Labor Reallocation in The Transition Economics Essay

Labor Reallocation in The Transition Economics - Essay Example Some important failures of the capitalist system like the Great Depression serve as the reasons on why the event should be remembered. Capitalism has not tested success on everywhere it was implemented (Aslund, n.d.). Transition Economies The economy which experiences change from a centrally planned economy to free market is defined as transition economies. In this type of economies the central planning organization is not entrusted with the task of setting the price. The market forces tend to determine the prices. There is no restriction to trade and the economy witness economic liberalization. There is tendency towards privatization and the financial sector takes the responsibility in facilitating stability in the economy. The change and creation of institutions characterizes the process of transition. The private enterprises have a major role to play (Atkeson, Andrew and Patrick, 1996, p. 377). The process of transition changes the role of the state. The process encourages the cre ation of different institutions and promotes state owned enterprises and financial institutions which can act independently. The role of the state in the transition transforms from being the provider of growth to an enabler. The private sector serves as the engine of growth in the transition economies. ... China and Vietnam followed the gradual transition mode while Russia and some East-European countries followed the aggressive model of transition. The main indicators of the process of transition include liberalization, macroeconomic stabilization, restructuring and privatization and legal and institution reforms (Boeri and Terrell, n.d. p. 2). A rapid change was expected in the configurations of institutions that structured the transition countries after the collapse of the Soviet Union. Almost all transition economies were expecting to face the twin impacts of recession and income inequality. In order to shift to an economy where wage is determined by the market transitional unemployment is necessary. Structural challenges like shortage of labor demand can result because of long periods of unemployment. The market should set the appropriate price of labor taking into account free mobility of labor and a supportive institutional framework (Nickel, n.d. p. 96). Labor Reallocation in T ransitional Economies The process of transition involves substantial reallocation of labor. Employment in the planned economies is concentrated on the heavy industries. There was absence of small business sector and private initiatives concentrated almost solely in agriculture. The economic planners used to determine the pattern of foreign trade. The Council for Mutual Economic Assistance was used to govern the trade flows in what are now regarded as the transition economies. In the process of transition, employment is concentrated in the small scale business sector. Actually shifting of employment from the state owned industries to these units take place. The success of transaction depends on how efficiently the reallocation of labor has been handled. Comparison of the modification