Economies in Transition

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Economies in Transition

Introduction

A transitional economy is one in the process of changing from a centrally planned economy to a free market. Economists generally regard the process to take ten years.

Historical Background and Scientific Foundations

Since the collapse of communism from 1989 to 1990, dozens of countries have seen their economies shift from centrally planned fixed economies to a free market. Transition economies undergo a period that can roughly be dissected into three often-overlapping parts: economic liberalization; macroeconomic stabilization; and privatization of state-run enterprises. Other reforms also take place, such as land or property ownership changes as well as the creation of stock exchanges. Such changes often lead to increased income inequality, dramatic inflation, and a fall of the gross domestic product (GDP).

Impacts and Issues

In the context of climate change and the terms of the Kyoto Protocol, transitional economies assume considerable significance. This is because targets of the Kyoto treaty are marked against 1990 emission levels. This was the last year of the Union of Soviet Socialist Republics (USSR) and a time when the Soviet client economies of Eastern Europe were functioning almost at full capacity. Peace also still reigned in Yugoslavia. As such, emissions levels were high.

The subsequent break up of the USSR led to the collapse of most former Soviet republics' economies. In

the former USSR, wealth was only 63% of its 1990 level ten years later. In client states, such as Poland where so-called economic “shock therapy” was applied, the transition to market economies was painful and beset by factory closures and industrial decline. In Yugoslavia, civil war broke out in 1991, grinding its economy to a halt almost for the rest of the decade.

In all of these countries, economic recession and turmoil fed industrial decline and a huge fall in carbon emissions. Russia, for example, saw a 23.9% fall between 1992 and 1998 and may have experienced a drop as high as 40% from its Soviet-era high. Albania, a particularly extreme example, experienced a fall in emissions of 72% from 1990 to 1991 alone as its economy went into meltdown after the collapse of its Soviet bankrollers.

Even when these economies recovered, the building of cleaner, more efficient industrial plants, the use of new technologies, or population decrease (another side-effect of transitory economies) have meant that carbon emissions have seldom reached their 1990 levels. As a result, most former Soviet-bloc countries have, in a swoop, met their Kyoto pledges and acquired a considerable surplus for trading on the emergent carbon market. In Russia's case, with carbon credits worth up to $60 billion, this was the key to its ratification of the Kyoto Protocol.

WORDS TO KNOW

ECONOMIC LIBERALIZATION: Reduced government regulation of corporate behavior and state ownership of resources
(e.g., oil, mines). Economic liberalization has been presented by many of its advocates as the only possible route to economic prosperity and is blamed by critics for such disasters as Chile's slide into greater unemployment and poverty starting in 1979, when military dictator Augusto Pinochet imposed economic liberalization measures. Those who criticize economic liberalization consider the term to be a euphemism (a nice-sounding name for something that is not nice). Liberalization in the form of “structural adjustment programs” has often been imposed on countries as a condition for receiving loans from the World Bank.

GROSS DOMESTIC PRODUCT (GDP): A measure of total economic activity, whether of a nation, group of nations, or the world: slightly different from Gross National Product (GNP, used by economists until the early 1990s). Defined as the total monetary value of all goods and services produced over a given period of time (usually one year). GDP's limitations have been pointed out by many economists. GDP is a bulk or aggregate statistic and does not take into account inequity: thus, a country's GDP might increase while 99% of its population got poorer, as long as the richest 1% grew sufficiently richer during the same period.

MACROECONOMIC STABILIZATION: Stabilization of an economy at the level of a whole nation (i.e., at the macroeconomic level). In many countries, governments manipulate certain financial variables to seek macroeconomic stabilization: for example, in the United States, the Federal Reserve Bank raises and lowers interest rates.

PRIVATIZATION: Transfer of state-owned resources to private owners, whether by sale or outright gift.

The other side of the case is China. With a malfunctioning and inefficient centrally planned economy and a majority of its population living in the countryside, in 1990 it boasted comparatively low carbon emissions. However, market reforms from the early 1990s onward have transformed it into an economic superpower. A majority of its people now lives in cities, and Chinese factories supply the world with its manufactured goods. China's CO₂ emissions increased by 109% between 1990 and 2004 and may double again by 2012. A nation whose lack of development meant it was not party to Kyoto targets in 1997 overtook the United States as of 2007 as the world's leading producer of CO₂ emissions.