These transitional economies vary both in their approach to central planning and in their subsequent approach to decentralization, or market reform. For example, some former republics of the Soviet Union are still controlled by Communist parties. Thus, the transitional economies have many faces--from the emerging stock market in Mongolia, where half the population is nomadic, to the family farms and tiny household factories in China, where markets are spontaneously taking root with little or no support from the Communist central government.

Prior to recent market reforms, most centrally planned economies had several features in common. Production was carried out by state-owned enterprises, which had little experience with the need to satisfy consumers. Prices were fixed below their market-clearing level, so there was an excess demand for goods. Private property rights to resources other than labor did not exist or were poorly defined. Domestic currencies were not convertible into foreign exchange, contributing to an isolation from global markets. These common characteristics resulted in a poor allocation of resources, obsolete capital equipment, deteriorating infrastructure, low worker productivity, and profound environmental problems.

In centrally planned economies, bureaucratic coordination replaced market coordination, so nonprice rationing emerged to cope with excess demand. In the former Soviet Union, the most visible forms of rationing were the long lines that formed spontaneously outside shops that had or were rumored to have had something of value for sale. Another way of dealing with the distortions that arose from fixed prices was bribery. Consumers bribed clerks to get desired products. Subordinates bribed superiors to get relief from the central plan's output requirements or to get vital resources. And first-time job seekers bribed officials to obtain jobs and university positions. Thus, prior to the market reforms, widespread corruption and lack of faith in formal institutions were woven into the social fabric of nearly all Soviet-type economies.

Most economists employed in Soviet-type systems had been trained to regard the "anarchy" of the market as a primary defect of capitalism. Most of them did not understand even the basic principles of the working of markets. But a more fundamental problem is that though Western economic theory focuses on the operation of efficient markets, most market economists do not understand the institutional requirements of such markets. Market economists simply take the necessary institutions for granted. Thus, privatization alone is not necessarily enough for a successful transition to a market economy. Impersonal market exchange must be supported by formal and informal rules of the game. This institutional tissue cannot be easily transplanted.

Some argue that because the credibility of the leadership in the former Soviet republics has been so thoroughly undermined, recent events may have actually moved these transitional economies further away from the institutional requirements needed to support a market economy. Some western economists expect rising unemployment, more inflation, and a continuing erosion of production. Critics of U.S. foreign policy have argued that Russia's problems stem, in part, from a lack of U.S. aid. But the institutional infrastructure cannot be built with foreign aid. The billions of U.S. aid that went to Poland during the 1970s disappeared without a trace.

The danger for Western economists is overselling the power of market forces. Psychologists point out how difficult it is for a person to change even one deepseated habit. The transitional economies are attempting to change habits and customs practiced for decades. By claiming too much for market forces, economists lay market economics open to attack when the transition to a market economy is threatened by ethnic violence, the absence of a legal system, the absence of a well defined system of property rights, opportunistic behavior by enterprise directors and workers, or the deep distrust of government.

Incidentally, there is an ironic contrast between the dissolution of the Soviet Union and the formation of the European Community. Republics in the former Soviet Union are losing their special trade relations with one another, their single currency (the ruble), and their ease of mobility across republics. Countries of the European Community are trying to form a union with special trade relations, a single currency (the ecu), and free resource mobility. More generally, market-oriented economies are forming trade alliances such as the North American Free Trade Agreement, while formerly socialist economies are coming apart.

No question, much remains unclear. Governments and jurisdictions are changing, reliable data are hard to come by, and reports and analyses are colored by normative views about the appropriate role for government. But considering how difficult it sometimes is to find out what is going on with our own economy--with the most sophisticated system of record-keeping in the world--we should not be surprised we don't always know what's going on half way around the world. The good news for professors is that the literature on transitional economies is exploding. (See "The Evidence File" on last page for some recent references.)