From Plan to Market: What Transition Means

What it took to turn centrally planned economies into market economies after communism, and the main tasks every transition involved.

Between 1989 and 1991, communist governments fell across Eastern Europe, and the Soviet Union broke apart into 15 countries. Around 30 countries began a historic transition from central planning, where the state decided what to produce and at what prices, to market economies.

What central planning was like

Under planning, government agencies set production targets for factories, fixed prices, allocated raw materials and decided wages. Most property was owned by the state. Shortages were common, queues were long and many goods were poor quality, while some industries, like heavy industry and defence, were prioritised.

The main tasks of transition

Economists identified several tasks:

Liberalisation: freeing prices and trade so markets could set prices and allocate goods.
Stabilisation: controlling inflation, which often soared when prices were freed.
Privatisation: transferring state-owned firms to private owners.
Institution building: creating laws, courts, banks, tax systems and regulators suited to markets.
Social protection: supporting people who lost jobs as inefficient firms shrank or closed.

A painful start

Almost every transition economy suffered a deep fall in output in the early 1990s. In some former Soviet countries, output fell by 40 percent or more. Reasons included the collapse of old trade links between Soviet republics, the closure of uncompetitive factories and disruption as old systems ended before new ones worked.

Very different outcomes

By the 2000s, outcomes varied enormously. Central European and Baltic countries that joined the EU generally did well. Many former Soviet countries experienced slower recovery, widespread corruption and concentrated wealth. Some, like Belarus and Turkmenistan, kept many features of the old system.

Freeing the price of bread

Under planning, bread might be fixed at a very low price, but shops often ran out, and people queued for hours. When prices were freed, bread became available on shelves, but at a much higher price. People could now buy it without queuing, but many found it harder to afford, especially pensioners whose savings had been eroded by inflation.

Thinking markets appear automatically when planning ends

Markets need laws, courts, property rights, banks and trust. Where these were weak, removing planning led to chaos, corruption and the seizure of assets by the powerful, rather than well-functioning markets.

Key takeaways

Around 30 countries began transitioning from central planning to markets around 1990.
Main tasks were liberalisation, stabilisation, privatisation, institution building and social protection.
Nearly all suffered deep output falls in the early 1990s.
Outcomes varied widely, with EU-bound countries generally doing best.