A transitional economic system is the type in which is moving from one kind of economic system to another. Most times it is from a “centrally planned” economic system to a “market oriented” economic system.
A centrally planned or command economy is the type of economic system in which all the factors and means of production are controlled by the government and there is very little or even no involvement from the private sector. This type of system follows the ideology of Marxism and Communism. On the other hand, there are two kinds of market oriented economies ; “free market” and “mixed”. A free market economy is the type in which the factors & means of production are controlled by the private sector and there is no government intervention at all.
China began operating a command economic system in 1949 when the China’s Communist Party was established and chaired by Mao Tse-tung. He believed in the ideologies of the likes of Karl Marx & Vladimir Lenin, therefore implementing socialist methods into the running of the country’s economy. He believed in a society where every member could share in the prosperity of the country. In order for this to be, he brought about different business under government control such as factories, farms, etc. From 1959 to 1961, China suffered a devastating fall in the production of food and this led to a horrendous famine leaving millions dead. It was evident that the economy of the country was doing poorly due to its lack of private sector activity.
This all changed when in 1978, Deng Xiaoping, veteran of the Communist Party, was eager to reform the economy by implemented capitalist methods and reforms that would stimulate economic activity. This would also restore the country’s confidence in the party. He implemented several economic reforms that would allow private sector involvement in China. Due to his reforms, China has gone from a country which completely opposed capitalism to the second largest economy in the world and is predicted to surpassed the United States sometime this century.
By moving from a centrally planned economy to a free market economy, there are positive as well as negative effects.
The first advantage would be an increase in the productivity of the country. A change like this increases competitiveness amongst producers. Since this type of economy is assumed to be perfectly competitive, producers will endeavour to use the resources available in an efficient and wise manner in order to make goods demanded by the consumers. This is because in this type of economy, the decision of what to produce ultimately lies on the consumers therefore, producing anything out what they’re demanding would be unprofitable and inefficient. In a centrally planned economy, planners are less likely to be concerned with what the consumers want but what they feel is necessary.
An advantage to be considered as well would be consumer choice. In this economy, the consumer is seen as sovereign and has the final say. Therefore this means that there are really no restrictions as to what can be produced and usually there is a wide variety of products due to the fact that consumers have unlimited wants and needs. In order for a firm to survive in this economy, they need to tend to the wants of the consumers. In contrast, in the command economy the wants of the consumers are not taken into consideration but only want is seen as a necessity by the planner.
Another advantage would be an increase in innovation. Industries and businesses are constantly looking for ways to be innovative and create something new to stay ahead of their competitors. Although in this type of economy government intervention is very minimal, the government still holds the function of protecting people’s right to the ownership of property and this covers intellectual property through legal documents and other means. This thus serves as an incentive for firms to be innovative and produce high quality goods. This would leads to a general surge of productivity in the economy and would further increase the competition. For the citizens of China, this means an overall in increase in the standard of living and wealth of their country due to an increase in GDP as result of new innovations & increased productivity.
Lastly, there is the advantage of higher economic growth rates. Statistics and history will show that countries operating a market oriented economic growth generally have higher growth rates and overall are wealthier e.g The United States. The country in consideration here, China, has experienced an overall increase in the rate of economic growth from then it was operating a command economy. Like for all the other advantages, this leads to a general increase in the standard of living of the citizens in the country. This is very familiar with China as it has one the the wealthiest economies in the world is said to soon surpass other countries in the near future.
Although there are benefits of this transition, a few disadvantages are present.
The first one to take into consideration would be that the market would be inefficient in some areas. In a pure free market economy, there is no government intervention, therefore public goods such as national defence, healthcare, etc. will not be produced (provided) if the consumers do not demand for them. This might lead to shortage and eventually result in economic failure as a whole. In a centrally planned economy, the planners are majorly concerned with providing the necessary amenities and the chances of the market failing as a result of this are low.
Another disadvantage of this transition is that it makes opportunities for industries to become monopolistic in nature. This is due to the fact that free market economies are highly competitive. If a firm manages to effectively become a monopoly in an industry, driving out other firms, it can restrict output and increase prices. Here consumers may be exploited an there is no government intervention to protect their rights. On the contrary, in a command economy, all the means and factors of production are effectively controlled and owned by the government which means that there is no room for competition to lead to a monopoly. Unlike in a monopolistic industry where the main goal is to maximise profit, in the command economy, the main goal is to effectively allocate resources.
In conclusion, both types of economies have their benefits and disadvantages but the one which serves more benefits to the citizens would be the market oriented economy which enables consumer choice and sovereignty as opposed to the command economy which disregards consumer choice.