2.6: The Nature of Economic Transformation Flashcards
Economic Transformation Steps
The shift to a market-based economic system involves several key steps: deregulation, privatization, and establishing a legal framework to protect property rights. These steps are essential for economic transformation.
Deregulation
Deregulation encompasses the removal of legal restrictions that hinder free market operation, private business establishment, and business operations.
In command economies, it meant eliminating state control over prices, allowing private enterprises in various sectors, and facilitating foreign investment and international trade.
Deregulation in Mixed Economies
Even in mixed economies where state intervention was less extensive, deregulation has involved similar measures to encourage a market-based system. India, for example, is an example of a mixed economy currently undergoing significant deregulation.
This process includes reforming licensing systems, opening sectors to private participation, and easing restrictions on foreign ownership and international trade.
Privatization
Privatization involves transferring state-owned assets into private hands, often through auctions.
It is seen as a way to improve economic efficiency by incentivizing private owners to enhance productivity and seek market opportunities.
Origins of Privatization
Privatization began in the early 1980s in Great Britain under Prime Minister Margaret Thatcher.
It was coupled with deregulation, allowing competition in previously monopolized sectors like telecommunications.
Global Privatization Trends
Privatization has become a global phenomenon, with countries worldwide implementing ambitious privatization plans.
Notable examples include Ghana, Mozambique, and Zambia in Africa, as well as the former Soviet Union and Eastern European states like the Czech Republic, Russia, and Poland.
Challenges in Privatization
Privatization faces challenges in some former command economies due to a lack of corporate governance regulations.
Inadequate governance may lead to managers benefiting at the expense of shareholders, hindering enterprise efficiency and wealth maximization.
Importance of Legal Systems
Legal systems are essential for a well-functioning market economy as they protect property rights and provide mechanisms for contract enforcement.
Without these, economic activities can be hindered by various entities, including organized crime.
Legal Challenges in Former Communist States
Many former Communist states faced challenges in establishing a legal structure to protect property rights after the collapse of communism.
Issues such as uncertain property titles, multiple pledges on the same property, and unsettled claims from the pre-communist era have persisted.
Contract enforcement also faces challenges due to inadequate court capacity and underdeveloped out-of-court dispute resolution procedures.
