From Marx to Market
Beginning in 1989, the countries of Eastern Europe and the former Soviet Union rejected the communist experiment and .introduced market economies. A cruel joke heard in Eastern Europe is “Question: What is communism? Answer: The longest road from capitalism to capitalism. Having decided to take the road back to a market economy, a command economy has an’ arduous path to follow.
Price reform ‘and free-mask: pricing. Prices of both inputs and outputs were often far below market clearing levels. Food, housing, and energy were generally heavily subsidized, while automobiles and consumer durable sold at levels far above the world price levels. The first step in most countries was to allow supply and demand to set prices.
• Hard budget constraints. Enterprises in command economies operated with “soft budget constraints.” This term means mat operating tosses are covered by subsidies and do not lead to bankruptcy. In a market economy, firms must be fiscal responsible-enterprises know that profitability ultimately means economic bankruptcy for the firm and economic ruin for the managers. Privatization. In market economies, output is summarily produced in private firms; in the United States, for example, only 3 percent of GDP is produced by the federal government. In Soviet-style communist countries, by contrast, between 80 and 90 percent of output was produced by the state: Moving to the market required that the actual decisions, about buying, spelling, pricing, producing, borrowing, and lingering be made by private agents.
T?is checklist of reforms applies also to other counties that have traveled some distance down the road to a centrally planned economy and want a more • market-oriented economy.