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.
The preliminary studies also will shed light to the difficulty of economic reform compared to political reform given the level of private ownership and entrepreneurship in these countries.
The aim of this preliminary study is to understand the reasons why in Poland shock theory is successful as opposed to the gradualism theory as applied in Hungary. In an effort to conduct the research, I will use secondary research conducted in this area by the experts in this field and by prominent economists in this field. The study also will explain the factors behind the successful transition dynamics of these countries.
In addition, the aim of this preliminary research is to explore the effectiveness of these transition theories based on the experience of these successfully transformed market economies to understand when, and in what conditions shock therapy and gradualism work, their inherent strength and weaknesses
This paper will highlight the role of liberalization, macroeconomic stabilization, privatization and institutional reform and microeconomic reform to an adequate degree and phase, given the unique situation of these economies.
The study is organized by reviewing the secondary research material critically based on the size of the data and for the time the data is collected, statistical modeling and analysis, accuracy and reputation of the researchers and their experience in this field. As well, it is also based on informed views of prominent economists in this field. This process enables me to collect and review appropriate secondary material and critically evaluate these materials. It also enables me to discuss critically and logically analyze the findings of the literature to synthesize and form an informed and unbiased objective conclusion on the economic transition of Poland and Hungary...
Transitional Sub Dynamics to Transform Planned Economy to a Market Economy
In a transitional process to a market system, it has three components. They are liberalization of the economic system and introducing price mechanism instead of central planning and the macroeconomic stabilization process.
The second component of the transition dynamics is the privatization process of the state-owned economy and reduces the role of government in economic affairs and increase the role of private sector and profit motive within the economic system in a rapid or in a gradual manner.
The third transition dynamics is the institutional building and regulatory framework to enable the market system to work effectively and create an environment to attract capital and capital formation to boost economic growth and efficiency of the economic system as a whole. As well, to develop policies and building institutions to increase technological innovation and reform in the labor market and other service sectors and banking system.
