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What Is Involved in the Transition to a Market Economy?

By Peter Hann
Updated: May 17, 2024

The transition to a market economy from a command economy requires adjustments to legal, economic and political institutions and a significant period for implementation. One of the most important changes is that government-controlled industries must be transferred to private ownership and prices must be determined by the market. At the same time, important adjustments to the financial system must be made to ensure that funds may be obtained by private companies looking to engage in new projects. New forms of doing business must be introduced and laws must be passed to regulate the new customer relationships. New foreign investment laws must be passed to open up the country to foreign investment, and customs regulations and tariffs may need modernization.

The legal system must be adapted to include definitions of new private forms of doing business such as limited companies, partnerships and sole traders, and the contract law may need to be expanded. New commercial laws must be passed to regulate business operations and to introduce protection for private property. A new court system and training for lawyers must be introduced to ensure that private businesses can enforce their contracts. The transition to a market economy requires new accounting and company law to introduce the concept of accountability to shareholders and to outline the responsibilities of directors.

The banking system will need to be adapted to ensure that it is geared up for the task of evaluating private business projects and taking decisions on lending to private companies. Very often, there will be a legacy of non-performing loans to government-owned industries and decisions will need to be made on how to deal with these. Banks will need to come to grips with the concept of venture capital investment and risk-taking investments in start-up businesses. In the transition to a market economy, the banks may need to adapt to a customer service mentality and learn how to deal with small companies and entrepreneurs.

The taxation system must be adapted to move toward the idea of taxation of income and profits of private people and companies. The transition to a market economy may require the introduction of new business taxes, such as sales or value-added tax. Foreign trade must be facilitated by modification of customs laws and regulations, including a move to reduce tariff and quota barriers to foreign goods. Investment protection laws may need to be introduced to promote foreign investments and protect investors from appropriation of assets or nationalization. New international treaties may have to be negotiated with trading partners in respect to investment and taxation and the country may need to join international organizations such as the World Trade Organization (WTO) and the World Customs Organization (WCO).

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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