Economic Development
and Transition
Chapter 18 Section 4
Transitions to Free Enterprise
Economic Development and Transition
Objectives:
* Identify some important steps in moving from
a centrally planned economy towards a free
market economy.
* Describe the political and economic changes
that have taken place in Russia in recent
decades.
* Describe the actions that China’s
communist government has taken to
introduce free market reforms into China.
Economic Development and Transition
Section Focus:
Making the transition from a command
economy to a market economy is a
difficult process. The shift requires
tremendous changes on the part of the
government and the workers.
Economic Development and Transition
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Most LDCs have discovered that a centrally
planned economy limits development.
Many communist nations are reshaping their
economies.
Former Soviet Union, Cuba, North Korea, and etc.
They have dismantled their economies and
replacing them with market-based systems.
China has modified their command economy to
incorporate some free market practices.
Economic Development and Transition
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The transition to free markets and
capitalism is a huge adjustment for an
economy and a nation.
Economic Development and Transition
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Moving Toward a Market Economy:
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One of the key elements of a command
economy is that the government, not
individuals, owns and controls the factors of
production.
The government answers the three key
economic questions.
First step moving from a command economy to
capitalism is privatization.
Economic Development and Transition
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Moving Toward a Market Economy:
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Privatization – the sale or transfer of
government-owned businesses to individuals.
Private ownership give the individual, not the
government, the right to make decisions about what to
produce and how much to produce.
Ways to do this…
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1. sell the business to one owner
2. sell shares in the business to interested people
3. give every citizen a voucher or certificate that can be
used to purchase shares in the businesses when they
are privatized.
Economic Development and Transition
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Protecting Property Rights:
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Even when the government gives up its role as
the owner and decision-maker, they play a
vital role in the economy.
Their role is to ensure the success of a new
market-based economy.
Government must set up private property laws
to protect people who own the land.
Entrepreneurs need laws to prevent criminals
from stealing their profits.
It takes time to develop a legal system that
will support a market-based economy.
Economic Development and Transition
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More New Roles for Government:
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The Government must be prepared to deal with the
unrest that might develop from rising unemployment.
The government must also play a role in helping workers
make the transition from a centrally planned economy
to a market-based economy.
Workers in transition often need to learn a new work
ethic – system of values that gives central
importance to work.
In a free market economy, incentives, not quotas,
influence people’s labor.
Economic Development and Transition
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Transition in Russia:
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Soviet Union was once the most powerful
communist nation.
The lagging Soviet economy prompted
economic and social reform.
Change came quickly to Russia, as economic
freedom led to the desire for political
freedom.
Economic Development and Transition
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Communism in Russia:
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Soviet Union arose out a revolution in 1917.
Vladimir Lenin, took control of the government
He had a repressive form of control
The Soviets reorganized their farmland into
state farms and collective farms.
State farm workers received wages, similar to
factory workers.
They had few incentives to encourage people
to work hard.
Agricultural output was low.
Economic Development and Transition
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Communism in Russia:
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Soviet policy emphasized the development of
heavy industry.
By 1940, the Soviets were the 2nd largest
producer of iron and steel in Europe.
With so much devoted to heavy industry, very
little was left for consumer goods.
The every day items were in short supply.
Economic Development and Transition
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Glasnost and Perestroika:
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In the late 1980s, Mikhail Gorbachev began a
series of radical political and economic
reforms.
He believed that economic prosperity could
happen without political freedom, he
introduced Glasnost – a policy of political
“openness” that encouraged Soviet citizens to
say what they wished for without fear of
government persecution.
Economic Development and Transition
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Glasnost and Perestroika:
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Gorbachev’s reform was a plan of economic
restructuring called Perestroika.
It called for a gradual change from a centrally
planned system to a free enterprise system.
Gorbachev’s main desire was to incorporate
the use of markets and incentives into the
existing structure of communism.
Under this system, the government began to
allow factory managers to decide what goods
to produce and how much to charge for them.
Economic Development and Transition
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Glasnost and Perestroika:
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They converted several factories used for
military goods to the production of consumer
goods.
The transition was very difficult for the people.
Economic reform produced some initial
hardships.
People lost secure government jobs, benefits,
and pensions.
Many people were hurt financially, especially
the elderly.
Economic Development and Transition
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Glasnost and Perestroika:
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Collapse of Communism –
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In 1991, the Russians voted in their first democratic
elections.
Gorbachev resigned as president at the end of 1991.
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The end of the Soviet Union as we knew
it.
Transition to the Free Market –
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Boris Yeltsin came to power and promoted a
market-based economy.
There were many improvements, but
hardships continued.
Economic Development and Transition
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Transition to the Free Market:
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In 1992, Yeltsin lifted all price controls
Supply and Demand controlled the prices
Money was moved to try and build up the urban
centers.
Corruption led to many problems.
They received billions of dollars of aid from
around the world.
The World bank and IMF helped out the country.
Things have got better for them, but they have a
ways to go.
Economic Development and Transition
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Transition in China:
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1949 – Communist forces brought Mao Zedong
to power.
Promoted the Great Leap Forward intended to
turn China into a world economic power in the
shortest time possible.
The government took over all of the
land and the people were organized
into self-sufficient settlements.
These were communes of 25,000
people.
Economic Development and Transition
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Transition in China:
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This Great Leap Forward was a huge disaster.
The people had no incentives to work hard, so
production fell.
The country went through a period of famine
and around 20 million people starved to
death.
Economic Development and Transition
Cultural Revolution –
- In the 1960s, Mao instituted this cultural
revolution – intended so that China could
further embrace communism.
- Organized the Red Guard – young men and
women to carry out his policy. They
persecuted people who did not follow.
He was trying to get rid of the “Four Olds”
1. old ideology
2. old thought
3. old habits
4. old customs
Economic Development and Transition
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Transition to the Free Market:
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Mao died in 1976.
Deng Ziaoping took over
He introduced a new approach
that shifted power to local
government.
He introduced a program of economic reform
He tried to incorporate some free markets into
the economy.
This program was called the “Four
Modernizations”
Economic Development and Transition
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Four Modernizations
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To improve agriculture, science and
technology, and defense quickly.
Agriculture – people had contracts with the
government to produce so much grain at a
certain price.
Any amount of grain over that set quota, the
farmer got to keep.
Industry was to produce consumer goods so
that more people would buy them and to
produce more light industry (clothing,
appliances, etc)
Economic Development and Transition
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Economic Zones
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Deng set up four special economic zones along
China’s east coast.
Local governments in these zones were
allowed to offer tax incentives to foreign
investors.
Businesses were allowed to make most of their
own investment and production decisions.
China began to have rapid economic growth
(mainly along the economic zones).
Today, China continues to grow economically.
Economic Development and Transition
REVIEW:
1. Identify three factors necessary for the
transition to free enterprise.
2. Why is privatization necessary to create
a free market?
3. What is glasnost?
4. What is perestroika?
5. Why was the Great Leap Forward such
a disaster for China?