Traditional ways of doing things are under siege wherever central planning is being replaced by supply and demand. Change is costly, and such costs are often manifested by inflation during major political and economic upheavals. Price levels were destabilized throughout the early 1990s in Russia, China, Yugosalvia and a host of other countries where market forces are displacing command economic systems.
During 1993, the Russia ruble, once pegged (artificially high) at an exchange rate of about 1.4 dollars ($1.40) per ruble, tumbled to less than $.001, or 1,000+ rubles per dollar). As you might expect, prices skyrocketed for items most Russians deem to be necessities. At times, average price increases approached the 50-percent-per-month hyperinflation threshold.
Bread, which had been subsidized under central planning in the USSR at about 5 cents per loaf (.04 rubles), quickly exceeded 1,000 rubles per kilo. Food staples, once plentiful for Russians who settled for monotonous diets after long waits in queues, disappeared from the store shelves. Armies of gangsters emerged, no longer afraid of the harsh punishments once meted out in the USSR police state. Black markets flourished, with tourists from more stable economies getting incredible bargains---as long as payment was in dollars, francs, pounds, or yen.
Recent Chinese inflation has been more moderate, in part because China's leaders have decentralized economic decisionmaking over time. A first stage was gradual elimination of low prices set by central planners for most agricultural goods. The set prices had acted as price ceilings would have in a market economy, resulting in some food shortages and imports of food into China during the 1970s and early 1980s. As many food prices were freed to seek their own levels, the cost of food rose in urban areas, but China shifted from being a net importer of rice to being a net exporter. In the countryside, waves of peasants abandoned farming and swarmed into urban centers, attracted by the higher wages offered by modernized industries and by new opportunities to start their own small businesses.
Economic decentralization has contributed mightily to Chinese economic growth, estimated at nearly 10 percent annually today. But this growth has been marred by 15-20 percent inflation rates, as the prices of housing, food, clothes, and other amenities have risen in urban areas.
Throughout this drive for modernization, ushered in under Deng Xiaopeng, the Chinese leadership has tried to maintain tightly centralized political control. Time will reveal, however, whether dictatorship of the party can be sustained in the long run, once economic decisions are decentralized.
Variations on these inflation stories have unfolded in Vietnam and other former Soviet states and satellites. One early stage in any major economic transition towards capitalistic markets seems to be a burst of inflation. Another common problem is widespread corruption, as officials demand---and get---bribes from would be entrepreneurs and assorted hustlers who must secure
import and export licenses, and more general access to transportation, information and government officials and the right to do business. With the passage of time, however, these economies show signs of settling down as the price system takes over and production takes off.