaten the power of those in current leadership.


Economic data and analysis

Some of the key ingredients of transition include liberalization and privatization/restructuring. Liberalization is the process of allowing most prices to be determined in free markets and lowering trade barriers that had blocked off contact with the price structure of the world’s market economies. In layman’s language liberalization is changing something from state to the other.

On the other hand, restructuring and/or privatization is the creation of a viable financial sector and reforming the enterprises in these economies to render them capable of producing goods that could be sold in free markets and transferring their ownership into private hands. The country has fully implemented the Schengen Agreement thus eliminating border controls, eventually opening its borders to all its neighbors, Germany, Austria, Poland and Slovakia, on December 21, 2007 (The Prague Post, 2006).

As a subset of transition, privatization has been implemented in most sectors of the economy, such as the banks and telecommunications. The current government plans to continue with privatization, including the energy industry by selling 7% of stake in the energy producer (CEZ group) and the Prague airport. In addition to the planned adoption of the euro in 2010, there are campaigns to reducing its dependence on highly polluting low-grade brown coal as a source of energy. Since 2005, Prague’s mayor, Pavel Bém, has worked to improve the city’s reputation by cracking down on petty crime and, aside from these problems, Prague is a relatively safe city, most areas are safe to walk around even after dark.

On the contrary, transition has brought with it increase in unemployment, as well as a rapid income polarization with ever mounting percentages of GDP funneled to the top of the social pyramid. In effect, the nation has begun to see a perceptible rise in crime, prostitution and drug use. Czech republic has the highest rate of corruption among other OECD countries and the public budget remains in deficit despite strong growth of the economy in recent years. However, the 2007 deficit has been 1.58% GDP, while the 2008 deficit is expected at 1.2% far less than original projections.

Conclusion and recommendations

There are key indicators in every economy undergoing transition. Such include: – large and small scale privatization, price liberalization, competition policies, interest rate liberalization, infrastructural reform, trade and foreign exchange system.

An economy cannot undergo transition successfully without support via institutional change, legal and institutional reforms (redefining the role of the state in the economy), establishing the rule of law to secure property rights, introducing appropriate competition policies, establishing an institutional and transparent market-entry regulations.

By bringing about private property right, the transformation to a market economy is not complete until functioning fiscal institutions, reasonable and affordable expenditure programs, including basic social safety nets for the unemployed, the sick, and the elderly, are in place.

The term “transition economies” usually covers the countries of Central and Eastern Europe and the Former Soviet Union. Outside Europe there are countries emerging from a socialist economy gearing towards a market-based economy (e.g. China). Moreover, in a wider sense the definition of transition economy refers to all countries which attempt to change their basic constitutional elements towards market-style fundamentals. The post-colonial situation is the major route of most transition economies in a heavily regulated Asian-style economy.

In 2000, IMF listed 30 countries as transitions economies, Czech, China, Bulgaria, Russia, Ukraine and Vietnam being common nations.  In addition, in 2002 the World Bank defined Bosnia and Herzegovina and Federal Republic of Yugoslavia (later Serbia and Montenegro) as transition economies



“Czech Republic to join Schengen”. The Prague Post. 2006-12-13.        Retrieved on 2007-10-08.

David Lipton and Jeffrey Sachs (1990a), “Creating a Market Economy in Eastern Europe: The Case of Poland,” Brookings Papers on Economic Activities, 1, pp. 75-133;


Transition Economies: An IMF Perspective on Progress and Prospects. IMF. 2000-11-03.    Retrieved on 2009-03-09

World Bank 2007 <,>





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