Transitioning from a command to a market economy requires changes to legal, economic, and political institutions. Government-controlled industries must be privatized, financial systems adapted, new business forms introduced, and laws passed to regulate customer relationships. The legal system must be adapted to include new forms of business, commercial laws passed, and a new judicial system introduced. The banking system must adapt to evaluate private enterprise projects and deal with bad loans. The tax system must move towards taxing incomes and profits, and foreign trade facilitated by reducing tariff and quota barriers. Investment protection laws may need to be introduced, and new international treaties negotiated.
The transition to a market economy from a command economy requires adjustments of 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, major changes need to be made to the financial system to ensure that funds can be obtained from private companies willing to engage in new projects. New forms of doing business must be introduced and laws passed to regulate new customer relationships. New foreign investment laws need to be passed to open the country to foreign investment, and customs regulations and tariffs may need to be modernised.
The legal system needs to be adapted to include definitions of new private forms of doing business such as corporations, partnerships and sole proprietorships and the law of contracts may need to be expanded. New commercial laws must be passed to regulate commercial operations and to introduce protections for private property. A new judicial system and training for lawyers need to be introduced to ensure that private companies can enforce their contracts. The transition to a market economy requires a new accounting and company law to introduce the concept of shareholder liability and outline the directors’ responsibilities.
The banking system will need to be adapted to ensure that it is adequate for the task of evaluating private enterprise projects and making decisions about lending to private companies. Quite often, there will be a legacy of bad loans to government-owned industries, and decisions will have to be made about how to deal with them. Banks will have to deal with the concept of venture capital investment and risky investment in start-ups. In the transition to a market economy, banks may need to adapt to the customer service mindset and learn how to manage small businesses and entrepreneurs.
The tax system needs to be adapted to move towards the idea of taxing the incomes and profits of individuals and companies. The transition to a market economy may require the introduction of new corporate taxes, such as sales or value added taxes. Foreign trade must be facilitated by changing customs laws and regulations, including a move to reduce tariff and quota barriers to foreign goods. It may be necessary to introduce investment protection laws to promote foreign investment and protect investors from asset appropriation or nationalization. New international treaties may need to be negotiated with trading partners on 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).
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