Reference no: EM131198627

In the era of perestroika (restructuring) and glasnost, there have been many changes in Russian and Central Europe since the fall of the Berlin Wall (1989) and the dissolution of the USSR (1991). Marx's communism has been traded in for Adam Smith's free enterprise system. The transition has not been easy as communism lasted 70 years in Russia, but less in Eastern Europe. The changes have involved culture, values, beliefs, and traditions. Eastern Europe has been faced with many transitional problems:

• There has been a rise in unemployment as formerly, inefficient state-owned enterprises have been privatized. Unemployment levels range from 6.5% (Czech Republic) to 17% (Croatia). 
• Inflation also has resulted as formerly governmentally controlled prices have risen to realistic market values. Inflation rates of 50% or more are not uncommon. 
• In many instances, many state-owned enterprises (SOEs) have undergone restructuring through downsizing or even closed down. Estimate costs of modernizing all Eastern European SOEs runs in excess of $200 billion. 
• New financial accounting practices have been introduced and now there is new emphasis on marketing and distribution channels. 
• There has been a proliferation of underdeveloped capital markets; yet, high interest rates make internal financing difficult. Coupled with that, there has been very little interest from Western developed countries regarding FDI. 
• The relationship of formerly communist governments and businesses has been stormy with high taxes, high fees for licenses, red tape for building, and the great bureaucracies that stodgily move proposed business projects slowly through the processes and approvals. There is an immediate need to reduce or even remove many of these obstacles. 
• Eastern European nations are having to move from a supposedly "egalitarian" society to a meritocracy, where individuals are rewarded for their contributions, production, and effort rather than a government induced reward criteria. 
• Many of the laws need to be amended regarding personal property ownership, business formations, contracts and enforcement, torts, labor laws, etc. 
• Much of the infrastructures need to be modernized including telecommunications, roads, bridges, railroads, etc.
• Emphasis needs to be placed on achieving sustainability in agriculture and agribusiness and using modern agricultural methods. 
• Government control over the means of production has disappeared and now decisions need to be made on market conditions, customer needs, and customer service as well as establishing efficient distribution channels. 

There are strong signs of a burgeoning middle class developing in Russia as the middle class accounts for between 10 and 20% of the population of 145 million, and they provide about 1/3 of the nation's GDP. This middle class consists of lawyers, doctors, accountants, and white-collar professionals. Also included are new entrepreneurs who are opening hotels, retail establishments, etc. The top 10% of the citizens have over 30% of purchasing power, while there are now fewer people who fall below the poverty line--one-third of Russians were impoverished a decade ago, compared to 19% in 2005.

The situation is significantly changing in Central European countries as many have been admitted to the EU and use Euros as currency. In Central Europe, especially in the Czech Republic, Hungary, and Poland, the middle-class push has been more dramatic. Unlike Russia, international companies such as Germany's supermarket giant Metro; Sweden's IKEA and Ericsson; and the United States' Citibank, Coca-Cola, and Nike, as well as the consumer firms Procter & Gamble and Unilever, have all moved into Central Europe and propelled its economies toward Western consumption levels.

With inflation down, banks and savings institutions have developed to provide a capital market for business use. Hypermarkets and malls are springing up. Advertising, once a luxury, has become a corporate necessity as companies compete for increased consumer discretionary income. In consumer goods in particular, though, local companies have provided strong competition. Many Eastern European consumers still like low prices and are wary of the hype, expensive packaging, and high-profile brands Westernization provides.

• Behrman, J., & Rondinelli, D. (2000). The transition to market-oriented economies in Central and Eastern Europe. European Business Journal, 12(2). 87-99.
• Starobin, P., & Kravchenko, O. (2000, October 16). Russia's middle class. Business Week, 78-84. 

Write a short paper on the following:

1. Relative to all of the issues of the transition from communism to capitalism in Eastern Europe, which issues do you think need to be tackled first and why? 
2. Why do you think Central Europe is apparently more successful in making the transition than Russia? 
3. There have been accusations of widespread corruption in Russia and Central Europe. Are these claims well founded? 
4. How has induction into the EU affected countries in Central Europe?